More than 90 percent of Spotify's sales come from subscription income: This is how the figures of the music streaming market leader could be overwritten for years.

The Swedes still do most of their business with paying users.

But the advertising sector is becoming increasingly important.

He contributed 13 percent (385 million euros) of the approximately three billion euros in sales in the most recent quarter.

Of course, Spotify is also noticing that the difficult general economic climate is not leaving the advertising market cold.

Benjamin Fisher

Editor in Business.

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At 19 percent, growth recently decreased significantly compared to the value from the second quarter (plus 31 percent).

In Europe in particular, the crisis was having an effect, it said when the figures were presented.

In addition, weaker advertising growth was cited as a reason for the gross margin being below its own forecast.

The stock hasn't been doing too well for weeks anyway.

Accordingly, Spotify boss Daniel Ek had emphasized again that 2022 was an “investment year”.

In an interview with the FAZ, advertising boss Lee Brown took a similar stance: “Our investments in advertising are long-term – including when it comes to new hires.” The segment is expected to account for 20 to 30 percent of Spotify’s total global sales

An ambitious goal, of which Spotify has a few.

At the Capital Markets Day in May, for example, the Swedes promised to reach more than a billion users in 2030 or a gross margin of 40 percent.

As of the end of September this year, it is 456 million, the gross margin was 24.7 percent in the third quarter - so there is a lot to do.

The advertising business is a special area for Spotify on the way to these house brands, as it is closely related to the hundreds of millions of dollars in the podcast market.

High sums to be able to offer prominent podcast hosts with their programs exclusively on Spotify are only part of it.

The service has also made numerous acquisitions over the past few months and years as part of its "audio first" strategy.

"The podcast space in particular continues to grow strongly, and we're seeing a lot of interest from advertisers," says Brown.

Admittedly, users of the free version also hear advertisements between pieces of music.

But the podcast segment is more appealing to advertisers.

Because here, ads can be integrated almost naturally into the flow of a podcast.

In addition, paying Spotify users can listen to music ad-free.

But podcast advertising is also fed to them.

The ads therefore potentially reach significantly more users.

Advertising revenue from podcast marketing is also particularly attractive for Spotify, as it makes the service more independent of the music industry.

Around two-thirds of the income from the streaming services goes to them.

A higher podcast consumption is therefore doubly worthwhile for Spotify.

"From a global perspective, we compete with Google, Amazon and Apple for advertising customers and listeners," says Brown - "and of course there are strong local players, for example in the radio sector." The marketing of digital audio in Europe is not yet so well developed like in the US market, he says.

"But there were never big digital radios like Pandora here either."

However, Germany in particular is catching up very well.

But the "classic" competition never sleeps.

"Radio is still an important player in Germany when it comes to audio advertising," says Yves Brunschwiler, who is responsible for the advertising business in Central Europe.

After all, 63 percent of Germans use music streaming regularly, "of which 48 percent listen with Spotify - and the trend is rising".

Podcasts are gaining in importance, especially in the young target group.

A basic optimism

There is no lack of potential anyway.

According to a study by the advertising association Interactive Advertising Bureau, revenue from podcast advertising is expected to grow to EUR 1.5 billion in Europe by the end of 2023.

Possible effects of the current crisis were not yet priced in here.

However, this does not cloud the basic optimism of the Swedes anyway.

Digital audio offerings offer a “personal and personalized audio experience,” says Brunschwiler.

"At the same time, this means that we can help advertisers in our app to address the right target group at the right moment, and we provide insights into the performance of advertising formats that are not possible in traditional, linear channels such as radio." Offer gradually expanded.

The annual “Wrapped” campaign, on the other hand, has not yet been used for advertising marketing, which is sure to be popular.

At the end of the year, Spotify users, but also musicians and podcasters, can share their annual review on social media here.

Of course, advertisers are encouraged to post their wrapped tiles as well, says Lee Brown, but: "Above all, it's a high-reach campaign to strengthen the Spotify brand itself." After all, the number of users and subscribers should continue to grow for a long time to come .