Docoh
Loading...

SPOT Spotify Technology

Participants
Bryan Goldberg Head of Investor Relations
Daniel Ek Chief Executive Officer
Paul Vogel Chief Financial Officer
Call transcript
Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Spotify Q4 2020 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. I would now like to hand the call over to your speaker today, Bryan Goldberg, Head of Investor Relations. Thank you. Please go ahead.

Bryan Goldberg

Great. Thank you, and welcome to Spotify’s fourth quarter 2020 earnings conference call.

Joining us today will be Daniel Ek, our CEO and Paul Vogel, our CFO.

We will start with opening comments from Daniel. And after the remarks, Daniel and Paul will be happy to answer your questions.

We will again be taking questions exclusively through slido. Questions can be submitted by going through slido.com S-L-I-D-O.com and using the code #SpotifyEarningsQ420. Analysts can ask questions directly into slido and all participants can then vote on the questions they find the most relevant.

If you don’t have access to slido, you can e-mail investor relations at ir@spotify.com and we will add in your question.

Before we begin, let me quickly cover the Safe Harbor.

During this call, we will be making certain Forward-Looking Statements including projections or estimates about the future performance of the Company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed on today’s call, in our letter to shareholders and in filings with the Securities and Exchange Commission.

During this call, we will also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our letter to shareholders, in the financial section of our Investor Relations website and also furnished today on Form 6-K. And with that, I will turn it over to Daniel.

Daniel Ek

Alright. Thanks Brian, and hi everyone. And thank you so much for joining us. Despite the global uncertainty of 2020, it was a remarkable year for Spotify. Folding, a strong Q2 and Q3, Q4 met or exceeded our guidance by nearly every metric. Monthly active users reached 345 million, coming in at the very top of the range, and we now have 165 million subscribers, which surpassed all expectations.

Over the last year, we have demonstrated our ability to pivot quickly, anticipate user trends and adapt to their new behaviors. And it is easy to forget, but 2020 had plenty of uncertainty and put across, our success really is a testament to the strength of the teams, and I’m confident this experience will serve us well in the future.

Going into 2021, COVID still has the potential to be a headwind as its difficult to fully gauge its impact.

For Spotify, more time at home, resulted in more people discovering streaming and turning to our platform, but it also created disruption in listening habits, consumption hours, and the release of new music and podcasts. We believe it is cost us to pull forward subscribers across the back half of 2020, which makes it really hard to predict it will drive the same subscriber growth in the year ahead.

However, the trend lines are healthy and long-term the ships from linear to on-demand that COVID accelerated will continue and remains a massive multi-billion user opportunity. Knowing your focus is likely on our outlook for the upcoming year, I want to spend a few minutes addressing how I’m thinking about 2021 and some of the uncertainty and some opportunity it creates. And as a reminder, our approach to forecasting is to only forecast will be at a very high degree of certainty that we will achieve.

Given the uncertainty we face today, I suspect that our full-year of 2021 plan will have a higher variance than prior years. Therefore, what you see reflected in the forecast is what I believe we will absolutely do. This does not mean that that is what I hope we will achieve, as evidenced by our outperformance in 2020.

So, I thought it might be worthwhile to outline some of the biggest drivers that may contribute to this variance.

For example, while we have seen some pull forward effect that may slow down subscriber growth in some markets, we are shifting to drive more aggressive revenue growth, where we know our pricing power will enable us to increase ARPU. We long believe that Spotify provides exceptional value and the positive early data we are seeing from this price increase that we announced in October, makes us very optimistic that our users agree. This week we implemented price increases across a number of markets and we will continue to evaluate future increases carefully based on the broader global economic impact of COVID.

Another important tailwind we will pursue is the continued expansion into new markets. We launched in South Korea on Tuesday morning, tapping into one of the fastest growing music markets in the world. And there are still millions of creators and billions of listeners who don’t yet have access to Spotify and work is underway to change that and I will say more in the near future. The impact from expansion into new markets also creates some uncertainty as we forecast future growth. And it has been really challenging to predict, take Russia as a prime example, we quickly and significantly surpassed all expectations there. The results of this outperformance is that we saw some additional pull forward of user demand again, leading to growth in 2020 that we expected to occur in 2021.

Another area of the business where we are seeing extremely strong results, but when the true payoff Spotify is still in front of us is podcasting. In the last year alone, we tripled the number of podcasts on our platform, moving from about 700,000 in Q4 2019 to 2.2 million podcasts today. And we have also significantly grown the number of podcasts users on Spotify.

Going forward I think our investments in original and exclusives are creating more and more reasons for listeners to choose Spotify. And our exclusive programming is already proving to be an essential part of our differentiation, that said with a small number of these shows on our platform today have many more in the pipeline, it is very difficult to know exactly when we will see the compounding effect of these investments, but all early indications are very positive.

Another example is our advertising business, other platforms have experienced inconsistent apps growth in their early years, and we are no exception to that. And we are putting more resources into developing this business, and in Q4 our apps business accelerated finishing above forecasts. In our mature markets our largest issue was the inventory constraint. And while this sounds like a good problem to have, and I guess it is, it is difficult for us to predict how quickly we can open up the inventory. And I expect that as the category of audio apps, matures, and more radio dollars to move to streaming, this area will become much more predictable, but for the next year or two, it will be a bit more uncertain.

So to conclude, 2021brings more uncertainty than any normal year. That said, we have a high degree of confidence in our ability to deliver against the guidance we provided. And we were able to overcome unprecedented uncertainty in 2020 and exceed almost all expectations and I believe that we can do the same in 2021. I’m also focused on identifying where we can see new opportunities and drive sustained growth in the long-term.

Just looking at what happened to video in 2020, linear video fell apart as viewers flocked to on demand and the companies who were not prepared to take advantage of this disruption faced huge challenges as their business models were upended. A similar shift hasn’t happened yet to linear radio, but you long heard me say that it is coming and I’m more confident today that that is the inevitable, but unlike video there are only a handful of companies who will be able to take advantage of this disruption in audio. And no other company has to keep a release, or this as well position at Spotify for this massive opportunity. And that is our eye on the prize. And with that, I will turn it back to Bryan.

Bryan Goldberg

Great. Thanks, Daniel. Again, if you have got questions, please go to slido.com #SpotifyEarningsQ420. Once your question is entered, you can edit or withdraw your question by selecting the option in the bottom right.

We will be reading the questions in the order they come in with respect to how people vote up their preferences for questions. And our first question today is going to come from John Egbert, Stifel. The high end of your 2021 subscriber guidance suggests you lead fewer net new sales this year versus 2020. We know that churn should decline in 2021, that we expect a newly announced price increases to represent a material headwinds sub growth in 2021. What are the factors should be considered here?

Daniel Ek

Yes, this is Daniel. Long-term, again, this is a multibillion user opportunity. And I’m as confident about that, as I have ever been.

As I mentioned in my opening remarks, all that said, we are facing a global pandemic. And that pandemic has shifted all user behavior in 2020. And as I mentioned, also did create some pull forward effects throughout the year. That means that there are more uncertainty throughout the year on what will happen to the subscriber growth.

So, again, our forecasting means that we do the things that we are only very, very certain that we will deliver upon. Specific to the price increases. Paul can probably address that to a greater extent. But we have seen very, very positive response from the price increases in October, and we believe that will be the same for the price increases that we just concluded. Paul, do you want to add anything?

Paul Vogel

Yes, I will just add a couple of things, I think, to echo what Daniel said, I think in 2020, we obviously had a very, very strong year, Daniel mentioned in his opening comments, we pull forward, the Russia launch, so Russia was a meaningful impact in 2020, we had originally thought that we wouldn’t really see meaningful impacts until 2021 so that helps 2020. And in hindsight, we didn’t really call it a specific quarter where we thought, the benefits of people being at home with Italian screening, were necessarily in any one quarter but in hindsight, when you look at it, it is a little bit tough to disaggregate how much was just better execution, in our part, how much was some pull forward from kinds of [indiscernible] extremely had in general, in 2020. But we do believe that each quarter probably saw a little bit of pull forward as well. And you go back and look at where we started 2020, where we ended, we finished about four million plus or minus above where we thought when we started the year.

So definitely some better execution, there are probably some pull forward, based on the tailwind extremely had, as well as the pull forward in Russia. And then when you look at 2021, I would say, Daniel mentioned, I think there is a higher degree of uncertainty than you normally have. There is lots of initiatives. I would say, uncertainty isn’t always a bad thing. There’s lots of things that could vary positively and there is some things that could be more challenging, but there is just probably more of them in 2021, than we have experienced in years past. And that is all baked into the forecast. And then as Daniel mentioned, with respect to the forecast, we have always said to you guys, we will give you guidance based on what we actually think we are going to do. And that is what we have done this year as well. But that being the case it really is a base case model of what we have a high degree of confidence that we will achieve. And it doesn’t necessarily assume that we are going to have the upside in some of the initiatives on searches where if they break positively, we could do better.

So again, we have giving you a best case forecast and one that we feel that we have a high degree of confidence that we will be able to achieve.

Bryan Goldberg

Alright.

Our next question comes from Eric Sheridan of UBS. How should we think about the progress made against previously discussed investments in the podcast opportunity? Is there an update about the puts and takes in terms of upsides of the business compared to global investments community to scale over the coming years?

Paul Vogel

Yes, overall, we are very pleased for what we are seeing. But just as a reminder, the primary opportunity, as we think about the long-term is in the linear radio experience that are moving online and into on demand. That is the eye on the fires, the one that we are changing, and that is still what we are kind of looking at.

As we looked at that universe though, the primary thing that we have been focusing on, as we got into this audio first attitude was, they already have a massive user base on Spotify today. How can we turn them into podcast listeners, and extending our platform into becoming the de fact of podcast players where a lot of these users throughout. And as evident, I think from this quarter, compared to even last, we keep on extending number of users on our platform that are using podcasts on the platform to now a quarter of them that our podcast users.

I think as we start getting on the upper end of those user ranges, you will see us going outside and trying to convert more and more of the outside users who are not yet Spotify listeners to come onto the platform. And I think exclusives will be a material part of that strategy. And even there, I would say it is very encouraging to see the early results of these strategies that they have. But we are in the early days in the sense that there are many, many more exclusive that we have in the pipeline in 2021, that we are excited about. The hard thing is to forecast what the compounding effect is of all of those when they happen and when you think to Spotify, there will be more and more reasons to come to Spotify. That is one thing for sure. But it is sort of a near-term uncertainty in terms of the effects of that.

Daniel Ek

The one thing I would add as well, I think if you go back over a year ago, I think we mentioned in one of our shareholder letters that we believe that podcasts and podcasts usage was highly correlated with improvements in retention and user growth, but we at that point could really prove out the causality.

I think in those shareholder letter that we did mention that we are doing now feel reasonably confident that we can prove out the causality of having a podcast and the benefit it is having on user growth and retention and that having podcasts is a positive contributor, LTV per subscriber.

So we are still going to continue to obviously work and monitor that and test that. But we do feel good about sort of the incremental knowledge we have in terms of the positive impact and podcast is having a platform.

Bryan Goldberg

Okay. The next question is from [indiscernible] Company. When will Spotify add social elements of the overall experience like Tencent music, apps like clubhouse could have an interesting entry to audio, and Tencent music could be a good way to follow up in some regards?

Daniel Ek

Yes, we are very interested in obviously pay close attention to everything that is happening in markets around the world and new developments in audio. I said this many times before, but I think we are in the early innings of the innovation of the audio formats. And creator to fan interactivity is definitely one of those things that we are paying attention to and looking at. And we are conducting experiments on it already. But I don’t have any sort of specific here to announce. But there are plenty more things to come in the coming months and this year as well, when it comes to sort of crater to fan engagements as well.

Bryan Goldberg

Okay.

Next question from Richard Kramer of Arete. In entering markets like South Korea, what is your strategy for building a subscriber base given that the market has six very well established players?

Daniel Ek

Yes. We always take a large amount of time to try to analyze the market and South Korea, certainly not an exception to that rule.

So some would even say that we are late to the party in some markets, Russia was kind of the same dialogue. But we have been studied in market for many, many years. And we are well aware that South Korea is a mature market and that it will take time for us to establish ourselves.

I think the key is the same thing that we do in pretty much every single market, we deeply under trying to understand the contents that we have in many of the domestic markets, we try to bring an international flags here and bring the creative talents that we have from all of our creators around the world to that platform.

I think we can definitely do a good job there.

I think our strength in personalization role will certainly play an incredibly valid in South Korea. And specific to the South Korean market, we obviously have a lot of partnerships for instance with Samsung, which is a major player in South Korea, so that and the 2000 other devices that Spotify is on is the major contributing factor I think to why the user experience is better and why I think South Korean consumers are very excited about Spotify.

Bryan Goldberg

Okay, our next question comes from Brian Russo of Credit Suisse. Do you think customers would be willing to pay specifically for podcasts, and if so, would the margin profile of that podcast revenue look different than your existing premium service?

Daniel Ek

I think we are in the early days of seeing the long-term evolvement of how we can monetize audio on the internet. I have said this before, but I don’t believe that it is a one size fits all. I believe in fact that for me, we will have all different models and that is the future for all media companies, since you will have ad supported subscription and our - carts sort of in the same space all [New York] (Ph) companies in the future. And you should definitely expect Spotify to follow that strategy in that pattern.

So I think it is early days to specifically kind of look at how that could play out, but obviously if that work could be the case, that new profile would be different than how we do music.

Bryan Goldberg

Okay.

Next question from Mike Morrison from Guggenheim. Did the meaningful audience uptake for the Joe Rogan experience come from new or existing Spotify users? How does the premium to free mix of heavier podcasts users compared to the overall base and can you share the churn difference between podcasts users and non or light users?

Daniel Ek

Paul, do you want to take this one?

Paul Vogel

Yes, I’m not going to be overly specific. But obviously, we do believe that people should be deposited to our user growth on the platform.

We haven’t broken out how much did you see she has come from existing users or new users. But, if you sort of take a giant step back part of the strategy, when you bring somebody like that on the platform is it is going to have a couple of issues section. One is to, to bring new people onto the platform. And another is to create a better experience for those already on the platform whereby their retention increases or their turn it goes down.

And so all of that is still what we believe to be the case and will happen.

We haven’t really given the split between treating podcasts users. But as I said earlier in my commentary, we are increasingly comfortable that, podcasting are having a positive effect on LTV subscribers.

And so, that is where the continued investment comes from.

Bryan Goldberg

Okay.

Another question in the queue from Eric Sheridan at UBS. How does the team think about strategies around tearing the products by format or content over the long-term?

Paul Vogel

Yes. I mean, I can try to answer it anyway.

So again, I think we are currently in the evolution stage and I think you can see this in the other media formats as well, where it is pretty much been in the early stages of adoption, you try to go for simplicity.

So you have a one size fits all in order to have an easy consumer proposition that consumers understand. In our case, we got a free tier paid for tier.

We have evolved that model to having free and paid and family and students.

I think as you get to the next level of growth and even more local markets, as we expand, you are going to see many more configurations than the ones that are currently there, and it is going to be a mix between subscription and advertising and our cards that will play a role into the Spotify’s future.

Bryan Goldberg

Okay. The next question from [indiscernible] from Truist Securities.

As it relates to price increases, could we see a family plan price increase in 2021 in the U.S.? Further, does guidance assume any impact to retention and conversion growth adds from the planned price increases?

Daniel Ek

So, on the price increases, as we have talked about, we lost seven markets a little while ago, and then 25 more markets most recently.

We are not going to specifically talk about what markets may or may not come in the future.

So, we will just have to see. There is obviously a number of factors that will go into price increases and wherever we launch them in the magnitude and the number of factors, some of them are the maturity of the market, both the streaming and general, our penetration right there, how we feel about each individual market.

And so, from some pricing, that is kind of how we think about and with the impact on the model.

As I have said, we have assumed the price increases in the model where we know we are going to launch them and when we are going to launch them.

So again, just to reiterate how we plan throughout the year is baked into our guidance. That being said, as I go back to my earlier comments, we sort of give you the base case of what is going to happen.

So, we have some assumed positives or negatives to churn or retention based on price increases, and we will see how the year rolls out. And I think as we mentioned earlier, there is still a lot of uncertainty throughout the year, COVID being one and the impact that has on the global economy. I will say now that, in 2020, we had expected to experiment with more price increases in 2020 than we did. We pulled back on that because of the pandemic and because of the uncertainty and because of not wanting to raise that with consumers, given all what is going on.

And so, when we talk about the unknowns into 2021, that is another unknown, which is how confident do we feel in certain markets and the timing, and a lot of this.

Bryan Goldberg

Okay.

Next question from another one from [Richard Kramer] (Ph). Artists lost their main source of income during the pandemic, live performance. Is Spotify in a position to support live streaming performances whereby artists would get directly excuse me, directly paid.

Daniel Ek

Yes. This has been a very, very rocky year, of course, for a lot of artists around the world and they have seen sort of their lives upended, based on COVID and their livelihoods.

We have responded in a number of ways, including artists takes the COVID relief fund, et cetera. And one of those happens also that traditionally on this Spotify artists pages, we have had concert listings.

We have now evolved those include also live performances as well. Those do not happen through Spotify directly, but it is facilitated so that artists can point consumers to that. And I know that there has been a number of artists that have been experimenting with those types of performances and some have been quite successful in doing so.

So we absolutely offered the opportunity, but it is not something that we are a principle of today, but we of course look, very carefully about you know, how it is going and you know what works better than what doesn’t evolve. And, and again, long-term our strategy, as I said, it is to allow those creators to fan engagements, to happen on the platform, in an even greater extent than what is currently dusting.

Bryan Goldberg

Okay.

Next question from Rich Greenfield of Lightshed Partners.

We have seen Amazon buy one rated, integrating podcasts into Amazon music, and Apple appears to be gearing up to launch some form of subscription podcast product while this is clear strategy validation, curious how you expect it to impact Spotify and the ability to make acquisitions in the category.

Daniel Ek

Yes, I mean, what I would say is I definitely do believe that - and we are not surprised that something like audio that interests billions of consumers around the world also will catch the attention of the big companies, because there are guaranteed spaces that have hours of most consumers time of day and reach billions of people at the same time.

So we are not surprised that this is happening. And, you know, we also do look at it, I will say validation that we are having the right direction. Again, we did expect this, hence why we are also getting very aggressive previously, with the acquisitions, most of our strategy going forward while we don’t exclude any further acquisitions it is about ramping up the ability of our own production capabilities that we now have through all the studios that we have acquired. And just to put that, in a finer point, cause I think this is kind of one of the internal points that I used to our team most of the time. I believe about three years ago, there were fewer than 30 people at Spotify that were actively producing content that ended up on our service in one way or the other. And that number now is, um, you know, I would say certainly during 2021 and we will be closer to a thousand people.

So it is, it is really a tremendous kind of shift at the company and even our skill sets that we have. And, when looking to use some of those muscles that you know added to our roster, throughout the last few years and create even more amazing content for our users to experience.

Bryan Goldberg

Another question from Richard Kramer, is there any reason to believe you can change the terms of deals with the labels to carve out time for podcasts and reduce the value of payouts to labels for the pool of listening.

Daniel Ek

Well I can’t comment specifically on how are labeled deal terms looks like.

We have said this before, but podcast is a separate category and does not involve how we pay out for music royalties. I don’t know Paul if you wanted to add something to that.

Paul Vogel

No, as we said, we carved out the advertising on podcasting.

So as that grows, we will continue to get the benefit of the advertising revenue on top of podcasts. And then if Daniel’s point, how the relationships evolve over time, we don’t really get into specifics. They always change.

Bryan Goldberg

Okay.

Next question from [Steven Cahall] (Ph). The implied 2021 incremental operating margin looks like it is approximately 3%. In 2021 indicative of the operating leverage of the business NOI or are there other factors ahead which should drive more meaningful margin expansion?

Daniel Ek

I don’t necessarily have to perform modeling depression on this call. But I guess I will give some high level thoughts on current operating margins over time.

I think one is you have to take in consideration year-over-year and the impact of social charges have on reported numbers. But we just have to take that aside, and we are happy to have those conversations offline. When you look at sort of the components on the operating the tax, the operating margin, after the gross profit, when you think about R&D, we have been pretty consistent and steady about talking about that we are continue to invest heavily in the business that we are in, that is an area of our financial model that you probably won’t see by leveraging, that if we clearly probably spend more than in order to continue to grow the business. And then when you look at sort of sales and marketing, I think there are areas over time that we could do more efficient there. Potentially on the marketing side, we will see and then also on the sales side, as we add more automation in the ecosystem, and more self serve products, and those types of things. And in the G&A side as well, and it is too heavy lists first to go and be prepared to be a public company. And then as you continue to watch more and more markets, what you need to do from the infrastructure standpoint. Obviously, there is some build out there. But you can imagine over time, once we are in more markets where we want to be and we are at a sufficient scale, you will start to see leverage on the G&A side as well. And maybe I want to add one more perspective too.

We are very much still in the investment phase of Spotify. And it is not just the investment phase in music that we are pursuing. Because clearly there we could show a lot more operating margin improvements as well by for instance, learning to sales and marketing costs, and some of those things that Paul mentioned. But we are going after billions of consumers around the world. And we have done broadly after the category called audio, and even more so I think the future of that audio platform is one where you will have millions of creators that are interacting with consumers in a social fashion. And to allow us to be that platform where, they can grow their audience, they can engage with their audience, and they can monetize them in a number of different ways. Those are all the capabilities that we are investing behind. And these are multiyear investments. Plus, of course, adding to the fact that we are, producing our own content engine, pursuing exclusives, we are going into categories, we are going into new markets, those are all the things that you are seeing in the P&L, coming through that we are given. In many cases, on a company our size, many of the investments that we are even making now are years in the making and many of the things you see flow through from the goodness are also things that you did years ago.

So we are very, very bullish on the long-term, it was still investing behind that bullishness. And that is what we should be expecting. And I think at a mature state that this will look very different than the first stage.

So we are investing right now.

Bryan Goldberg

Okay.

Next question from Mario Lu with Barclays. Currently in Korea, it launched is only good for premium individuals and dual plans with no option of either the family plan or premium model, which should help drive ARPU. That being said, can you speak a bit as to why you came to that decision and if we will eventually see both plans in Korea?

Daniel Ek

Yes and just quickly, this is not very uncommon practice for us, we typically launch as I mentioned, with a very simple proposition in new markets, and then overtime to build on. And that is something that has been incredibly successful for us to do. And if you go back to almost all market launches, China follows the same pattern. Go in the very clear propositions are very clear audience and then broaden that proposition overtime, both with more local content, more local nuances, and as I mentioned more plans and pricing.

Just mentioned one example, like prepaid planning is something that you have experienced something within Southeast Asia. That is just one example of us innovating to local nuances.

Bryan Goldberg

Next question from [Rich Greenfield] (Ph). There was a recent article about podcasters being disappointed in the anchors ability to deliver sponsorship with ads, often for anchor, plus Spotify. What happened and there is this time while you bought megaphone?

Daniel Ek

Well, what I would generally say is, we are early on in our podcast platform monetization efforts.

So most of the focus so far has been how to get more great content on the service. And the vast majority of podcasters on the service today, are self monetized.

We have been experimenting with various forms for monetization, including, of course, the ability one for podcasters to monetize themselves, but then are the anchor monetization efforts that you mentioned and now also, with megaphone as part of that.

We are very bullish on the opportunity to provide a meaningful ways for podcasters and monetize through the platform efforts. And I hope to be able to talk a little bit more about what our plans are in the near future on that. But again, lots of experimentation, but you should feel comfortable that there is a lot in our capabilities and portfolio that I think it can bring to the amazing traders that are doing podcasts on the platform.

Bryan Goldberg

Okay.

Another question in the queue from [Mario Lu] (Ph). Can you remind us how price increases flow through to costs? In other words, do labels receive the same share of the price increase or is there a min max threshold for pastors?

Daniel Ek

As we said in the past, we are never going to give you specifics of how any of our cable deals work. That being said, anytime we are raising prices, I think the labels are happy with that, but in terms of how it flows through, we don’t get into specifics.

Bryan Goldberg

Another question from [Richard Kramer] (Ph). What is the total investment you have made in acquisitions and commitments to content owners in the podcast space and how do you measure the payback on that investment? Will it be an ad sales conversion to premium or separate subscriptions?

Daniel Ek

Paul, do you want take that one?

Paul Vogel

Yes.

So look, I think from a payback is a, it is a holistic approach, and I think you mentioned a number of them in the question itself.

And so, when we look about, when you look at the investment in podcast, whether it is something developed on our own or a licensed or buy, the model that we build out has all those factors into it.

So there is an expectation of a potential new users that may come to the platform based on having this content. There is a increasing, we are starting to be able to measure what we think the retention benefits would be from having that on the platform as well. And then overtime, it is how much can we grow advertising ad sale else through it. There is a lot of nuance in there. Obviously, there is certain points and inflection points where you have enough content on, on certain type of content or a certain genre or certain demo where you could have an inflection point on the advertising side, where once you get that threshold, you can even have a faster growth because you have that critical mass.

And so that will weigh into as well.

So we look at all of those factors to measure it. And I would say additionally, as I said earlier for us it is really spending the time to understand how much value different pieces of content have on our platform, understanding what we should be paying for different pieces of content on the platform. And then understanding so the causality between having it and then, how much it benefits LTV.

So when we are looking at all of that, we are modeling all of it out. And I think when you look as Daniel mentioned we continue to invest in being in investment mode. We had said back [Technical Difficulty] So let me get back on that now.

Sorry about that. I was saying that, if you go back in the past we said, if we continue to - you see us invest in projects and podcast content, it is because we are seeing the benefits within our ecosystem. And the more we invest, the more you can have some confidence that the goodness within seeing throughout Spotify and the benefits we are seeing, we are going to do invest again.

Sorry. I apologize about I cough too much [indiscernible] restate anything I missed.

Bryan Goldberg

That related question in the queue from Josh Le of Covenant Capital.

You expect 2021 gross margin to be lower than the current level, while seeing premium ARPU improvement. Can you elaborate on content costs and podcasts investments in 2021?

Paul Vogel

Yes.

Let me address a couple of that.

So with respect to ARPU, I think when we said there is improvements in ARPU monthly after year-on -year. When you look at it on an FX neutral basis, I think for the full year ARPU will probably be roughly flattish. Currency is still a pretty big impact on our business. It is pretty attributable in Q1, specifically written in the shareholder letter.

So it will still be down a little bit in the first half of the year. We do expect ARPU to increase sequentially throughout the year. But again, because of our currency, it probably would still be slightly negative from a reported basis.

The second part of the question was just on gross margin in general. Yes, I think there is always lots of presentation, gross margin.

If you look over the last, couple of years, we have sort of hovered between 25%, 25.5% gross margin. And then, we do have some control on our investment and how much we want to spend and what we feel comfortable with respect to where we are on the growth curve, where we want to continue to double down on spending.

And so, there is a continued increase in podcast spending. in 2021, the revenue against podcasting is growing very, very nicely as well.

So we are seeing that.

We are not quite at the point yet where the revenue is outpacing the continued investment.

We are very optimistic that, overtime we will get there. But as Daniel mentioned, we are going to continue to invest and that investing has a compounding effect and a compounding benefit on the business and so that is where we are headed.

Bryan Goldberg

Okay.

Another question from Rich Greenfield, Lightshed. It appears Apple is going to enable direct monetization for podcasters became to patriot compared to the aggregated subscription the way Spotify does? Can you explain why your model is superior for podcasters?

Paul Vogel

Yes, sure.

So first and foremost, what I can’t speak to what anyone potentially may do.

I think, I alluded to this in some of my prior remarks. I don’t view the feature of Spotify to be a one size fits all. And even today, if you are a podcaster, there are plenty of ways for you to monetize through Spotify.

So again, you can come in as a consumer as a free user, you can come in as a paid subscriber and long-term, I believe that we will allow for all three models, which is both advertising a subscription and [indiscernible] as a feature for creators.

Bryan Goldberg

Okay.

Another question from [Richard Kramer] (Ph).

Given as your podcast engagement definition is mounting content for more than zero milliseconds. Can you provide us with a more useful metric on podcasting, for example, time spent relative to music?

Daniel Ek

It is not an issue, given on the past.

We have talked about that your 25% of our MAU engage with podcasts. That is where we are now, which is up from 22% in Q3.

So clearly, music is still the dominant mode on Spotify. But the podcast has been has continued to evolve materially, every quarter, it was up again in Q4 so.

Bryan Goldberg

Alright, great.

We have got time for one more question. And that is going to come from Ben Swinburn at Morgan Stanley. Daniel, is the growth strategy shifting from focus on users to a balance of pricing users. If so why did that make sense to do now? Does it suggest user growth is peaked? And then a follow-up for Paul does the premium user guide for first quarter of 2021 have seen any additional churn from the price increases?

Daniel Ek

So why don’t I start and then you can take the second part of the question, Paul.

So from my side, I think we have talked about this a number of different times, including them barriers there, there is three legs to the stool of how we can grow. One, we can improve our product composition. Two, we can launch new markets and three, we can raise prices. Up until now, you haven’t really seen us flex the third muscle, because we have been focused on improving our product proposition and launching new markets. And that is still the majority of what we are doing. But our take by home country, Sweden is a great example. That is a clear case where we aren’t tapping out of an addressable population. Hence, raising prices in Sweden probably makes sense in order to grow, which then obviously not only complicate Spotify but complicate all the amazing creators we have on the platform and our losses to strengthen the proposition to them as well.

So we are trying to optimize for growth and there is three ways to grow and we are now adding a third part of the signal here as well, but I don’t think you should read into that. The growth has peaked. It is more than we are now sort of flexing our muscles and adding a third-party, when we have experimented visits for quite some time, I should say as well. Like we started two years ago.

So it is not something that we had done just, you know, in a rush. We did in Norway two years ago.

We have done it since in Argentina, Australia, and in many, many other markets, you know, throughout the time, but this is the time maybe where you are seeing, it is actually becoming part of the strategy mostly in fact, because of all the positive response, that we have been seeing, or just the value that we are providing already to consumers.

So we feel we have this opportunity and that it will benefit both Spotify and all the nascent creators on the platform. And then with respect to Q1 particular, I will call it a couple of things. One is, last year in Q1we had an exceptionally strong Q1. We had, as we often do experiment with different, marketing plans and different plans.

And so we had some of our promotional activity, which normally ends at the end of the year, continue on through, into February of Q1 2020, which we think we are obviously benefited Q1 of last year. We don’t have a similar promotion running in Q1 this year.

So the comp between a promotion last year, no promotion this year will definitely impact growth in Q1. And I would say second, secondarily, we obviously had a very, very strong Q4. We think there is potential, we put forward some of what we would normally get into one, into Q4 given the upside there.

So again, we feel, really good about kind of where we’re headed in 2021. But Q1 does have some pretty challenging comps throughout the promotional activity we had last year and from the lack there off in from the lack there of in Q1 this year.

Bryan Goldberg

Okay.

We are out of time for the question and answer session we will turn it back over to Daniel for some closing remarks.

Daniel Ek

Alright. Thanks, Brian. I’m very encouraged by the progress we made on our path to becoming the world’s number one audio platform. And I want to thank all the Spotify employees who stayed focused, our creators, fans and partners around the world this year, and for executing at such a high level.

While it is still early days, it is clear to us that our strategy is working, looking ahead, we will continue to tap the user experience, expand into new markets and develop and acquire unique content for both new and established creators.

We are planning to share more details about these innovations as well as what is next for Spotify during our Stream On event, later this month. I hope you will join us for this virtual event, as it will shed more light on what the coming months and years will bring. I will be talking more about it and our earnings report on our podcasts, Spotify for the record, which will go live on our platform tomorrow. Thanks again for joining us.

Bryan Goldberg

Okay. And that concludes today’s call a replay will be available on our website and also on the Spotify app under Spotify earnings call replays. Thanks again, everyone for joining.

Operator

Thank you everyone. This will conclude today’s conference call.

You may now disconnect.