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Marcus Johnson (00:00):

In the rapidly evolving world of retail media, few platforms are as uniquely positioned as DG Media Network. With more than 20,000 stores, Dollar General serves as a lifeline for over 990 million shoppers across the US at a time when all shoppers are looking to save money. DG Media Network, media built better.

(00:28):

Hey gang, it's Friday, September 12th. Danny and listeners, welcome in to Behind the Numbers, the eMarketer Video podcast. I'm Marcus and joining me for today's conversation we have senior editor living in New York. It's Daniel Konstantinovich.

Daniel Konstantinovic (00:40):

Hello. Happy to be here. How are you doing-

Marcus Johnson (00:42):

Hello. Very good. How are you?

Daniel Konstantinovic (00:44):

I'm doing well.

Marcus Johnson (00:44):

Very nice. Today's fact. Okay, I think this is how you say it. Lake Baikal is today's fact and on Monday's show, I talked about the world's longest continuous railway line, which is the Trans-Siberian Railway. Well on its 6,000-mile journey, it runs alongside the world's largest freshwater lake, Lake Baikal. For a few hundred miles it runs alongside it. It's quite big, which is the world's largest freshwater lake, holding around 20% of the world's total unfrozen freshwater. Most of it is still frozen for now. It is also the deepest lake in the world at one mile deep.

Daniel Konstantinovic (01:40):

Oh my gosh.

Marcus Johnson (01:41):

[inaudible 00:01:41] driving. Just count a mile out and that you could be driving to the bottom of this lake. So it's a mile deep and it's also the oldest existing freshwater lake on Earth estimated between the 20 to 25 million years old.

Daniel Konstantinovic (01:57):

Wow. That was like six facts about this lake.

Marcus Johnson (01:59):

It was. I should have saved some of them for other [inaudible 00:02:03]. Now I have to go find others.

Daniel Konstantinovic (02:03):

I wonder how deep Loch Ness is. Maybe Nessie would be more at home in Lake Baikal.

Marcus Johnson (02:09):

Maybe that could be my next facts. Yeah, this one's not very... I think it's that wide, but yeah, it is incredibly-

Daniel Konstantinovic (02:17):

That might be tough then. I was imagining helicopters airlifting the Loch Ness monster from one lake to another. Just kind of dropping it in.

Marcus Johnson (02:25):

Yeah, just it's moving home.

Daniel Konstantinovic (02:28):

Yeah.

Marcus Johnson (02:29):

Maybe they think about that stuff. Who knows. Property market and other places. Anyway, today's real topic, Spotify. So Wall Street Journal article by Dan Gallagher points out that Spotify is still the king of the audio streaming world. A few reasons why. Spotify has 700 million monthly active users across 180 markets, basically every country. At the end of Q2 [inaudible 00:03:00] was up 11%, that 700 million year-on-year. That's more than double the number of people who subscribe to Netflix. And in the US alone, our forecasting team points out the Spotify has over 100 million users, double that of second-place, Amazon Music.

(03:18):

Point number two, streaming now accounts for nearly 85% of all US recorded music revenues, which is close to $18 billion. A lot of money. Census estimates on Visible Alpha suggests Spotify alone accounts for one-third of that streaming total. And third point, company's share price is up 50% year to date. So we're playing slice of pie for this first question. I asked Danny to create a pie chart as to the reasons, three max, why Spotify is as the journal article states still the king of the audio streaming world. What do you have Danny?

Daniel Konstantinovic (03:57):

So I went back and forth on this one a couple times. I think-

Marcus Johnson (03:59):

Okay.

Daniel Konstantinovic (04:00):

Spotify tries to downplay my first one, but I think it is still something that has to be mentioned, which is that it has a first mover advantage. I mean now the music streaming space is really saturated and it has many competitors, but Spotify was still the first one on the scene and I think a lot of its early onboarding efforts through things like cheaper subscriptions for students has created a really sticky lasting consumer base that has been using the service for years and is probably hesitant to jump to a new one.

Marcus Johnson (04:34):

Yes.

Daniel Konstantinovic (04:35):

So I think that is definitely still a factor for that.

Marcus Johnson (04:37):

What share did you give that?

Daniel Konstantinovic (04:38):

Oh sorry, I gave it 20%.

Marcus Johnson (04:40):

Okay. But that sounds like less than the last time. Is that share going down?

Daniel Konstantinovic (04:44):

I think so. I wanted to shrink it.

Marcus Johnson (04:48):

That's fair.

Daniel Konstantinovic (04:48):

Just because Spotify has been around for a long time now. So saying the first mover advantage is 50% feels like it would be a little bit outsized.

Marcus Johnson (04:58):

20 for first mover. Okay. What else?

Daniel Konstantinovic (05:01):

I gave 40% to value for consumers. I think that even though Spotify has gotten some flack for raising prices in the last two years, I still think that a premium subscription at around $11 to $12 a month for the amount of content that you get and ad-free content as well, I think that it's a hard thing for people who are subscribed to to part with if they can afford it.

Marcus Johnson (05:31):

It did surprise me how much conversation there was around Spotify raising its prices because from 2013 to 2023 it did not raise its price at all. And every other service, streaming, audio, video, whatever did, and then it bumped it up once in 2023, again in 2024, but not by a lot. I think buy a dollar each time.

Daniel Konstantinovic (05:49):

Yeah.

Marcus Johnson (05:50):

So yes, I think value for money is a good one.

Daniel Konstantinovic (05:52):

Yeah. And it had increased prices in other markets, but that was the first US price increase I believe.

Marcus Johnson (05:57):

Great point.

Daniel Konstantinovic (05:58):

Which I think is its largest user base.

Marcus Johnson (06:00):

Yes. All right. We've got 40% left.

Daniel Konstantinovic (06:04):

Yeah. I gave that one to cultural capital. I think Spotify has just really ingrained itself in music, in the music industry. When artists are sharing a new album, the thing that they're linking to on social media is almost always the Spotify link. They have done a great job with branding campaigns. It feels like Spotify advertising is absolutely everywhere. They have Spotify Wrapped, which feels like a big cultural event where the users are basically doing the advertising for them every year. And that's been so successful that even Instacart is trying to do a year in review sort of thing now or has been for a while. It's just become a very popular format.

(06:50):

I just think that Spotify has really cemented a place in entertainment, in music at the moment that is hard to shake. Even though competitors like Apple Music are doing heavy spending like sponsoring the Super Bowl halftime show, I still think that Spotify is the dominant brand in music.

Marcus Johnson (07:10):

Yeah. Yeah, that's a good one, especially the reference to Spotify Wrapped. We were talking about this the other day, how I thought that social media might do something similar. If you could look at not just where you spent your time on social media across different platforms, but also what you were watching most of. But I don't think people are as proud of the content they consume as much as they are in terms of music. They're very proud of these are the songs I listen to, this speaks to who I am. Whereas maybe for social media there's some stuff which we might not want how long we spend watching animal videos, we might be like, I don't want the whole world to know that's how I'm spending my life. But I think they're great ones. They're really good and yeah, there are some really strong reasons to why Spotify has been able to stay on top.

(08:00):

However, despite Spotify's strong position, the audio streaming giant's share price, I say it's up 50% year to date and it is, but it slid 11% right after the most recent Q2 earnings and after posting what the market viewed as disappointing results. With the revenue, operating income and quarterly guidance all coming in lower than analysts anticipated. So it went down, but they were lower. Mr. Gallagher from the Journal thinks that this shows investors still expect a lot more to come from the company. One of those things, Danny, could be price increases. They feel like they've got a lot of price increase runway. Still an incredibly affordable product or inexpensive product. Spotify, as we mentioned, only increased their prices twice in the last 14 years and there was a June Evercore ISI survey highlighting Spotify's stickiness showing the lowest percentage of customers saying a $1 a month price hike would compel them to cancel their subscription. So I think they've got a lot of price runway to increase it there. What else do you think Mr. Gallagher means when he think investors still expect a lot more to come from the company?

Daniel Konstantinovic (09:10):

Yeah, I thought this was an interesting quarter. I feel like the thing that jumps to mind is advertising. Spotify has been under pressure for a couple of years at this point to really drive more ad revenues. It is a very, very small portion of its revenue compared to subscriptions. And even though they have a lot of pricing runway, the more expensive Spotify becomes, maybe the easier it becomes to jump to these other services because Spotify is lacking in some features like high quality audio that say Apple Music or Tidal has. And if you're paying $15 a month for Spotify and one of these other services costs the same amount for better quality, maybe that's suddenly more appealing than it was if Spotify was $2 cheaper. But yeah, I think advertising is really a huge part of the picture here.

Marcus Johnson (09:59):

So what do you think there? Because there are certainly greater expectations for Spotify's advertising business. Mr. Gallagher from the piece was saying subscriptions business remain strong, but the ad business struggling in the face of macroeconomic headwinds and the sluggish ramp up of its ad stack. What do you think is behind a slower than expected ad growth?

Daniel Konstantinovic (10:18):

I think that nailed it. I do think that it's an inconvenient time to try and push into advertising in a big way. I think Spotify is not alone here. There are a lot of other companies that we cover that years of building up ad tech and setting up for a big push into advertising is coinciding with all of this macroeconomic craziness. I do think that the issues in the broader economy and advertisers just generally being more hesitant right now to try unproven or less proven or less convenient ad channels just means that it's a slower role than I'm sure that they hope.

Marcus Johnson (10:59):

Yeah. And it needs to pick up the pace on podcast advertising, right?

Daniel Konstantinovic (11:03):

Yeah. That's an interesting one.

Marcus Johnson (11:04):

Yeah, there's some expensive missteps out the gate, Ian Moore of Bernstein was saying. But he's saying Spotify now commands over 20% of the global podcast ad revenue market. However, Spotify recently admitted it's been moving too slowly, especially since advertising accounted for 11%. As you mentioned, small piece of their total revenue even though over 60% of its subscribers are on the ad-supported tier. Spotify noting that premium subscribers' revenue grew 12% year over year in Q2 and supported fell by a fraction.

Daniel Konstantinovic (11:39):

Yeah. That's a interesting point to bring up too. A huge number of Spotify's overall users are not those paying subscribers that make up the majority of the revenues. So why has it been so hard or so slow for this company to effectively reach them with advertising?

Marcus Johnson (11:55):

Yeah. And we expect those numbers to go up. Spotify US podcast ad revenues we expect to go from 2023 to 2027. So from that window '23 to '27 to go from over 200 million to over 400 million. It's not the most money in the world, but it's not nothing. And that is doubling in that time. It feels like the push into programmatic will help. That's what they're expecting. Right? Spotify ad exchange, over a 60% surge in advertiser adoption since it debuted this past spring according to global head of product and commercial growth, Chloe Wicks. Programmatic share of US podcast ad spending creeping up from a little under 10% last year to 11 and a half in 2026. So it is going up.

(12:43):

The slow growth does make sense though, our Grace Harmon noting that Spotify is threading the needle, preserving high touch sponsorships whilst enabling automation at scale. She says the advertiser growth since launch points to strong demand for simplified buying, but the CPM and performance gap versus host read ads will be the key metric to watch. So this is unique in that regard, right, Danny?

Daniel Konstantinovic (13:08):

Yeah. I think Grace's point about host read ads versus programmatic ads is a really good one. I think maybe part of why Spotify has struggled to get more revenues from podcast advertising is something that is just innate to the format, which is shows or hosts making deals directly with brands outside of the audio platform.

(13:31):

But when some host is reading off a sponsorship, the vast majority of the time that is a partnership that comes from the show or the host and the brand directly. And Spotify does not get a cut of that, and it's hard to envision what they could do to become involved in that process beyond exclusively acquiring shows and controlling the advertising rights to them. Which they do, but which is also a very expensive and risky thing that Spotify has had mixed results with for a risky strategy I should say.

Marcus Johnson (14:08):

Yeah. It is such a personal form of advertising, the host read ones and so they don't want to dilute that too much by flooding the zone with a lot of programmatic ads, I believe. To Grace's point, they want to make sure they're striking the right balance there.

(14:28):

A few other things here I thought were interesting or worth talking about. I mean one of them is even though Spotify is number one, as we were saying, they have the crown according to a lot of folks in the Journal article. Investors see strong competition from YouTube and increasingly Netflix on video podcasts, the Evercore ISI survey finding nearly 40% of folks picking Spotify as their favored music app, double that of Apple Music. Nearly two-thirds of its podcast listeners preferring podcasts with video though, as video becomes increasingly crucial. But YouTube remains the top choice for podcast listeners favored by 31% versus Spotify's 27 according to Edison Research. So a lot of the time Spotify in the beginning getting compared to the Apple Music, the Amazon Musics, but now increasingly so the video platforms, the YouTubes and the Netflixes.

Daniel Konstantinovic (15:22):

Yeah. I mean especially when it comes to video podcasting. I mean Spotify has made some pushes into video podcasting. There's a lot more video on the app now and you're seeing full recorded episodes on there. If you are uploading a video podcast to Spotify, I could see more ways for Spotify to create ad space there that they more directly control or control a larger share of.

(15:46):

But yeah, it is really interesting that despite being this everything audio platform, that YouTube is the preferred podcasting platform and I think it is because of video. I don't think that that means that users are glued to the screen. Yeah, and discovery. I don't think that users are glued to the screen for every second of a video podcast. It's more of like a glance when something of interest is happening and it's still largely an audio format for them. And YouTube is the video hub. So I guess it makes sense that they would go there for that.

Marcus Johnson (16:19):

A lot of young users, the one server, I forget the source now saying that the number one way that they are viewing, listening, consuming video podcasts is the video's there, they glance at it, but mainly listening. And so that just is how people are consuming them now.

(16:36):

Danny also, it is interesting because we've been talking about the premium whatever name it's had, tier of Spotify for years and years and waiting for this thing to launch. But Wall Street still it seems has high hopes for the premium super fan tier or whatever they're going to be calling it, which they're baking into their projections that Spotify's annual revenue will surpass 20 billion by the end of 2026. That would be 20% above its current levels. Do you think whenever this thing comes out that it can have that big of an impact?

Daniel Konstantinovic (17:10):

I don't know. I wonder. I feel like we've been talking about this super fan tier for a while now. I think the road map for it is pretty unclear. And one of the kind of caveats that I feel like always comes up or that I always feel like has to be mentioned here, so one of the proposed features of this tier... I say proposed, but Spotify I don't think has said this directly. It's just kind of in reporting. Is high fidelity audio, which is something that the other competitors offer by default as part of a subscription.

Marcus Johnson (17:46):

True.

Daniel Konstantinovic (17:47):

So I think that makes it a little bit awkward for Spotify to come in and say pay even more as a super fan for something the others are giving you at the same price point that we used to charge.

Marcus Johnson (17:57):

Yeah.

Daniel Konstantinovic (17:58):

I wonder what the other features that will be a part of that are that could entice someone to pay for it.

Marcus Johnson (18:03):

That's the question. Yeah.

Daniel Konstantinovic (18:05):

The people are paying for a Spotify super fan tier, that's not the general consumer. That's a person with very deep or specific interests that makes them want to pay extra. The average person I really don't think is going to change their subscription from premium to whatever this higher tier is called.

Marcus Johnson (18:25):

Yeah. We'll see if it ever gets launched. It's kind of like the Airbnb membership program. We've been waiting for years and years and they say it's coming at some point in some form but not quite yet. One other thing I wanted to touch on with regards to Spotify and how the company sees them increasing growth, social features.

Daniel Konstantinovic (18:46):

Yeah. I was glad you mentioned this.

Marcus Johnson (18:47):

Yeah, I thought this was fascinating. Another article from Grace pointing out Spotify added mobile device direct messaging to its free and premium tiers, marking a major step toward the streaming platform becoming a more social destination. Users can start conversations with folks they've already shared content with. So think of collaborative playlists or blends, things like that.

(19:11):

Grace was saying... I thought this was really interesting. "If Spotify integrates algorithmic or curated content into a central, scrollable experience similar to TikTok's For You page, but for music it could drive engagement, create moments of social discovery and open the door to more ad interactions." What do you think?

Daniel Konstantinovic (19:34):

I feel sort of mixed on it. Spotify has tried some TikTok like video feed redesigns before that were pretty poorly received by users. Some of those things have stayed. There definitely is a scrollable feed format on Spotify now, there's a lot more video. I mean some of those features have stuck I suppose is just the point that I want to make, but I don't know if Spotify could ever go full TikTok.

Marcus Johnson (20:08):

I think Grace agrees with you. She says that user adoption could lag without a more visible social layer such as a dedicated feed or discovery surface. Without that, DMs could feel hidden or redundant, especially since users already message their friends on other platforms.

(20:24):

DMs, they're not Spotify's first social features. You mentioned they've done real time listening, activity sharing, they've done comments on podcasts. So it sounds good in theory, but can they become the place where people go-to to share things or to talk with friends? Seems tough. There's competition out there.

Daniel Konstantinovic (20:40):

It seems tough, but I think maybe they could do it. I think the messaging feature made a lot of sense to me because when people are sharing their music, I feel like they're always sharing it from Spotify and delivering it via some other app. Whether you're texting someone or posting it on Instagram or something like that.

Marcus Johnson (20:59):

WhatsApp or whatever. Yeah.

Daniel Konstantinovic (21:01):

So when you pull up that little share tab for a song on Spotify and it just shows the list of your friends or people you've interacted with on Spotify right there without you having to go into something separate, I wonder if a lot of users will just take that and send it there. I think maybe communication around it has not been the best. It's kind of hard to find in-app where you receive messages or send them from outside of those share tabs. So I think there's some UI work to be done there perhaps.

Marcus Johnson (21:33):

700 million folks across the world, yeah. And this is just another step towards them being everything audio app. There's obviously music, there's audiobooks, there's podcasts, there's merch, there's being made aware of different concerts that are happening. There's maybe the social elements and so they're definitely going to give it a try. We'll see if it sticks.

(21:53):

Well then we're just talking about the digital audio market in its entirety, Danny because I just want to zooming out for a second. It does feel like an untapped reservoir because according to the forecasting team, two thirds of Americans, that'd be 230 million people, listen to digital audio. And as you can see from this chart on the screen, this is from our forecasting team showing where Americans spend their time with media each day. Time spent with digital audio is in third place with close to two hours. That's slightly more time than we spend on social media each day and it's about 10% of all the time we spend with media is digital audio. It's only behind TV and subscription OTT, things like Netflix.

(22:37):

However, despite time spent with digital audio exceeding time spent with traditional radio, digital audio ad spend, Danny, still just three quarters the size of traditional radio ad spend. Digital audio ad spend still smaller than traditional radio ad spend. What do you make of the space in its entirety?

Daniel Konstantinovic (22:59):

Yeah. I think you're right that it's kind of an untapped space and I find it surprising that it's been so hard to ramp up the ad revenues relative to how much time is spent there. Especially since pre streaming advertising was kind of baked into so much of the music listening experience if you were listening via a channel like radio. So yeah, I find it very interesting that it's been such a slow roll and I feel like introducing programmatic buying will open up the door for a lot more advertisers to get into digital audio. But yeah, again, the timing with advertiser budgets shrinking or at least not growing too much is unfortunate.

Marcus Johnson (23:46):

Yeah, timing is often almost always everything. So we'll see. That's all we've got time for this episode. Thank you so much Danny for hanging out with me today.

Daniel Konstantinovic (23:54):

Yeah, of course. Always love to talk to Spotify.

Marcus Johnson (23:56):

Yes sir. Thanks to the whole editing crew and to everyone for listening to Behind the Numbers. It's an eMarketer video podcast made possible by DG Media Networks. If you haven't already subscribed or followed us, you should. It's life changing. It's not, but you should because you get alerted to new episodes. We'll be back on Monday. Hope to see you then. Happiest of weekends.