Professional Documents
Culture Documents
Investor Day
Company Participants
• Paul Vogel, VP, Head of FP&A and Investor Relations
• Daniel Ek, Founder and CEO
• Gustav Soderstrom, Chief R&D Officer
• Seth Farbman, Chief Marketing Officer
• Charlie Hellman, Vice President of Creator
• Troy Carter, Global Head of Creator Services
• Alex Norstrom, Chief Premium Business Officer
• Danielle Lee, Global Head of Partner Solutions
• Brian Benedik, Global Head of Sales
• Barry McCarthy, Chief Financial Officer
Other Participants
• Rich Greenfield, Analyst
• Unidentified Participant
• Ross Sandler, Analyst
• Benjamin Canet, Analyst
• Nick Delfas, Analyst
• Matthew Thornton, Analyst
Presentation
Paul Vogel, VP, Head of FP&A and Investor Relations
Good afternoon, everyone. I'm Paul Vogel, Head of Investor Relations and Financial Planning and Analysis at Spotify.
It's my privilege to welcome everyone in the room and everyone on the live stream for our Investor Day. One of the
main reasons we decided to pursue a direct listing instead of a traditional IPO was our desire to be more transparent and
more accessible to a wider range of investors.
We believe hosting an Investor Day prior to our public listing will do just that. So today, you'll get a very detailed look
inside our business from the folks who run Spotify, our senior management team. We hope to provide you with a
greater understanding of our aspirations and strategies for growing the Spotify platform and ecosystem.
Before we begin, I want to share a couple of few dates. First, we expect to begin trading on the New York Stock
Exchange on April 3rd. On March 26th, prior to trading, we will announce financial guidance for both the first quarter
and full year of 2018 and we'll furnish that guidance to the SEC.
And one last item, please let me share one of the true thrills of running Investor Relations, the disclosure of the Safe
Harbor provision.
And with that let's gets started. (Video Presentation) Please welcome to the stage, Founder and CEO, Daniel Ek.
Page 1 of 26
Company Name: Spotify Technology SA Market Cap: N.A. Bloomberg Estimates - EPS
Company Ticker: SPOT US Current PX: N.A. Current Quarter: N.A.
Date: 2018-03-15 YTD Change($): N.A. Current Year: N.A.
Event Description: Investor Day YTD Change(%): N.A. Bloomberg Estimates - Sales
Current Quarter: N.A.
Current Year: N.A.
All right. Good afternoon, everyone. Thanks for coming today and welcome to Spotify's First Investor Day. And as
Paul said, we're approaching things a little differently here with our direct listing. For us, going public has never really
been about the pump or the circumstance of it all. So you won't see us ringing any bells or throwing any parties, and
despite the enormous respect they have for the New York Stock Exchange in this process, I also won't be on the floor
doing any interviews. And this is because I think the traditional model for taking the company public just isn't a very
good fit for us. The typical IPO requires a lockup and we don't think that's the right thing to do. Our most valuable asset
is our people and we want to treat them fairly and we want to empower them and we have allowed shareholders and
employees to buy and sell stocks for years, and that shouldn't stop just because our stock is becoming more widely
owned and since Spotify isn't selling any stock when we go public, we really entirely focused on the long-term
performance on the business. So for us the most important day isn't our listing day, but it's the day after and the day
after that and this is when we will continue the hard work of helping one million artists to be able to live off of their art.
Another thing, you may notice today is that we're actually live streaming today's event to anyone that wants to watch.
And one of the reasons for this direct listing is that we want to be as transparent as possible and give everyone equal
access the information about the company. So today we are really excited to walk those in the room and those on the
live stream through what we feel make Spotify so uniquely positioned for growth. Spotify is often still considered a
startup, but we are actually over 10 years old. And in that time, we've become a pretty big company, so we now have
more than 159 million active users in 65 markets and we got 71 million premium subscribers, more than 3,500
employees around the world and more than 35 million tracks, but we're just getting started.
I'm not really a baseball guy, really soccer is more of my game, but as big as we are, I think a good analogy would be to
say that we're just in the second inning of this game. And I think you will learn today that Spotify is a lot bigger than
you thought that the opportunity ahead is much, much greater than you might have realized and that there is really no
other company competing the way we are doing.
But before we get into where we're going, let me back up a bit and talk to you about how we got to where we are today.
The story of Spotify of course starts in Sweden where I'm from. In my young age I found two loves, music and
technology and over the years I pursue then both with equal passion. And at the age of 14, I was building websites for
people when I was making up fairly good living for 14 year old and then of course I was playing guitar. So over time,
even though I still love music, it became clear that I'd likely had a better shot of success in technology. So in high
school I created a few small tech companies and I found myself suddenly achieving a lot of my goals a bit early. So as I
enter my 20s, I really felt that I wanted to do something big. I wanted to do something meaningful and I wanted it to be
connected to both technology and music. So one night at a party in Stockholm, a friend who's a musician told me he
had to take another job to pay his bills and he was really quite upset because music piracy really disrupted his ability to
make a living. And this was especially true in Sweden where the idea of piracy enjoyed widespread support even
among the Swedish government. So as a search for the next thing to do, I really kept coming back to music. I thought it
was just too important to let piracy take it down and identified a kindred spirit in my co-founder Martin Lorentzon and
of course nobody wanted to make any bets in music after Napster, so we have the bootstrap the company ourselves and
we focused on Sweden and the neighboring countries and it took us about two years, but we were able to get licenses,
enlarge the service in the region and it grew and became very popular very quickly.
I think it all worked because we've recognized the consumer behavior. Fans wanted all the world's music for free
immediately. So what we did was to build a better experience. We built something that can compete against piracy and
make sure artists were compensated for their work and this sense have grown very rapidly in the US and around the
world. So today Spotify is the largest subscription music streaming service in the world and this by factor of roughly
2X to that of our closest competitor and our brand is very popular with younger audiences around the world and in fact,
72% of our users are under the age 34 and 43% of them are under the age of 24. We have a strong and growing
business in markets like North America, Europe and Latin America and we're starting to see meaningful growth in
Asia, as we continue to open new markets.
So based on this success, I'm sure you all wondering where we going from here and how are we thinking about
long-term creation. Well, there is really three key strengths that are fundamental to our growth today and in the future.
One, our premium offering. So you'll hear in detail today about how our free product drives premium subscription
Page 2 of 26
Company Name: Spotify Technology SA Market Cap: N.A. Bloomberg Estimates - EPS
Company Ticker: SPOT US Current PX: N.A. Current Quarter: N.A.
Date: 2018-03-15 YTD Change($): N.A. Current Year: N.A.
Event Description: Investor Day YTD Change(%): N.A. Bloomberg Estimates - Sales
Current Quarter: N.A.
Current Year: N.A.
growth at least the better personalization and drives use among younger demographics with greater potential lifetime
value. Two, our unique embrace of ubiquity across all platforms. So we see the world dividing into multiple platforms
and Spotify is really the only player that can work across all of them globally. So there is Amazon in the home, you get
Android in the car and in emerging markets and you got iOS on the phone in the western world and Spotify can be
accessed across all of it and that makes it easier for us to grow our business in both existing and newer markets.
And then three, personalization. So as you'll hear today our ability to deliver personalized experience using the
incredible amount of data that we're collecting really sets Spotify apart from other streaming services, but we will also
be showing you a more detail than we've ever publicly shared a crucial aspect of our approach to the Spotify mission, a
two sided marketplace strategy. So we're not just serving fans, but we're really also building tools for the entire artist
community, and we will walk you through what this looks like today. And I think both of these efforts really
compliment each other as the music industry transition into music ecosystem on the Spotify platform. But as big as
we've gotten and as strong as our leadership position is, there is still a lot of growth ahead for Spotify.
Let's consider these stats for a moment. Only 12% of smartphones that are payment-enabled in our 65 countries and
territories are using Spotify today and there is an estimated 1.3 billion payment-enabled smartphones in those markets
today and through 2021 that number is going to grow to 1.7 billion. So as we enter more markets around the world we
believe that there would be another 1.3 billion payment enabled smartphone, that's 3 billion smartphones in total. And
we only recently launched in Japan, Indonesia and Thailand and we're working on launching in some of the biggest
markets in the world, places like India, Russia and most of Africa, which have very rich musical cultures. And through
our investment in Tencent Music in China will also have great exposure in the growth of the Chinese music market.
And then of course our advertising business, which is also growing super-fast and it's one of the largest digital audio ad
platforms in the world. If we have just begun to invest in non-music audio and in our first year we became a top three
podcast player in 2017 and Spotify is one of the most used apps in the world with average use of over 49 minutes
across both of our tiers and radio still has about four hours of usage. So we think that there is a huge opportunity to
capture share here. So I think it's safe to say that if we only focus on MAU and subscriber growth, with Spotify's today,
we will continue to put out some pretty big numbers, but we see a bigger opportunity.
I want to take you through our mission statement. So our mission is to unlock the potential of human creativity by
giving a million creative artists the opportunity to live off of their art and billions of fans the opportunity to enjoy and
be inspired by these creators. And the great thing about having a goal like this is that there's really no other company
that has this as the sole purpose of their company. There is nobody else is doing what we're doing. We're creating an
ecosystem of mutual discovery and benefit for millions of artists, billions of fans and really the entire music industry.
Now looking back, I kind of think that we could have done a better job of telling the story before today and as I am sure
you know, our arrival on the scene caused some concern from others who really didn't understand our intentions. But
today, I think Spotify's impact speaks for itself. Everyone agrees that music streaming has returned the music industry
back to growth after many years of decline.
Let's put this in context, the industry have declined 40% from 1999 through 2014, but it increased 3% in 2015 and then
another 6% in 2016. And streaming lead this growth and Spotify is the dominant global streaming platform. So every
day, our users share with their friends the joy of exploring music through Spotify, which creates an incredible word of
mouth engine for our business.
So I think the opportunity in front of us is even bigger than we thought when we started out simply trying to help
people access the music they want to hear. So at one-time, radio was the consumption and discovery tools for new
music, but we think that streaming and Spotify in particular, has an even greater opportunity to scale, reaching billions
of people around the world.
So when I said that we're still in the second inning here, it's really because as successful as we are in streaming, we
don't really think of Spotify is just a streaming music company anymore. Instead, we're building a vibrant ecosystem of
macro and micro markets around the world that is creating new opportunities for artists of every level of fame.
Page 3 of 26
Company Name: Spotify Technology SA Market Cap: N.A. Bloomberg Estimates - EPS
Company Ticker: SPOT US Current PX: N.A. Current Quarter: N.A.
Date: 2018-03-15 YTD Change($): N.A. Current Year: N.A.
Event Description: Investor Day YTD Change(%): N.A. Bloomberg Estimates - Sales
Current Quarter: N.A.
Current Year: N.A.
It's everything from the superstar to the artists whose musical career is really just still a dream. I think this puts us on a
growth trajectory of generational proportions.
And a very important piece of this puzzle and I think something that's not widely understood, because it's really outside
of our consumer experience is our creator experience platform. And this is a set of tools that we're still expanding, but it
helps creators, labors and managers, not only optimize their experience in Spotify, but really their fan engagement
overall.
In our data and insights, it enables artists to connect with their fans and learn from their fans in ways that's never before
been possible. So for example, they can see where they have a significant engaged audience and plan their touring
schedules accordingly, they can talk to their fans directly to design or sell a concert merchandise, or even invite super
fans to special events.
They can of course better understand what songs are gaining traction and which are ones that are being skipped, and I
think this transparency is unheard of in our industry. And this is the other half of our two-sided marketplace strategy,
the complement to the consumer platform.
So why does this matter? Well, because we all know information is power, and for many, it really helps bridge the gap
between the struggling and the successful, and I think through this once again, the power is rebalanced. There are of
course more talented artists in the world than the pipes of the traditional music industry could handle.
And this industry always had to pick winners and losers, and it wasn't really driven by any kind of bad intent. It was
just the reality of doing things in the traditional world. It's always been too expensive to do proper marketing for a
concert in a theater with 500 seats, and it's been too expensive to record and properly promote an artist, who doesn't
have an obvious path for hit. And if you were doing a global marketing campaign, you really needed to choose an artist
of proven value.
With Spotify, those filters are now starting to fall away, which creates more economic opportunity for everyone in the
industry. So all of a sudden, Metallica is adjusting its concert setlists from city-to-city to make sure that they play the
most popular songs in each of those markets based on Spotify data. And this tale is not just for massively popular artists
like Metallica, but really again through those smaller artists who none of us have even heard yet, artists like Dermot
Kennedy. So in 2015, Dermot was performing on the streets of Dublin, and today, after being screened by over 0.5
million users on several of our discover weekly playlists, Dermot is now about to hit 2 million monthly listeners on
Spotify.
And he's a full-time musician and he is playing shows around the world. I think this is such an important part of the
Spotify opportunity, because this is the part that nobody else is doing. And some people say that Spotify is disrupting
the music industry. But I think we're really just part of the evolution of the music industry, we don't want to replace
anyone, we want to make everyone better, more efficient, and have more impact.
And if it's easier for people to discover and enjoy new music, people will listen to more music and that's the foundation
for our flywheel.
The more people discover, the more they listen, and the more they listen, the more artists will be successful, and that in
turn of course will attract more people to Spotify. So I know it's popular to make comparisons, but at Spotify, we are
not focused on selling hardware, we're not focused on selling books, we're focused on music and connecting artists with
fans and I think that in itself is a huge business. Nobody else has more than 3,000 employees focused on just this one
thing, and nobody else has the global scale that we've already built. And of course, as we continue to grow Spotify and
to pursue this mission, we will update you on our progress against these goals, and how we are doing as a business.
And we will do so in a transparent way and hopefully over time earn your trust.
And as you'll see today, we have a very strong management team that is committed to building a great business. But to
put a finer point on it, transparency is really a key pillar of our culture, it's always been, it's just who we are and how
we do things.
Page 4 of 26
Company Name: Spotify Technology SA Market Cap: N.A. Bloomberg Estimates - EPS
Company Ticker: SPOT US Current PX: N.A. Current Quarter: N.A.
Date: 2018-03-15 YTD Change($): N.A. Current Year: N.A.
Event Description: Investor Day YTD Change(%): N.A. Bloomberg Estimates - Sales
Current Quarter: N.A.
Current Year: N.A.
We just haven't done it externally to the same degree as internally, but we're really excited to change this now. So as
you start to follow Spotify as a public company, I hope you let us know if you think that there are areas where we can
do better in terms of meeting that standard.
And as the team takes you through the business this afternoon, you'll get a closer look at how we gain our leadership
position, and you will also get a detailed view of how we're going after the even bigger opportunity now before us. And
this is a team that's proven its ability to execute, grow and win on a global scale. So I'm very excited for you to hear it
from them directly.
Thanks for indulging me as of taking you through this overview of Spotify, and I will be back in a bit to tell you a bit
more about our marketplace strategy. But for now, let me hand it off to Gustav, who will talk more about our product
and platform growth. Thank you, everyone.
Page 5 of 26
Company Name: Spotify Technology SA Market Cap: N.A. Bloomberg Estimates - EPS
Company Ticker: SPOT US Current PX: N.A. Current Quarter: N.A.
Date: 2018-03-15 YTD Change($): N.A. Current Year: N.A.
Event Description: Investor Day YTD Change(%): N.A. Bloomberg Estimates - Sales
Current Quarter: N.A.
Current Year: N.A.
streams to happen that was much, much faster. Fast enough to feel instantaneous.
And for users the effect was as if all of the recorded music was sitting right there on your hard drive, waiting for you
for free. It was like a magic trick and user growth just took off. Then a few years later the world went mobile, and all of
a sudden everyone had a smartphone and, of course, people want it from their smartphone, but they've gotten used to
getting from Spotify on their computers, instant, on-demand access to all music ever made. But how do you achieve
that in a world of poor and sometimes very expensive mobile connectivity? This time the solution was a combination of
technology innovation and licensing innovation. We built a way to seamlessly offline sync your music and we worked
with labels to design new contracts that allowed you to stay offline for up to 30 days, while still reporting royalties
correctly. And as we rolled this feature out, we saw subscriber growth skyrocket as people wanted Spotify to travel
with them on their phones. So these are just two examples of how these principles have played out over the years and
there are obviously many more.
Let me take you through our three guiding principles; ubiquity, personalization and freemium in some more detail,
starting with ubiquity. From the very beginning, we believe that you should be allowed to use Spotify on whatever
device you wanted. And as software keeps eating the world as Marc Andreessen famously put it, our opportunity also
keeps expanding. Most recently with the whole now becoming a software platform to these connected speakers, we've
all heard of.
We have more than 250 partners today that help make Spotify a service that you can use on pretty much any connected
device for social networks. These are partners like Samsung, Apple, Google, Amazon, Sony, Microsoft, Tesla, GM,
Facebook, and Twitter. Back in 2014, we believe that connected speakers were about to take off. We figured that they
would simply replace your home stereo, because it was a much better solution, so we invested early and we were on the
very Amazon Echo and Google Home voice speakers ever shipped. And as we're watching the really incredible growth
of these voice speakers, we are not just watching the home become software, and that's available to companies to
services like us, we were also watching the home become multi-platform and more heterogenous, running different
operating systems in different devices from different providers, not these single platform ecosystems. And this is
exactly why we made a bet on ubiquity.
Our cross-platform protocol Spotify Connect is in the firmware of nearly every speaker shipped today and lets users
transfer control and playback between TVs, cars, receivers, phones, laptops and game consoles. And being everywhere
allows us to get a more complete understanding of our users. And what we see is that, people use Spotify on more than
one device are much more likely to stay with lower churn and higher lifetime value. And today more than
three-quarters of Spotify subscribers are using Spotify on multiple devices, thanks in large part to things like connected
speakers. And Barry will take you through this in some more detail in his presentation.
Of course, the car has always been a very important place for music listening. 30% of music listening in the US still
happens in the car today and it's where most of the radio market share, that Daniel mentioned, exist. So, we're investing
heavily in the car use-case. We have deep integrations into the audio platforms of the leading audio make -- automakers
today ranging from in-touch navigation that uses your phone as a connection all the way to deep integrations with data
streaming costs covered for the life of the car with Tesla in Europe. We also have integrations with Apple's CarPlay,
Google's Android Auto and we're working with many more to rollout integrations into the market.
But already today, we believe that more than 50 million Spotify users are using Spotify in the car, according to our
data. So as different companies keeps taking out different part of your life as a consumer, one company owns your
phone, another company owns your speakers, third company owns your car, fourth company owns your TV, we believe
that the right bet is on ubiquity. Doing what is best for the user, not for the company and trying to solve the user's
problems by being everywhere.
This brings us to the principle that is really defining, the next phase of differentiation and innovation on Spotify,
Personalization. All early users loved the playlists. I mean, they were literally sound-tracking their lives. Not just
connecting music by traditional genres, but also by other interesting angles like the mood they had or activities that
they were doing. And as we watched all of the music in the world, get organized by music fans on Spotify back in
2008, neatly bucketed into playlists and labeled with names, it's slowly dong on us, it took over, but it slowly dong on
Page 6 of 26
Company Name: Spotify Technology SA Market Cap: N.A. Bloomberg Estimates - EPS
Company Ticker: SPOT US Current PX: N.A. Current Quarter: N.A.
Date: 2018-03-15 YTD Change($): N.A. Current Year: N.A.
Event Description: Investor Day YTD Change(%): N.A. Bloomberg Estimates - Sales
Current Quarter: N.A.
Current Year: N.A.
us that we were also watching the largest crowdsourced music classification project ever undertaken.
Today, that project is powered by 159 million people and we're collecting 3 billion music-related events every day and
we're using this data to deliver deeply personalized discovery that keeps driving engagement ever higher, as you will
see in the data that Barry shows you. To put this into perspective, one way to think about Spotify is to think about the
vast music catalog as a landscape and really to think about the playlist as the way you navigate that landscape, as your
car.
Now until recently, you had to be a pretty good driver to get the most out of our catalog. If you knew enough about
music history, you really stayed up-to-date on new releases, you could use our search box and our playlisting tools to
create really great sessions. And in the early days we had a lot of users who were really, really good at music and it
created literally billions of playlists. But all of this data is now unlocking what we think of as self-driving music,
automated discovery for people who aren't music experts, accurate predictions on music that we think you would like
based on your past behavior and other signals that we see in the Spotify ecosystem. With users now spending more than
49 minutes a day on Spotify, our lead is constantly expanding and we estimate that already today, we have more than 5
times the amount of music data that is competitive to us.
So going back to the car analogy, think about it this way. Being analyst who cover technology, you all know that the
race to win in self-driving cars is about miles driven, it's what every company reports and what everyone looks at, right.
The one with the most cars on the road, that drives the most miles per day and collect most data is going to win that
race. Well, we have by far the most cars on the road in terms of users, but importantly they are also driving more how
hours per day than anyone else, so more miles. And we're putting more new cars on the road than anyone else because
of our free tier. So as the platform keeps getting smarter, we're now starting to deliver meaningful discovery, not just
average music listeners, but even to the experts, I mean no matter how much you know about music, it is physically
impossible to go through every track in our catalogue.
Today we have over 35 million tracks in our catalogue capital and we're adding 20,000 new ones every day. This is
self-driving music, but the machines haven't taken over. We're leveraging the taste and expertise of the world's best
music curators, added human layer to machine learning at Spotify. We call this our algo-torial approach and here's how
we know its working. Today, over 30% of the music that is being listened to on Spotify is programmed by a
combination of our algorithms and our editorial teams. So more and more this is not just a vision, people really are
handing over the wheel to us. People are finding new music that they like through services like this couple weekly, the
unique personalized playlist that we built for every Spotify user, every Monday. And they are amazed to see us
accurately rebuild the mixed tapes of their use through services like time capsule to hope you've had a chance to try.
The use is predictive analytics to look back at the catalogue that was popular when you were a teenager. And what's so
interesting to ask about this is how it's changing consumer behavior. We see people listening to many more artists than
they used to and they are listing across genres. It's really an amazing phenomenon.
And suddenly, if you think about it, we're not really in the same business as everyone else anymore. We're in the
business of discovery and we think everyone else is still mostly playing the game of access, but access alone isn't
enough anymore. In the world where the catalogue can be found anywhere, value shift to discovery. This is what we
are today. And the deeper we go into discovery the more we see the leading indicators of growth, engagement, timing
the App and word of mouth just go up.
So this brings us to the third and last principle, Premium. As you think about how we build Spotify for growth. The free
experience has really been the linchpin of our business and it continues to be the most important growth driver today.
As we already covered, our strategy is to be everywhere, by being pure software integrating with anything and then try
to deliver on the promise of personalization better than anyone else using our data advantage that seems like a pretty
coherent strategy, right. But if you really want to reach the most possible users and what is a very competitive world,
what is the most aggressive strategy you could have. Well, it would have to be to lower the price point to 0, all right.
Something for nothing. It's the greatest value proposition in the history of the world, and simple math ensures the you
won't be on the cut on price. And if you think about it, it's really nothing new, this is how people have been consuming
music on the radio forever. So while we will talk a lot about our premium today and we are very proud of our premium
Page 7 of 26
Company Name: Spotify Technology SA Market Cap: N.A. Bloomberg Estimates - EPS
Company Ticker: SPOT US Current PX: N.A. Current Quarter: N.A.
Date: 2018-03-15 YTD Change($): N.A. Current Year: N.A.
Event Description: Investor Day YTD Change(%): N.A. Bloomberg Estimates - Sales
Current Quarter: N.A.
Current Year: N.A.
product.
We actually invest quite a lot in our free product, a personalized music experience that stays free for the rest of your
life and we believe that this is the unique offering in the Google Play and Apple app stores and that there is huge
demand for it. If you think about it pretty much everyone like music, right. Is that one of the few use cases that is truly
global and still exists that no has taken. So we're happy to meet this demand, because the free product does a few
critical things for us, they may not to be obvious to you at first glance. First, it reaches the millions of consumers who
are still on the fence about paying for music and as they continue to think about that they are in our ecosystem, which
obviously gives us a huge advantage down the road. Secondly, it allows us to learn from the biggest possible group of
listeners in the world and the data from these free users not only improve the experience for them, but also for everyone
else. And third, once they have Spotify on their phone, in their car, on their speaker, on their PlayStation and all of
these devices, what we see is that music simply becomes a much bigger part of their life. And the more they engage,
the more likely they are to decide that paid music is for them, so simply put, the more you play, the more you are going
to pay. And as they come to that conclusion, they are deeply on-boarded into our system and very, very likely to choose
Spotify premium as their paid music provider.
If you think about it, why would you pay upfront for product that you have no experience with, that doesn't really
happen anywhere else. So promotional offers can only take you so far. Spotify's free trial is one of the only free
streaming solutions for people who are interested in streaming. It allows us to reach much, much deeper into the
market, way beyond people who self identify as music people to the true mainstream. And as our business has grown
and changed and we have gone deeper into technology and deeper into music over the years, a lot of things has
changed, but the price that we envisioned more than 10 years ago is still the price today. The opportunity to change the
way everyone experiences music, this is what keeps inspiring us and this is why we keep trying to raise the bar both for
fans and for creators.
Thank you for listening. I hope this has been helpful to you. Now I'm going to ask our Chief Marketing Officer, Seth
Farbman to come up on stage and take you through our brand and platform growth. Thank you very much.
(Video Presentation)
Page 8 of 26
Company Name: Spotify Technology SA Market Cap: N.A. Bloomberg Estimates - EPS
Company Ticker: SPOT US Current PX: N.A. Current Quarter: N.A.
Date: 2018-03-15 YTD Change($): N.A. Current Year: N.A.
Event Description: Investor Day YTD Change(%): N.A. Bloomberg Estimates - Sales
Current Quarter: N.A.
Current Year: N.A.
For example, in India, aided awareness of Spotify is 36%; and in South Africa, which we only launched a couple of
days ago, it's already at 45%. And this before we have spent a single dollar on marketing. It's come solely through word
of mouth, nearly half the people who try Spotify do show on the recommendation of others. One reason is, we've
become connected to culture. When cultural events happen, the very things that bring us all together they are reflected
and the music people listen to on Spotify. When culture happens out there we see it in here.
For example, during the solar eclipse in the US last year, we saw a spike in streams of Bonnie Tyler's Total Eclipse of
the Heart. When Sweden, our home country, played to get into the World Cup, we saw a rapid increase in the streams
of the playlist Go Sweden. And when David Bowie recently died fans went to Spotify to share and celebrate his music.
Culture happens on Spotify.
But sometimes we actually create culture. A year ago, little more, as President Obama was leaving office, we decided
to publicly offer him a John. He's a music fan who regularly puts playlist on Spotify, so we figured why not. Now it
turns out he'd other things he wanted to do, but it's still worked out pretty well for us.
Take a look at this.
(Video Presentation)
This was a cultural news story and it created massive social engagement. If we were to buy that level of attention, we
believe it would be roughly around $9 million. And in case you're wondering about that job, we're still holding up for
the right candidate. This approach to creating demand for Spotify, it's highly effective, yes, but it's also highly efficient.
All of our marketing is designed with earned media, social sharing and word of mouth in mind. And it's not just music
fans who share, it's also artists like Katy Perry, who proudly shared her connections with Spotify with her legion of
fans who view the single Instagram video more than 2.3 million times.
Look, it's no secret that some of our competitors have sizable media budgets, but we're not looking to outspend them,
instead we are leaning on authenticity, data and culture to drive the kind of popularity that just is not for sale. So, it's
also why we created Wrapped, our end of the year campaign that is built on insights from audience data and taps into
this common desire we all have to share things about ourselves. If you're one of the more than 100 million people, who
received a personalized dashboard of your listening habits for the year, you already know what I mean. The results can
be inspiring, there are always interesting and occasionally they're quite humorous. Here is 2017 Wrapped.
(Video Presentation)
And it worked. This holiday campaign contributed to over 6 million new premium subscriptions, 2.35 incremental free
MAU and it generated over 1 billion streams of the Wrapped playlist in just over 10 days making it our fastest growing
playlist ever.
Companies often talk about the power of influencers, but what I'm describing is really something more, brand
evangelists. This doesn't happen by accident, it's strategic and it's purposeful and it's powered by our data advantage.
Just as Spotify's user data enhances our products it also helps our ability to grow efficiently through marketing. Our
data allows us to deliver the right message to the right audience at the right time, maximizing the impact of every dollar
spent through performance marketing channels like paid search, paid social and programmatic display. Last year
performance marketing alone drove of 12% of our registrations and 21% of our subscriber conversions and we continue
to see our data help us drive even more efficient growth.
Lastly, I want to share more about how we are differentiating Spotify by creating unique sub-brands from some of our
most popular curated playlists like, RapCaviar and Viva Latino. As Daniel said, we believe that RapCaviar is bigger
than any hip-hop radio station in the world, but it's not just a list of songs, it's a virtual gathering place for the global
hip-hop community, a passionate community of artists and fans. We are turning the playlists into lifestyle brand with
artist focused video content, live concerts and experiences and targeted marketing plan. This past December, we
created RapCaviar Pantheon in annual program to give the three most influential hip-hop artists the attention that they
deserve. But it went beyond just promoting them on the platform, instead we put on a public exhibit at the Brooklyn
Museum supported by a short documentary film narrated by (inaudible). It brought us an incredible amount of
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attention. The film alone was viewed online more than 3.5 million times with a click-through rates, 35 times higher
than the industry benchmark. And in the first week it launched, we saw a nearly 700% increase in people saving the
RapCaviar playlist. And what RapCaviar is to hip-hop, Viva Latino is to Latin music. Now Latin music has become
mainstream music. You remember (inaudible). At Spotify, we saw this coming and we invested in Viva Latino. It
quickly attracted in audience that we believe made it bigger than any Latin music radio station in the world. And
through marketing including the television commercial that aired during the Latin Grammy's brand awareness grew by
more than 15%.
(Video Presentation)
And this is just the beginning, Spotify is different. We're not just about access to music, we're about discovering. We
connect artists and fans to each other and to culture. We have a product that is best-in-class and getting better every day
and we have a meaningful data advantage, but we also have a brand that is loved by millions of fans and artists who
talk about Spotify day-in and day-out. Thank you for your time. Let's take a quick ten minute break then we're going to
continue with the program. Thanks so much.
(Video Presentation)
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So, this is not like a streaming video service where only a few thousand items of content that matters. On Spotify, there
will be more creators and the number of creators that matter will also increase, and I know this sounds like a big leap,
but I think to understand what's changing you also have to understand that's Spotify is really a very different service
than it was just even a few years ago. So, up until recently, Spotify was kind of more like a search box. Listeners have
to come to us and they have to know what they want to listen to and it used to be that artists needed to drive demand
elsewhere and then bring it to Spotify. But today Spotify, is much more powerful. Over 30% of consumption on Spotify
come from music that we suggest the listeners through our sophisticated programming, and that is a massive
transformation.
So, by constantly giving people the right content, we create a better experience, which in turns means people will listen
more. And the key to providing a better user experience as it turns our is serving them new personalized discoveries.
And this also perfectly serves the artist needs, who wanting to grow their audience and it becomes a very powerful
virtual cycle, it puts Spotify and control of the demand curve. And this opportunity is one, that really just beginning to
uncover, but it's one that excites us a great deal and this is why we're in the business of discovery, and this is a problem
the software is well-suited to solve and we're getting better and better at it each month.
But the impact we're seeing already is quite staggering, 10 billion times every month an artist stream those Spotify, but
someone who's never heard that artist music before. That means 10 billion discoveries every month. There is 10 billion
chances for an artist to win a new fan and 5 billion of those 10 billion discoveries were programmed by our Spotify
content team and our algorithms. We are driving discovery at scale around the world, and I think this statistics highlight
a big opportunity to artist, people are listening to more music and they're listening to more artists and they're doing on
Spotify. So, if you're an artist in search of an audience, you really want to be on Spotify, and making it on to one of our
your playlists can literally change artist life. And the global appetite for Spotify playlists is only increasing. So, we
believe that today's topics today as a bigger audience than any US radio stations. And as Seth, mentioned the before,
RapCaviar has more followers than any hip-hop station in the world, and Viva Latino has the biggest audience of Latin
fans in the world. And then of course Discovery Weekly, which features more than 150,000 artist every single week.
I talked about how our vision for the industry is different and how we don't believe in gatekeepers. We're simply
providing more outlets for artists and labels to build their audience. And from this foundation of a more open and
accessible ecosystem, we're also building services, not just for listeners to have a great experience, but really for the
entire creative community to thrive its artists, songwriters, labels and publishers. And I think as we grow the
opportunity for great art to find its audience that the opportunity for those supporting creators and artists also grows.
And that means audio engineers, studio musician, songwriters, publishers, labels and potentially even new members of
the creative community, we can't even currently predict.
Now I think it's safe to say that the rule that those service providers play will shift and evolve, but need to nurture great
talents is really larger than ever before. And we believe the great music and artists in the future will come from
specialized talent incubators, like the labels of the past. And that gives opportunities to the next Berry Gordy who
found Motown, or Rick Rubin who founded Def Jam, or (inaudible), who founded that Lathanic Records. And those
small labels really shapes cultures and labels like this will be economically viable again in this emerging uses to
system. And that of course means a lot more great music. So, as the platform grows and the ecosystem flourishes, we
will continue to build out our marketplace of services for the industry. This, so that artist can take advantage of the fan
relationships that are being formed.
So, in closing music has changed dramatically in the last decade. And there's really no doubt in my mind that the
industry will continue to evolve. And as we look ahead, we believe the new digital marketplace, not only gives artists a
better opportunity to take control over the destiny, but that Spotify's uniquely positioned to accelerate progress to this
new world, through software. So, we're confident that what seems improbable today, at least that far away.
You will next hear from Charlie Hellman, who leads our Creator Marketplace team. He will talk to more about the
incredible suite of tools that we're giving artists and labels so that they can have more control. And soon we believe
millions of artists will be using our platform to solve the inefficiencies and the creation and distribution and marketing
and discovery, that today it limit their opportunities. And after Charlie, Troy Carter, our Head of Creator Services will
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tell you A bit more about the services that we're providing on top of the tools with artists and labels at all levels of the
industry. And so he's spent his career helping artists like, Lady Gaga, Meghan Trainor, and John Legend built their
careers as one of the top managers in the business. And he is now doing this work at Spotify providing very similar
advice about things like what song should be a single, where and when to tour, how to mention artists brand, and he is
really helping both artists and labels on how they best use the platform at the services we're building.
So, with that I will now turn it over to Charlie, to share some more. Thank you so much.
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hundreds of artists gave their Spotify superfans the opportunity to buy tickets before they went on sale. Both superstars
like Katy Perry, but also many Hindi artists like (inaudible). And through these targeted campaigns, in 2017 artists sold
more than 1 million concert tickets. So word is getting out about the services we provide to artists and how powerful
they can be.
We launched Spotify for artists less than a year ago and we've already seen more than 100,000 artists using the product
every month. Now to put that in perspective, those hundred thousand artists make up about two-thirds of all the streams
on Spotify, so that let's you know that the most successful artists have been early to adopt. And as awareness grows, we
know that Spotify for artists will proliferate throughout every level of the artist community. With the services that we
have in Spotify for artists and the products we're still building into it, we're providing new options for our artists, labels
can succeed in music.
Now fame and fortune aren't the only things that artists care about. For most artists nothing is more important than
realizing their creative vision, the music itself. But in yesterday's music industry, creating professional quality music
was the privilege of a limited few, the people who had access to high end equipment or knew the top producers. But
today things have changed completely. We want to make sure that the Kedu [ph] is growing up with the talent to be the
next Paul McCartney or the next Siddle has access to the tool she needs to have a shot.
So we have dedicated research and innovation teams working on software to help musicians make their best work. One
of those teams is Soundtrap, we acquired at the end of last year. Soundtrap is an online studio that let's people from
anywhere in the world collaborate in real time. They can make a podcast or song together and they can do it from any
type of device. We're continuing to invest in Soundtrap to make it easier to use and more powerful so that anyone with
talent can produce professional content. Now our position as the leading listening platform allows us to think about
creation tools a little bit differently. For the last 70 years, music has been an audio recording and a square piece of
cover art, because that's what LPs, CDs and downloads could support. But our phones can do so much more than that
and we want to let artists take advantage.
Since Spotify is both the interface for over 100 million fans and the artists, we can give artists new ways to express
themselves creatively. We can give fans more than just an audio file. We're building new formats that exist only within
Spotify and we show you one example of what that can mean. We're starting to give artists the capability to add visual
layers to their music, not just cover art, but a dynamic experience that they program for their fans as the music plays.
We've only begun to test this capability, but we're already blown away by what artists are doing with it. For example,
recently Migos a Hip Hop Trio from Georgia embraced this format for their songs on their new release. And the fan
reaction was amazing. This is a whole new canvas for artists and as it develops fans will benefit from a totally new
experience on Spotify. We're also extending this type of capability to our growing podcast business, so that host can go
beyond just talking about the days news, but they can also highlight key points in the story with glanceable visual
elements. We started piloting this format a few weeks ago with partners like BuzzFeed and Cricket Media. And
generally speaking, we know the podcasts are just scratching the surface of their potential on Spotify. With the same
creation, promotion and monetization tools that we're building for musicians, we know we can open up opportunity for
all types of audio creators.
So these are the problems we're working to solve for creators every day. When music first met the Internet, technology
was hurting artists, but we flip that on its head, the tools we're building now will power the next wave of artists, to
understand their business for themselves, to grow a fan base whatever their genre, to earn a living both on and off
Spotify and to create in new ways, releasing music when and how they want to. In tomorrow's music meritocracy,
Spotify isn't the gatekeeper, it's the enabler, enabling musicians, podcastors, labels to have new options for how to
succeed. Serving artists in these new ways can be transformational, the opportunity is huge for artists for fans and for
Spotify. Next I'm going to hand it to Troy, because as we build this marketplace, we're guided every step of the way by
creators themselves, we're hearing from them directly. And that connection to the artist community is largely made
possible by Troy and his team, so he'll now tell you about how we're partnering with artists. Thanks.
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for independent artists, and says appreciative of our support that will be a huge understatement. I let Gashi tell it.
(Video Presentation)
I think he was excited. And as you guys can see, we stand with all types of artists. Our editorial process is a unique
meritocracy in a industry that was once controlled by just a handful of gatekeepers, and it's a win for both sides. Artists
and labels, they began to realize that we are much, much more than just distribution. We've given them a powerful
platform to grow their audience, get fans attention and to keep people engaged. We have over 4,500 of our own playlist
that range from pop to the most obscure genres you could possibly imagine. We even accommodating some artists
whose formats have all but disappeared from radio programming.
Charlie mentioned earlier, our fans' first ticketing program, and let me explain why this is such a big deal for our artists.
We now live in a world where the most passionate fans are sitting in a nose-bleed sections right now. And while the
front row tickets are going to scalpers and platinum credit cardholders, all taken away in a presell, and this is a pain
point for both artists and the fans. Artists feed off at his energy in the front first few rows and the fans are kind of stuck
in the back. So superfans, they want to be front and center seeing everything firsthand. With fans first, we were able to
give those fans the front rows back, and now we're filling entire venues. And just last year alone, we've executed over a
1,000 campaigns for nearly 700 artists, generating $40 million in ticket sales, and we have a lot more coming in 2018.
Well, before an artist can even book a show, they first have to be discovered. This is one of the top priorities in the
music business, sign in and develop a new talent, that's considered the music industry's R&D and is also where a
significant amount of our resources are being deployed in the music industry. When artist start to gain traction on the
platform, Spotify team and our technology are right there to provide support in terms of marketing, playlist, and end
strategy. We call that program rights. And as you've heard from Daniel and Charlie, we're helping artist at every stage
of their careers now, including some of the most popular artists in the world.
Some of the biggest names in the music industry actually credit Spotify now. We're helping them to become the biggest
stars in the world today. In fact, all five nominees for Best New Artist at the Grammy's this year, we've all championed
them from the beginning of their musical journeys and they also showed up their format at our Grammy celebration this
year. Khalid, SZA, Lil Uzi Vert, Alessia Cara, and Julia Michaels, they all gave an electrifying performance in front of
300, it is, superfans and several hundred industry execs and their fellow artists. They will come because they owed us
something, they came because they wanted to support Spotify, they were proud to associate themselves with Spotify.
They didn't ask to get paid, they just came out to support same way we supported them, that's the definition of a true
partnership.
We've also begun to integrate these sort of live experiences into our playlist brands as well. Last year, with RapCaviar
Live and we did t in small nightclubs and theaters with acts like Cardi B and Migos, and this year we'll be producing
them in arenas that can host tens of thousands of fans, and we're just getting started on this. The combination of
RapCaviar playlist and the live experience, it seems that RapCaviar has the voice of -- and the global authority in urban
culture now. Artist know this isn't just a biggest hip-hop playlist in the world, it's respected. It's become the most
important signal of where urban music is going now, and being part of that playlist can break an artist career overnight.
You also heard us talk a lot about the power of our data today. We know which audiences want to hear which music
and how to get it to on. Not just in the US, but all throughout the world across all genres as well. Spotify helps music
travel in ways that were previously unimaginable. Genres like K-pop are no longer just to train their career. Our
longrunning partnership with K-pop's megagroup BTS is inspired and they have audiences all across Brazil, France,
Germany, Indonesia, and Mexico, all the unite. Our editors took their Korea language song and set it next to some of
the biggest pop songs in the world and we exposed these bands to millions of new listeners, and this is how a regional
genre can go global.
We're not started as guy guys manager, the industry looks a whole lot different. It literally took almost a full year to get
our single Just Dance played on the radio, we struggled. Now, instead of spending years biting their way through the
industry gatekeepers, artists can break out in just weeks. And if you're really good, maybe even days, now that's fair.
We're helping artists and labels managed through this transition. We're helping them see that successes within their
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reach and that we can help them achieve their dreams. Today, Spotify is not just releasing the music, we're actually
connecting artists and labels with communities of fans all throughout the world. Industry looks a whole lot different
now, I can tell you that. I dedicated my life to music and to artists and to be part of such an incredible thing, and to be
able to bring this to the world. I'm very proud to be a part of Spotify and I thank you, guys.
Next up is Alex, our Chief Premium Business Officer. Thank you.
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Our objective is to have a full lifecycle of premium products that can meet consumers' needs, across all ages, across all
demos, and, hopefully, for multiple decades. So as these plans were rolled out over the last couple of years, average
revenue per user has come down, but we've seen substantial retention improvement and much faster audience
expansion. We are covering more parts of the demand curve. So these plans have been very meaningful for cohort
retention, but make no mistake our commitment to product R&D and the resulting user engagement has also been
important. And as you can see from the chart here, premium users are staying with us for longer. Over the last three
years, each cohort of new subscribers shows increasing levels of retention.
Okay. Let's go back to the user journey. Once the user joints premium, engagement goes up even further. Premium
users stream on average more than 80 minutes of content per day. So, let me explain this further. Remember, 60% of
our users come from free. We've already learn a lot about them. They are not coming in cold. This means their
experience from time of conversion is a much richer one. Your daily mix has already trained. And as users gain full
control over what songs they listen to, the machine learning gets even better. Users recommendations improve and they
discover more music. You don't get engagement like this if people don't love your product. So another metric that we
pay close attention to is our net promoter score, or NPS. And as you heard, today, that number is 79 for premium, and
that's 79 globally, its a big number. Of course, we are pleased by this, but we know we need to keep earning this
positive sentiment every day, because we know that the strength of our relationship with Spotify users is also our best
growth driver.
Again, remember, as Seth mentioned, more than 50% of our users tell us they first tried Spotify, because it was
recommended to them by a friend. And that friend was likely a satisfied premium customer. So this willingness to
recommend Spotify fuels a virtuous cycle that's continuously fills the top of the funnel with new users, especially in
free, which feeds premium, as I described. So new free users explore the product, habits are formed, engagement goes
up, and at some point the join premium, then with more control and even more personalization, engagement goes up
again. This results in satisfaction and word to mouth that then drive new user intake and boo we are full circle, just
wanted to check that you're still with me.
So this cycle has enabled us to grow quickly, the improving retention drives high lifetime value, the strong order mouth
results in lower acquisition cost of new subscribers, this means that we are growing at a fast rate, while maintaining
excellent subscriber at unit economics. Our lifetime value Is 2.7 x or subscriber acquisition cost, with these economics
we can and should continue to investment into customer experience and growth. It allows us to add even more energy
back into an already effective premium fly will. And naturally we do this by investing in marketing to acquire even
more users, but we also commit to improve the experience of our existing customers and we do this by leveraging our
data advantage. We are only in the early stages of the potential personalized programming as you heard. And as you
heard earlier today, we also do it by expanding the reach of Spotify through platform ubiquity and our many unique
partnerships, premium users love this kind of stuff that the most avid users of these features and these platforms
because it adds more value to create more satisfaction, but we don't stop there. We also invest in our existing
subscribers by adding value that we believe they want, but don't necessarily expect. For example, we recently bundled
Spotify for students with Hulu in the US, this software was an incredible success, it both amazed our existing
customers and added new ones expanding both Hulu's and Spotify's audiences.
We also have a similar partnership with Headspace in Europe. We will continue to explore creative ways to add value
back to our existing subscribers. Again this adds satisfaction, it adds retention and it increases word of mouth, fueling,
the premium fly will yet again. So there is a step, it gives you the -- a sense of the size of our opportunity in front of us.
There are 1.3 billion payment enabled smartphones in use. And yet just 12% subscribe to news extremely service, only
12% Spotify with our 71 million subscribers owns half of that existing 12%. I think you can see that potential. Our
unique operating model and ability to innovate has allowed us to grow to the point where we are nearly double the size
of our closest competitor. And as Daniel mentioned, we anticipate our total addressable market to growth over 3 billion
in the future.
And as you can see, there is still significant opportunity remaining both for Spotify is already available and in new
markets. So that's a premium, sticky and it's got brand love and it's sitting on top of millions of free users that are
moving closer to premium every day. The winners are our back, smartphone adoption is growing, data costs are coming
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down and the premium flywheel catches these tailwinds perfectly. We have strong subscriber economics and we are
adding energy back to the flywheel and innovative to keep delighting customers and nobody else, nobody has our scale.
Thanks for attention and your interest in the Spotify premium. I will turn it over to Danielle.
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today about our investments in R&D for artists and creators, but we're also building a great experience for brands. We
were one of the first movers in the programmatic audio space and we've seen this channel double in revenue in 2017,
not just with audio but for video and display formats as well.
We've recently launched the world's first self-serve advertising platform for audio. This new platform helps businesses
of all sizes, build audio campaigns and connect with our audience on Spotify. So, in summary, Spotify ads represents
10% of total revenue and is close to a 50% growth business. We are a global brand across 65 markets with an audience
that takes us with them everywhere. We will continue to lean forward with ad innovation that allows brands to connect
with their most relevant audiences and drive business outcomes.
Thank you for your time. And I'd like to welcome our final presenter, our Chief Financial Officer, Barry McCarthy.
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I'll talk more about how we intend to manage the trade-offs between growth and free cash flow towards the end of my
presentation. We've already heard about our freemium model, which accounts for roughly 60% of our gross added
premium subscribers. Some of you may know that I began working with Spotify as an investor and a Board Member.
But it wasn't until after stepped in the my operating role that I realized the effect of the freemium model on the overall
economics of our business.
So, now some of you are looking at me like, okay, dude, are you kidding me? Which in New York's figurines roughly
means, are you the stupid? The answer is, yes or no. It just took me a while before I realized that the ad supported
service is also a subsea program that offsets the cost of new subscriber acquisition.
There are three ways to invest in growth; geographic expansion, marketing spending and developing a better user
experience. The third of these three strategies produces by far the most viral effect and impact. And that's why the key
to success in this business begins and ends with the user experience. I'll discuss why that stood a moment, but first I
want to make two points.
On this slide, you can see how the tech and dev investments we've made to improve the user experience have increased
engagement. The number of hours of content consumed per MAU has increased by more than 30% since 2015, because
the user experience is better. Why do we care about engagement so much? Because engagement drives conversion from
free consumption to paid subscription. If you remain engaged with the Spotify service, then over time more than one of
every two free users will become a paying subscriber. Now given our success with conversion, you may be surprised to
learn that most free users drop off the service over time, because it doesn't meet their expectations. And that's why
Gustav and his team are constantly working to improve the user experience. But for those who remain engaged, more
than 50% will become paying subscribers.
Now once our free user converts, it takes us an average of 12 months to recoup the cost of acquiring that subscriber.
The longer they stay, the greater their lifetime value to Spotify. In this chart, you see the cumulative lifetime value
measured in green and the net present value of monthly gross profit measured in blue based on our Q4 premium ARPU
and consolidated gross margins. This chart offers two important insights. One, the faster we grow into the subscribers,
the more money we lose when they join the service, particularly in periods of seasonally fast growth.
Two, the longer they stay the more profitable they become. And this second point has profound implications for the
profitability and predictability of the business as it matures. It also has important implications for competitive
advantage, which I'll discuss in a few slides.
Now, the primary driver of lifetime value at Spotify is churn. And the primary driver of churn is customer satisfaction.
And that's why our R&D and content teams are so heavily invested in improving the overall user experience on
Spotify.
The larger the sub-base gets the more operating leverage there is from extracting small improvements in the slope of
the churn curve and you can see from this slide that we're seeing small steady improvements in churn over time. Now,
this slide also shows us that over the life of an individual subscriber, churn declines, and that means that as the average
tenure of the subscriber base increases, the average churn rate falls.
So, if you and I both run competing subscription businesses and yours is older than mine, then even if our services are
equally light with exactly the same churn curves by customer cohorts, your average churn rate will be lower than my
average churn rate, which means that more of your marketing dollars are going to support new subscriber growth and
more of my marketing dollars are going to replace churn subs, which means you can grow faster than I can and beat me
(Technical Difficulty) like a drum, and that is a really good example of why scale matters.
Then the asset test for whether our business model is working is the LTV to SAC [ph] ratio, which was, as Alex
mentioned, 2.7 to 1 in Q4 of 2017. Now, as long as this ratio is positive, then we increase our enterprise value each
time we add a new subscriber. Even though we lose money on each new subscriber when they first join the service.
And this is one of the reasons you should expect us to continue to invest in growth at the expense of operating profit.
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Now, after LTV to SAC, the next biggest driver of margin expansion over time is the ratio of newly acquired subs to
legacy subs or recurring revenue. We pay to acquire the new subs, but the recurring revenue is free from a marketing
perspective. Over time, the ratio of free to pay shifts increasingly towards paid, which drives down marketing expense
as a percent of revenue. And this was the second largest driver of margin expansion during my 12 years at Netflix when
marketing expense fell from 24% revenue to 14% of revenue.
So if your business -- and this is another example of scale. Now, if your business is more mature than mine, then you're
likely to have more recurring revenue than I do, which means you can use your higher margins to drive faster growth to
sustain your leadership position. And it also probably means that your installed base is larger than mine, which means
you've got more subs telling friends about your service, which means you got more free organic growth than I do,
which means your overall subscriber acquisition cost, which is a combination of free organic plus pay (Technical
Difficulty) growth is probably lower than mine. So not only can you beat me like a drum but your drumsticks costs less
than mine. So where does all this leave us in terms of operating goals for the business.
As between growth and profit, you should expect us to manage for growth, because scale drives a sustainable
competitive and economic advantages, I spoke about earlier. And as between operating losses and free cash flow, you
should expect the business to continue to generate positive cash flow ex non-recurring items like the build out of our
US headquarters in 2018. Now, if the investments we make in R&D and content improve the overall user experience,
and if, as a result of building our two-sided marketplace, we come to own discovery and demand creation for users and
artists (Technical Difficulty) and we expect the long-term margin structure of the business to evolve along the lines
summarized on this slide.
Now, whether we're able to achieve these goals depends on whether we're able to continue to drive a virtuous cycle of
increased investment driving increased customer satisfaction and engagement, lower SAC, lower churn and higher
lifetime value, which is our overarching goal.
I want to thank you very much for your attention today and for your interest in Spotify. And now, I'm going welcome
Daniel back to the stage for a few moments of Q&A.
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Thanks. Barry, one way that Netflix over time created a lot of LTV was by effectively raising prices. Do you think that
this company has the ability either through tiering or through straight up price increases in the distant future 5 to 10
years to increase LTV?
And then secondly, Daniel, is there as this music industry goes through this massive shift, at some point in the future,
do you think there is a role for a much more direct licensing with -- between Spotify and the labels something that
dramatically changes the role of labels in the industry?
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And then the second point, I want to make is, I think, at Spotify like [ph] Netflix profit was a managed outcome. So
you decide how big you want your business to be, and how much of the value you want to drive this part of your
consumer equation. And you can dial up or down the gross margin kind of more or less at your discretion. So, Netflix
could operate with a higher gross margin than they do, they have elected not to, and it's the long as we are playing a
market share gain. It's high enough that we can have attractive operating margins in the business, and afford ourselves
the opportunity continue to reinvest in the value proposition to drive that virtuous cycle.
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both succeed our businesses, but that's to the extent there is a partnership.
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paid nothing through radio play. Someone in streaming is going to eat that marketplace and the labels are going to get
paid a lot of money in the process.
Now, it will grow a lot faster, the better the free user experience is and it will grow a lot slower the worse it is. We've
been very forward leaning in terms of monetization and in terms of our ad metrics on a DAU basis, we've actually are
doing quite well versus the competition. We lag phase [ph] but we're significantly better than Snap, we're significantly
better than Instagram. We need to have a better user experience for free, which we're working on constantly and both
from a R&D perspective and a licensing perspective and we need to be continue to be forward leaning from a tech
perspective, and which we have been, so that we've got the tools we can deliver the targeting and the ad results that the
advertisers expect.
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