Spotify (SPOT +0.38%) listeners in America are going to see their monthly bill rise for the first time ever. The leading "audio platform," as management prefers to call itself, made a broad-based price increase for individual and family plan subscribers in the U.S. and other major markets around the world.
The news coincided with the company's second-quarter earnings report. Management addressed several questions on the price increase. Here are five things investors need to know about Spotify's new pricing.
1. The competition already raised prices
Spotify's price increase follows similar price increases from Apple, Amazon, Alphabet's YouTube, and Tidal.
Each competitor now charges $10.99 per month for individuals and $16.99 per month for family plans, except Amazon. Amazon gives Prime members a $2 discount on its individual plan, charging just $8.99 per month, and its family plan remains a dollar less per month at $15.99.
The parity in pricing means Spotify won't be at a disadvantage when it comes to attracting price-sensitive customers. Its free, ad-supported tier holds a big advantage over the competition in attracting new listeners before converting them into paid subscribers.
2. Revenue impact won't show up until the end of the year
Spotify will give existing subscribers an extra month of their current price after their next billing cycle. For most customers, that's going to be in August, considering the announcement came at the end of July. So that means Spotify won't start collecting the extra $1 per subscriber until September in most cases.
That's reflected in Spotify's outlook for the third quarter, which sees average revenue per premium subscriber roughly flat from the second quarter. CFO Paul Vogel said fourth-quarter revenue per user will increase meaningfully as a result of the price increases, though.
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3. Prior increases haven't helped, but this one could be different
This isn't really Spotify's first-ever price increase. Management likes to point out that it's made dozens of price increases in smaller markets around the world, and it has learned a lot. Importantly, the company said past price increases have had limited impact on churn rate and subscriber growth.
But this one could be a little different. Management's outlook for the third quarter calls for just 4 million premium subscriber additions. Vogel explained that there's some conservatism baked into that outlook, though -- not just because of the price increase in major markets like the U.S., but because of the strong results in the first half of the year.
Spotify has added 62 million active users in the first six months of 2023, including 48 million premium subscribers. It ran a promotional campaign last quarter, which resulted in a massive outperformance in premium subscriber signups. That may have pulled forward a lot of users from the third quarter.
So it'll be hard to separate the reasons for underperformance in premium subscriber growth in the third and fourth quarters if it materializes after this price increase.
4. Room to increase prices again in the future
CEO Daniel Ek hinted that Spotify might not be done raising prices. He said it's all about how much value Spotify is offering listeners. He noted several product improvements over the past year that have improved engagement and discovery for listeners.
He also pointed to the company's nascent investment in audiobooks, which he believes will be a meaningful source of revenue for the business in just a couple of years.He's focused on raising prices as Spotify delivers more value to its listers.
That said, Spotify must remain mindful of what its competition is charging. At the end of the day, its service is access to a library of content. Its differentiation stems from its user experience and better discovery of that content.
5. The price increase wasn't Spotify's first choice
During his prepared remarks on the earnings call, Ek noted there are three ways Spotify can increase revenue: grow users, create new businesses and revenue streams, or raise prices.
He said the preference is to grow the total number of users on the platform, something Spotify's been doing extremely well in the last few quarters across every market it operates. And when the competition raised its pricing, Ek noted it was an opportunity to grow even faster.
Nonetheless, Spotify raised its pricing. And while the price increase will ultimately benefit Spotify with increased revenue and better margins, it could curb subscriber growth to some degree. At play is a complex relationship between Spotify and the music labels. In Spotify's latest round of negotiations with labels, the music owners may have kept a hard stance on pricing, even if it's not in the long-term interest of Spotify.
Ultimately, the price increase at Spotify merely puts it on a level playing field with the competition. And the move does push it closer to its goal of 30% overall gross margin, which is being further supported by growth in podcast revenue and marketplace. With the sell-off on the second quarter earnings miss, it may be an opportunity to buy shares.
