Spotify focuses on lifetime value versus average revenue per user – Billboard
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Since the early days of subscription music streaming, platforms have been measured by a single financial metric: “Average Revenue Per User,” or APRU. Now, after a decade and a half as a company and four years as a public company, Spotify apparently wants to reduce ARPU. Its replacement, judging by the company’s investor presentation in New York on Wednesday, is “lifetime value,” or LTV, which measures a user’s total contribution over time to the company’s bottom line. It is a holistic measure that helps the company evaluate its decisions and determine where it invests its money.
LTV combines the amount of time a consumer uses Spotify and the amount of money they spend on a subscription or generate through advertising. To calculate LTV, take a user’s contribution margin — revenue minus revenue costs, such as music licensing fees — and discount a single amount in today’s dollars. (It’s like how an entire company or publishing catalog is valued.) Subscription ARPU is just one aspect of LTV. The monthly churn rate also plays a key role here. As churn decreases, people stay longer, listen to more podcasts, pay more subscription fees, and increase average LTV. On the other hand, something that increases churn can have a negative effect on LTV. ARPU alone cannot distinguish between the long-term implications of different decisions.
One of the most illuminating data revealed on Wednesday was Spotify’s monthly churn rate, which rose from 5.5% in 2017 to 3.9% at the end of 2021, according to the chief financial officer. Paul Vogel. It was the first time since 2018 that the company released an actual churn figure. Investors also learned that subscriber churn in Spotify’s oldest markets averaged 2.4% at the end of 2021 – and as low as 1-2% in its more mature markets. Although developing markets, where Spotify has operated for the shortest periods, have higher churn than mature markets, after three years their churn rates “have historically reached the same point on the churn curve. than developed markets,” Vogel said.
ARPU has an appealing simplicity, and Spotify always tracks it in its quarterly earnings reports. But it’s also more nuanced than it first appears. As long as Spotify has released its financials, ARPU has steadily dropped to a slight uptick in recent quarters. ARPU fell from 5.53 euros ($5.82 at current conversion rates) in the second quarter of 2017 to a low of 4.12 euros ($4.34) in the first quarter of 2021 before increasing steadily to 4 .40 euros ($4.63) and 4.38 euros ($4.61) in the fourth quarter of 2021 and the first quarter of 2022, respectively. The simple interpretation is that Spotify has received less from each additional subscriber over the years. But much of the drop in ARPU comes from increased adoption of student and family plans, which have lower ARPU but benefit the business by helping to attract and retain subscribers. Even with lower ARPU, the net effect of lower churn can result in higher LTV. ARPU alone cannot capture this positive impact. It’s an important distinction when Spotify can’t or won’t raise subscription prices.
For Spotify, LTV is a more sensitive measure of a streaming platform’s progress than ARPU because it can better gauge the long-term effects of decisions. During the presentation, Tony Jebera, VP of Machine Learning, explained that focusing on LTV discourages Spotify from doing things that could improve short-term gross profits — like increasing the number of ads it runs and recommending content that doesn’t suit them – but has negative, long-term consequences. For example, the Jebera team runs tests to determine which podcasts generate more LTV per hour of streaming. One of the findings, Jebera said, was “that clickbait content fabricated to fool users and algorithms can actually reduce LTV.”
Adopting a long-term vision makes sense for a company that must make substantial investments before reaping the financial benefits. Spotify’s commitment to podcasting has tested investors’ patience as expenses far outpaced revenues. In 2021, podcasting generated revenues of nearly 200 million euros ($215 million), but weighed 103 million euros ($108 million) on gross profit, or a gross margin of -57 %. In the presentation, Spotify argued that the investment would be justified because users who listen to both music and podcasts have higher LTV than those who listen to either. (He expects the same momentum to continue with his next product expansion, audiobooks.) Additionally, Vogel cited lyrics as another example of LTV browsing. “It’s mostly an extra expense,” he said. “However, since its global launch in November, it has quickly become one of our most used features.” So even if the lyric feature creates a short-term gross margin impact, Spotify believes it will ultimately improve LTV.
LTV is also a sensitive metric for investors, although it is difficult to calculate with limited information. Over the years, Spotify had left it to analysts and investors to estimate the number of unsubscribes based on its limited public disclosures. As Billboard reported in a 2021 article on Spotify’s LTV, Citi analyst Jason Bazinet believed Spotify’s drop in ARPU was the result of family plans, which have lower ARPU than subscriptions. standard for one person, as they kept followers on the platform longer. The longer consumers stay on the platform, the more valuable they become to Spotify (and creators and rights holders). Measuring churn isn’t easy either. Spotify offers daily and weekly subscriptions in some countries in addition to the standard monthly plans available everywhere. These short-term plans “distort” monthly churn figures, Vogel said, and help explain why Spotify doesn’t report churn on a quarterly basis.
Now Spotify’s challenge is to share the right information with analysts and investors. The LTV is a convenient internal measure, but how much transparency will foreigners get? Vogel couldn’t say exactly how Spotify will communicate its achievements, but promised to provide “consistent updates” on progress toward goals and the revenue and cost impacts of the new product. The last investor presentation was a good first step.
Until June 10, the % change over the last week and the change since the beginning of the year.
Universal Music Group (AS: UMG): 20.65 euros, -3.1%, -16.7% since the beginning of the year
Spotify (NYSE: SPOT): $102.23, -11.9%, -56.3% YTD
Warner Music Group (Nasdaq: WMG): $27.41, -6.8%, -36.5% YTD
HYBE (KS 352820): KRW 223,500, -2.0%, -36.0% YTD
nation live (NYSE: LYV): $92.27, -3.2%, -22.9% YTD
iHeartMedia (Nasdaq: IHRT): $9.78, -15.2%, -53.5% YTD
Cumulus Media (Nasdaq: CMLS): $11.50, -3.6%, +2.2% YTD
Tencent Music Entertainment (NYSE: TME): $4.39, +7.9%, -35.9% YTD
Cloud Village (HKE: 9899): 72.45 HKD, -2.0%, -53.9% YTD
tank media (Nasdaq: RSVR): $6.69, -14.3%, -15.4% YTD
Composite NYSE: 15,096.69, -0.9%, -8.0% YTD
Nasdaq: 11,340.02, -1.0%, -23.2% YTD
S&P500: 3,900.86, -1.2%, -13.8% since the beginning of the year