Spotify Technology S.A. (SPOT) is an audio-streaming subscription service legally domiciled in Luxembourg, but whose operational headquarters is located in Stockholm, Sweden, where the company was first launched. Its streaming services are monetized through both premium subscriptions and advertising, officially designated as its Premium Service segment and Ad-Supported Service segment, respectively.

Spotify offers its services globally with a presence in 92 countries and territories, and boasts 320 million monthly active users (MAUs) and 144 million Premium Subscribers as of September 30, 2020. Some of the company's primary competitors include Apple Inc. (AAPL), Amazon.com Inc. (AMZN), and Google, whose parent company is Alphabet Inc. (GOOGL). Unlike these rivals, Spotify doesn't have devices on which its music-streaming service is preloaded, putting the company at a significant competitive disadvantage.

Key Takeaways

  • Spotify provides audio-streaming services.
  • The biggest share of Spotify's revenues come from its Premium Service, which provides online and offline ad-free music and podcast streaming to paying subscribers.
  • Spotify aims to continue generating revenue through the retention of current users, attraction of new ones, and conversion of users of the Ad-Supported Service to the Premium Service.
  • Spotify is testing out a new service that would allow artists more control in promoting their music on its platform.

Spotify's Financials

Spotify files financial statements with the U.S. Securities and Exchange Commission (SEC), but as a foreign entity, the company is not required to file in accordance with Generally Accepted Accounting Principles (GAAP). Instead, Spotify files in accordance with the International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

Spotify's revenue rose 14.1% to €2.0 billion in Q3 2020, which ended September 30, 2020. Nearly half of Spotify's revenue originated in the following three countries: the U.S. at €739 million, the U.K. at €208 million, and Luxembourg at €1 million, for a combined revenue share of 48%. The other 52%, or €1.0 billion, originated in other countries throughout the world.

Despite growing revenue, the company recorded a net loss of €101 million in Q3 2020. It was a significant and unwelcome change for the company from the net income of €241 million posted in the year-ago quarter.

Spotify's Business Segments

Spotify monetizes its streaming services through two main business segments: Premium Service and Ad-Supported Service. The company provides segment break downs of revenue and gross profit, the latter of which was reported as €489 million in Q3 2020, generating a consolidated gross margin of 25%. 

Premium Service

Spotify offers audio-streaming services to both paying and non-paying members. However, paying members, known as Premium Subscribers, are able to enjoy unlimited online and offline access to Spotify's entire catalog of music and podcasts without having to listen to commercials. Spotify generates revenue from its Premium Service segment through subscription fees.

The segment posted revenue of €1.8 billion in Q3 2020, comprising about 91% of total revenue for the quarter. Gross profit came in at €488 million, comprising essentially all of Spotify's gross profit for the quarter. The segment's revenue grew 14.7% compared to Q3 2019. Gross profit grew 16.5% compared to the same three-month period a year ago. The segment’s gross margin was 27%, no change from the year-ago quarter.

Ad-Supported Service

Members who do not pay for a premium subscription are able to access Spotify's Ad-Supported Service. Such users have limited on-demand online access to the company's music catalog and unlimited online access to its catalog of podcasts. Users' streaming experience is interspersed with advertisements. Spotify's revenue from its Ad-Supported Service segment is primarily generated through the sale of advertising across its music and podcast content.

The segment posted €185 million in revenue in Q3 2020, comprising about 9% of total revenue for the quarter. The segment reported gross profit of €1 million, a negligible share of the company's consolidated gross profit. The segment's revenue rose 8.8% while gross profit sank 95.5% compared to Q3 2019.

Spotify's Recent Developments

On November 2, 2020, Spotify announced that it was going to start testing a new service that will help artists to promote their music on the company's platform. The service will employ a modification to the algorithms Spotify uses to suggest new music to its users. This modification will enable greater control for artists to promote particular songs. But artists would be paid a lower rate for their music in exchange for the added promotional boost.

How Spotify Reports Diversity & Inclusiveness

As part of our effort to improve the awareness of the importance of diversity in companies, we offer investors a glimpse into the transparency of Spotify and its commitment to diversity, inclusiveness, and social responsibility. We examined the data Spotify releases to show you how it reports the diversity of its board and workforce to help readers make educated purchasing and investing decisions.

Below is a table of potential diversity measurements. It shows whether Spotify discloses its data about the diversity of its board of directors, C-Suite, general management, and employees overall, as is marked with a ✔. It also shows whether Spotify breaks down those reports to reveal the diversity of itself by race, gender, ability, veteran status, and LGBTQ+ identity.

Spotify Diversity & Inclusiveness Reporting
  Race Gender Ability Veteran Status Sexual Orientation
Board of Directors        
C-Suite
 
     
General Management        
Employees ✔ (U.S. Only) ✔ (Americas and Asia-Pacific Region Only) ✔ (Americas and Asia-Pacific Region Only) ✔ (Americas and Asia-Pacific Region Only)