Earnings Call Transcript - SPOT Q2 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by. And welcome to the Spotify Q2 2020 Earnings Call. At this time, all participants are in a listen-only mode. [Operator Instructions] Thank you. I would now like to hand the conference over to your speaker for today, Paul Vogel, Chief Financial Officer. Please go ahead.

Paul Vogel, CFO

Great. Thank you, and welcome to Spotify’s second quarter 2020 earnings conference call. I hope everyone is continuing to stay safe. As is the case with just about everyone, our team will be hosting this call entirely remotely. Our CEO, Daniel Ek, is participating from Stockholm, and I am at my home office in New Jersey. This morning, I am pleased to introduce our new Head of Investor Relations, Bryan Goldberg, who just recently joined our team. I am sure many of you recognize his name from his time at Bank of America. Also joining the IR team is Lauren Katzen, who was previously on our Licensing Finance team within FP&A. We are excited to have both of them on board. Mike Urciuoli, who has been both part of our IR team and FP&A teams over the past few years is transitioning to an extended role within FP&A but will be on hand to answer questions after this quarter and for the next few weeks. And with that, I will turn it over to Bryan.

Bryan Goldberg, Head of Investor Relations

Thanks, Paul. Turning now to the call, we will start with opening comments from Daniel, after which Daniel and Paul will be happy to answer your questions. Like last quarter, we’ll be taking questions exclusively through Slido. Questions can be submitted by going to slido.com, S-L-I-D-O.com and using the code #SpotifyEarnings. Analysts can ask questions directly into Slido, and all participants can then vote on the questions they find the most relevant. If for some reason you don’t have access to Slido, you can email investor relations at ir@spotify.com, and we will add in your question. Before we begin, let me quickly cover the Safe Harbor. During the 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 page and also furnished today on Form 6-K. And with that, I will turn it over to Daniel.

Daniel Ek, CEO

All right. Hey, everyone, and thank you so much for joining us. Like all of you, Spotify continues to navigate issues related to COVID-19 and racial injustice, both of which are reshaping our industry and society in significant ways. Given the role we play in culture, we believe Spotify has the responsibility to use our platform to help build a more equitable future. For us, that means focusing on what’s core to our business, amplifying the music and perspectives of black creators and taking every opportunity to connect them with current and future fans. We are also taking a hard look at what we can do to build a more equitable workplace and we have committed to increasing representation of black employees at all levels within Spotify. When we do this right, it’s good for employees, good for creators and good for shareholders. Now turning to the quarter. We are pleased with our results, which met or exceeded our guidance by almost every metric after making adjustments to help us weather the pandemic in Q1; consumption returned to normal levels this quarter. Monthly active users increased to 299 million and subscribers grew to 138 million, both exceeding our expectations. Advertising revenue, which took a significant hit in Q1, improved notably throughout the quarter and we feel good about our momentum as we enter Q3. We also continue to invest in our audio-first strategy, signing exclusive deals with some of the world’s most well-known creators and most powerful voices. Earlier today, we launched the first episode of 'The Michelle Obama Podcast', and it features a conversation with a very special guest, President Barack Obama. Our podcast catalog now has over 1.5 million shows, 50% of which launched in 2020. And while it’s been gratifying to see so much enthusiasm for these announcements throughout the quarter, it’s important to remember that with many of our newest shows, we are still early in progress; in some cases like DC Comics, we need to produce the content, and in others like Joe Rogan, it has yet to launch on our platform. There is still work to do and much more to come. On the music front, we entered a new multi-year global license agreement with Universal Music Group that reflects our shared commitments to growing the industry and supporting artists at all stages of their careers. Universal Music Group will leverage Spotify’s marketplace tools for both frontline and catalog artists to connect them with fans, grow their audiences and better monetize their fan base. And we’ll also work together to develop new products and tools that drive discovery and engagement at a scale that has never before existed. Spotify has now surpassed 60 million tracks globally, giving artists even more opportunities to connect with their biggest fans. Just last week, Taylor Swift’s surprise release of her new album 'Folklore' broke the record for the number one first-day release for a female artist in Spotify’s history. She also became the most streamed artist on Spotify on any day this year with nearly 98 million streams on July 24th alone. Finally, I would like to address our business overall. Investors often ask me what our secret sauce is, expecting that there is some sort of silver bullet to our growth. The reality is that at a platform of our scale, it’s rarely about one thing; instead, it’s about setting up a culture of experimentation and being willing to double down on opportunities if we believe they have the potential to enhance the user experience and change the slope of our growth curve. I want to share two recent examples that I think exemplify these points. Over the last two years, we’ve tripled the number of experiments from a few hundred to thousands of A/B tests. Some of these experiments yield nothing more than a few key learnings, while others have shown great promise. In one of our recent podcast experiments, we increased listening among the test group by 33%. That’s just one example of many. When we see results like this, you should expect us to invest even more. We know that no one experiment is going to materially impact us even in the next year. It's the thousands of little things that we're doing, which will gradually add up over time. The second example I want to point to is new market launches. Just this month, we launched in Russia and 12 other European countries. Our first week in Russia was huge, even bigger than our first week in India. If we do this right, we have the opportunity to reach 250 million more listeners in these markets over the long term. We are now operating in nearly every country across Europe, but there is still a lot of pent-up demand for Spotify in markets around the world, which is why we have plans for further expansion globally. What these two recent examples underscore is that staying focused on long-term growth while managing for speed of iteration in the near term is what will drive future growth. Using that lens and the examples I gave, I think it is apparent that we still have many more improvements left to make. That’s also why we keep investing. And with that, I'll turn it back to Bryan.

Bryan Goldberg, Head of Investor Relations

Thanks, Daniel. Again, if you have any questions, please go to slido.com #SpotifyEarnings, and we’ll read the questions in the order they come in with respect to helping people vote up their preference for questions. The first question today is going to come from Eric Sheraton. Can you frame the impacts you expect long-term in your business from greater podcast content consumption, lower churn, greater gross ad share of streamed audio, and increased long-term reported gross margins?

Daniel Ek, CEO

Well, it’s really about taking a step back and I think what we are seeing here is the beginning of our flywheel. As we talked about before, Spotify is now going after all of audio, which is obviously a significantly larger market than just the music industry on its own. So, what we're seeing is that by every piece of content that we are adding on the service, we are successfully serving to our consumers, we are creating more engagement. That engagement in turn leads to lower churn, but more importantly, now that we have almost 300 million monthly active users on the platform, these users are also, when they find great shows, sharing that on social media and other forms to other consumers, driving this virtual cycle where more and more people are learning about what's going on with Spotify, and more and more creators want to be on Spotify creating this virtuous flywheel. With the expansion of podcasts, we are definitely seeing more of that and it’s happening at a faster clip than what we’ve seen before, and we are very encouraged by it.

Paul Vogel, CFO

Yes. From a numbers perspective, I would say everything you mentioned is what we are looking at to value each piece of content. So it is the combination of what is it doing for our user growth, what is it doing to improve retention and lower churn, and how can we grow advertising on top of it. When we look at pieces of content and we look at how much we need to add and where we are spending, it’s really about the LTV of the overall spend on content and how it impacts holistically the entire business from user growth to subscriber growth to advertising growth.

Bryan Goldberg, Head of Investor Relations

Okay. Great. Next question is from Rich Greenfield: What percentage of ad revenue is now directly tied to podcasting? Trying to understand what ad-supported music revenues were down year-over-year relative to the 21% overall ad decline in the quarter as podcasting growth and acquisition first-time benefits presumably benefited the 21% decline.

Daniel Ek, CEO

Yes. I would say a couple of things regarding this. One is, podcasting is still relatively small compared to the overall amount of advertising. That being said, it did outperform in the quarter and we felt it was one of the stronger areas of growth, which is great. Hopefully, everyone has seen the deal we struck with Omnicom in the last couple of weeks, which is a $20 million deal to invest in podcast advertising moving forward, which we are really excited about. The other thing about podcasting is it’s having a couple of effects. One is, overall podcast growth is there; we finished this quarter at 21% of MAU, which is up from 19%. Podcast consumption is still up over 100%, and we are seeing advertisers really wanting to invest in podcasting as a medium. The other thing that’s benefiting us is that we are starting to sell more media deals across all of our products. So we are seeing nice growth from deals that incorporate both music advertising and podcasting advertising. In general, podcast was strong in the quarter. It’s still reasonably small but growing very nicely.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Eric Sheraton: Can you update investors on your views on acquiring licensing, podcasting content? What will drive either approach? Any update on the level of investments in podcasts and how critical is putting podcast content exclusively on your own platform against your long-term goals for the business model?

Daniel Ek, CEO

Yes. I mean, we are really pursuing sort of all strategies in tandem. It’s really all about creating the best overall user experience, as I talked about before with this virtual cycle. Now, that said, exclusivity is a key component of that strategy. We want to create more original programming that only exists on Spotify. And I think this quarter, you started to see some of those announcements coming in a big way. Obviously, that’s something we are pursuing with creators, but it’s important that we are an open platform and we are seeing more and more content; as I mentioned in my opening statements, over 1.5 million shows are now available on Spotify and over 50% of them were created in 2020. It’s impossible, even if we wanted, to have all that content exclusively on our platform. So, it’s going to be a mix of all of those things going forward.

Bryan Goldberg, Head of Investor Relations

Okay, next question from Richard Kramer: With the UMG deal, has Spotify secured any firm commercial commitment to pay for two-sided marketplace services?

Daniel Ek, CEO

So, as we talked about before, we are very, very excited about the marketplace and the momentum it’s having. We are seeing lots and lots of big artists come in. We saw John Legend, we saw the 1975, Lady Gaga, among many others, adopt the tools this quarter. So we are very excited about it. With the Universal Music Group announcements, they are now leaning in because of that early excitement in the marketplace and want to adopt more tools and want to go deeper because they are seeing the potential impact that it can have on their business.

Bryan Goldberg, Head of Investor Relations

Next question from Eric Sheraton: Can you give us a sense of how the ad market evolved over the recent quarter in terms of ad budgets, pricing, and how you see those dynamics evolving against the current macro backdrop? Can you provide color on any variability by industry verticals, geographies, or type of ad budget?

Paul Vogel, CFO

Yes. So the advertising market definitely started slow. We mentioned coming out of Q1 that the last three weeks of Q1 were pretty weak and saw some big declines, and that continued into April and May. We were actually running behind on the ads business for April and May, probably down about 25% on those two months, and then we really had a nice pickup in June. June was only down about 10% on the advertising side. In terms of geographies, I am not going to get into specifics, but we have a much higher percentage of our revenue on the ad side that comes from North America than from the Premium side. So, how North America goes tends to be how our overall business goes. In terms of product, the direct business was weak in the quarter and actually underperformed our expectations. However, we were very strong on Ad Studio, which is our self-service tool, which outperformed, and as I mentioned above, podcasting outperformed as well.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Michael Morris: Is the level of podcast engagements similar across both premium and ad-supported users? Are you seeing a difference in churn for podcast users? If so, can you quantify the relative impacts?

Paul Vogel, CFO

At a high level, I would say the good news is that podcast engagement in general is increasing. As I mentioned, we are now at 21% of our MAU engaged with podcasts, which is up from 19%, and consumption was up over 100% in the quarter. So we continue to see it going up in general. Premium does have higher engagement than the ad-supported business, but both segments have been moving up nicely and have been improving. With respect to any impacts on churn, we don’t break that down individually.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Doug Anmuth: Do you expect podcast to have a bigger financial impact through advertising dollars or more through incremental premium subscribers to the platform?

Daniel Ek, CEO

I would really say it depends on what the time horizon is that you are looking at. Obviously, our subscription business is the much larger business, so even as we improve that by a small percentage base, that’s likely going to be a larger impact than even if we improve our advertising business with strong double-digit growth as well. In the short term, any improvements we can make on retention will be material to the subscription business. That's how you should look at it. But long term, when I look at the landscape, what excites me is that we are going after all of audio; and all of audio is a multi-billion user opportunity, and the marketplace that only in its existing form today is north of $50 billion in advertising revenue. It’s the combination of subscription and advertising long term that I think is the future of media businesses. Spotify has really since its inception played in both of these businesses. So, I am very excited about being a principal player in advertising as well as in subscription long term.

Paul Vogel, CFO

And I would just add, which I think I mentioned earlier, when we look at some of the larger content deals we've done, we are measuring or forecasting both sides of the equation in terms of how we value that content moving forward.

Bryan Goldberg, Head of Investor Relations

Okay. Another question here from Doug: Can you talk about how the recent Universal deal may treat the two-sided marketplace differently than other recently signed label deals? Or are they essentially the same?

Daniel Ek, CEO

Well, I think the big difference here is really Universal’s willingness to experiment and go all-in on the marketplace. What that means essentially is that Universal has seen the early success and is excited by it. They want to make sure that they can get behind and experiment much more with the paid tools of the marketplace, but also the organic tools that allow artists to engage with their fans and monetize their fanbase better. Overall, we want to work with all labels, but we are incredibly encouraged to see Universal go all-in on the tools and services that we are building.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Mark Mahaney: Where can ad-supported gross margins go near-term? And long-term, can these gross margins match those of the premium?

Paul Vogel, CFO

Yes. In the very long-term, we definitely think ad gross margins could reach the Premium gross margins. We haven’t given a timeframe on that. But we believe that’s where we are headed. In the near-term, there are a couple of factors at play here. One, obviously is the weaker overall ad environment, which is impacting gross margins. Particularly, on the ad side, there are some minimums that we pay in certain markets where the advertising hasn't quite reached critical mass. As we get to a tipping point in some of those markets on the music side, the gross margin will improve. Additionally, just a reminder, we now account for all of the costs of podcasting in our ad-supported business, so the entire brunt of the investment we are making on the content side is hitting the ad-supported line. As we continue to invest in content, the ad business will fill more. We do expect ad’s gross margins to improve in Q3 and even better in Q4.

Bryan Goldberg, Head of Investor Relations

Our next question is from Steven Cahall: When do you expect there to be an impact to MAUs, premium subs, and gross profit when 'The Joe Rogan Experience' comes exclusive to Spotify in September?

Daniel Ek, CEO

I think it’s too early to talk about what the impact will be. Yes, we obviously know it’s a big show and we are encouraged by the reception we’ve seen in the marketplace. Many of his fans are very excited about the announcements. However, it’s going to take time, and we have to learn how to market and merchandise 'The Joe Rogan Show', both to his existing fans and to all of the other 300 million or so listeners on Spotify. As we have talked about before, even with the announcement of Joe Rogan, this was the number-one searched show on Spotify that we are now including. I think it’s going to be very positive, but again, the best way to think about this is that Spotify is not about one single show. It is really about the drumbeat now of new exclusive content, original programming, and the 1.5 million podcasts that exist on the platform that are growing at a very rapid pace. So there is something for everyone. That’s the message I want you to take away.

Bryan Goldberg, Head of Investor Relations

Next question is from Rich Greenfield: Howard Stern's multiyear agreement with Sirius expires at the end of this calendar year. If you are Howard Stern, why would you want to be on Spotify versus Sirius?

Daniel Ek, CEO

I can’t really speak to Howard Stern, specifically. What I can say though, is that you’ve seen in the quarter, there are more and more great creators around the world that are turning to Spotify. Part of that reason is this is an interactive medium that allows them to better connect with their audience; seeing the data, how they are engaging with the content, and receiving feedback directly. It is an international platform too, not just domestic. While we are very large in North America, we are equally large in Europe, LATAM, and Asia. This is a global audio platform unlike anything else. The combination of that interactivity and the flexibility it allows along with the global nature and scale of this platform is what excites many creators to be on our platform.

Bryan Goldberg, Head of Investor Relations

Next question is from Richard Kramer: How will you get the local data to target podcast ads you intend to insert? Will each host have to record a large number of ads, which will be inserted depending on local interests, customer segments, etc.?

Daniel Ek, CEO

I’ll take this, and maybe Paul, you can chime in as well. Just to level set with everyone, there are a number of different tools that we have in our podcasting advertising set, and the host-read ads are one of them; what we call SAI is something very different. Specifically addressing the question, on our host-read ads, the host decides among different brands that it wants to work with and then reads those ads in; Spotify serves those to the audience that best suits the advertisers' intents. With SAI, it's more dynamically created ads that are set in. Some are recorded by the advertisers themselves and some are host-read ads, baked into the mix. This is a very nascent marketplace that exists today. When it comes to podcast, a lot of this data that’s become standard on the Internet has not existed. So, generally speaking, when you have internet-level data and accessibility of those tools, the performance of those ads goes up. When the performance of those ads goes up, the value goes up as well, both to the creator and to the platform. We are very excited about bringing internet-level advertising technology to the podcast medium. This is something that I am very encouraged by and think you should look out for in the coming quarters and years.

Bryan Goldberg, Head of Investor Relations

Next question is from Michael Cling: Can you elaborate on how you expect the addition of video will impact the growth of Spotify’s advertising business? Is it realistic for investors to expect a positive impact in the next 12 months?

Daniel Ek, CEO

Yes. The way you should look at video overall is yet another capability that we are adding for creators to connect with fans. Just this quarter, with the discovery of podcasts, where the podcast charts are coming in more tools and data are being added for podcasters. This is another innovation that allows podcasters to creatively express themselves in a different way. You should expect this to iterate on. Now, that said, we are an audio-first platform, and for the foreseeable future, we expect the majority of consumption to be audio, meaning that consumers will go in and out of the video experience and then be able to put that experience in their pocket, continue listening. When they hear something interesting, they will pull it back up and re-watch the show. Video is priced very attractively for advertisers, but the share of video on Spotify is low right now; it will be growing, but I don’t think you should expect it to be another YouTube.

Bryan Goldberg, Head of Investor Relations

Next question is from Matt Thorton: On podcasts, can you give some color on: one, what percent of hours are currently monetizable and how is that trending? Two, how do current ad loads and CPM stack up versus the industry average? And three, what's the third-party ad network opportunity?

Paul Vogel, CFO

Yes. We don't really disclose ad loads, particularly, but I'd say they are pretty close to industry averages. In general, what’s really interesting, and I think Daniel touched on this, is as you get better at targeting with tools like SAI, you are able to increase your monetization, increase the relevancy of the ads, and overall monetization without having to increase the overall ad load. We feel really optimistic that our technology and innovation will allow for greater monetization over time, doing it in a way we don’t necessarily have to increase ad loads. In some cases, you might have to deal with the lower ad loads if you're able to target the ads more specifically to users with a higher ROI. In terms of the third-party ad network opportunity, it's something we could potentially look into in the longer term. We know that when we launched SAI, which is only on our owned and operated properties, the number of inbound calls from folks interested in using that technology was pretty high. Although nothing to announce at this point, it’s obviously something we would consider.

Daniel Ek, CEO

One thing I would add is that part of this question was how far we are in just the rollout of this. We are very early days. The vast majority of advertising you hear on Spotify today is the burnt-in ads that the podcasters themselves have served. Spotify does not participate in that. By building out tools like SAI and host-read ads, which are much more efficient and better for the advertisers, and creators, we expect a lot more adoption in the coming quarters.

Bryan Goldberg, Head of Investor Relations

Next question is from Rich Greenfield: You mentioned a change in the cadence in promotional offers impacting churn. How should we think about the timing and length of major promos going forward?

Paul Vogel, CFO

Yes. I think if you take a step back, historically we’ve run promotional offerings seasonally. So, one in the summer and one at the holiday period of time every year, which we've done for the last couple of years. Last year, we did even more experimentation with offers at different times and different types of offers. For instance, in Q4 of last year, we had an always-on promotion that started earlier in Q4 than normal. In Q1 this year, we actually extended the normal holiday campaign into Q1, which persisted through the early parts of February. The seasonal cadence led to more folks in Q2 this year rolling off of seasonal campaigns than we normally do. So, as a result, you can expect some uptick in churn when people roll off those promotional offerings. While the quarter-on-quarter year-on-year churn was down, it was up modestly on a quarter-on-quarter basis, but that was totally expected and in line with our expectations. Moving forward, you can expect us to continue to experiment; I would say the seasonal campaigns are likely to continue to happen with the same regularity while we’ll experiment with other offerings and promotions and regional plans over time.

Bryan Goldberg, Head of Investor Relations

Next question from Lloyd Walmsley: Can you tell us how much premium gross margins benefited in Q2 relative to a year ago from the extended use of the free trial this year versus last year’s 99 for three months? What about the total impact to first-half premium gross margins?

Paul Vogel, CFO

Yes. In Q2, that impact was small. It was probably about 15 to 20 basis points. It had a bigger impact in Q1, around 80 basis points. Together, it's likely about 40 basis points or so for the first half of the year.

Bryan Goldberg, Head of Investor Relations

Next question from Rich Greenfield: The core Apple Podcast experience hasn’t evolved in years, but there are a wide array of dedicated podcast apps such as Pocket Casts, Overcast, Castro, etc. How would you rank the experience of Spotify as a podcast player versus the dedicated apps? Can you become the best place for podcasts?

Daniel Ek, CEO

That’s certainly our ambition. Again, what I’ve said previously is that we want to be the de facto audio platform of the world. There is a lot more innovation that we have started doing about two years ago, and that we keep shipping quarter by quarter. I think my personal favorite at the moment, which I am super excited about, is the ability to do group listening remotely. Just as an example, this is something we announced yesterday, where our consumers can now share what they are currently listening to and people can tune in to that experience, whether that be podcast or music. We have this large music platform, and all of the benefits we are developing for the music ecosystem are coming to the podcast ecosystem as well. This is true for advertising, discovery tools, and other usability benefits too. Over time, that’s going to compound into an amazing user experience that we believe will be attractive to most, if not all consumers around the world who are interested in listening to audio content.

Bryan Goldberg, Head of Investor Relations

Next question comes from Ben Swinburne: Why do you believe COVID-19 pressures seem to persist more substantially in Latin America and the rest of the world than in North America? Separately, do you think there has been a reduction in artist releases due to COVID and if that’s impacted engagement?

Daniel Ek, CEO

It’s a very good question. Generally, I would say we see some of this seasonality on a market-by-market basis, not related to COVID, but just due to seasonality and holidays, that sort of thing. My best thesis at the moment is we’ve talked about this last quarter; there has been a pool of forward effect of smart devices and smart home devices exploding in consumption. Smart speakers, smart TVs, etc. This has been a nice tailwind overall. My best thesis at the moment is we don’t have the same extent of smart devices in LATAM as we do in, say, more mature markets like North America and Europe. That can have some of the impacts we are seeing as well, but that’s my own thesis and I can’t confirm it broadly.

Bryan Goldberg, Head of Investor Relations

Next question from Sumant Wahi: Can you talk about the margin profile of the podcast business and the shape of the ROI? What are your expectations there?

Paul Vogel, CFO

Yes. As we've talked about in the short-term to intermediate-term, we are still in investment mode and we are going to continue to invest in the business. You will see the content drag on gross margins continue for some time as advertising grows. Over the long-term, we think it should be margin accretive. How long that takes, we’ll have to see. We’ve said on a couple of occasions that if you continue to see the goodness in the business from podcasting, whether it’s on user growth or subscriber growth, if it positively impacts the retention numbers and churn, we are going to continue to invest in that business. You’ll see it holistically in our LTV and our LTV to SAC and how we think about that. It could be a drag for a period of time before it starts to give benefit, which we think will be significant over time.

Daniel Ek, CEO

The one added thing I would probably add to what Paul said is that the best measure we use internally for judging the business success is the LTV to SAC metric. Baked into the LTV metric, of course, is the retention of our users. It’s about getting exclusive content, and that exclusive content may mean that we are the only place that has that show, which enables pricing power as well. Long-term, that’s the flywheel, that’s the metric that we are focusing on. We are investing in this business to build a differentiated operation compared to others that exist, and we think this will be the audio platform on the internet. That’s a large and valuable opportunity both with subscription and advertising.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Brian Russo: On your recent renewal with UMG, can you confirm this partner has agreed to treat podcasting on your premium tier in the same manner that the other majors have with regard to a carve-out of listening time?

Daniel Ek, CEO

I think what we’ve said is that from a podcasting perspective, the advertising related to podcasting will be 100% Spotify’s and not shared. Beyond that, I am not sure we’ve commented much on any other terms of the deal.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Richard Kramer: What ROI do you think you can provide advertisers or labels for their promoted songs? How do you balance that with the legal limitations on payola and consumer expectations around recommendations?

Paul Vogel, CFO

Yes. We have been investing in the marketplace for quite some time, and particularly we have had marquee being out there. We are always monitoring consumer satisfaction and making sure that is high. That’s the gauging factor we are looking at. The single largest cost for a label today is promotion and marketing. Spotify is the platform where most people are consuming and discovering content, so if labels invest a portion of the marketing spend they use to promote a market artist on this platform natively, the results should be a lot better. You should see better results for consumers, better results for artists and labels, and a higher gross margin for Spotify; a win-win-win scenario.

Bryan Goldberg, Head of Investor Relations

Okay. Next question from Steven Cahall: When users combine into a premium dual account or a family plan, how is this factored into gross adds, net adds and churn?

Daniel Ek, CEO

If you are already a subscriber and you just move within plans, you continue to be a subscriber. There is no change there. For gross adds, it’s just every new user to the platform. I am not expecting churn if you're moving from one plan to another but you're staying a subscriber.

Bryan Goldberg, Head of Investor Relations

Okay. We've got time for about two or three more questions. We’ll go to Mark Mahaney: Can you talk through the P&L impact so far from the two-sided marketplace and comment on its potential future financial impacts?

Paul Vogel, CFO

Yes. We mentioned last year that it was about a $30 million benefit to gross profit, and at the start of the year, we expected the marketplace to contribute to gross profit in 2020 by about 50%. There is no change at all to our expectations for the year regarding how marketplace is rolling out. The majority of that is contra cost, providing a benefit to gross margin without revenue. There are some revenues associated, but they are reasonably small. The benefit we gain is mostly related to the gross margin.

Bryan Goldberg, Head of Investor Relations

And the next question comes from Deepak at Barclays: With Joe Rogan coming on the platform exclusively in September and other podcasts potentially launching, how are you thinking about the potential benefit to premium subs and MAUs in your third and fourth-quarter guidance?

Paul Vogel, CFO

Yes. It’s a great question and to piggyback on what Daniel said earlier, we’ve been reasonably conservative with the expectations for how much it benefits our platform. When you look at the guidance range, again, we had mentioned a certain level of conservatism in our guidance, particularly for MAU with respect to how much potential benefit we will see this year from podcasts and content launches. We definitely have seen continued MAU growth; as I mentioned earlier, it was up this year more than it was a year ago in the same time period, and we’ve seen nice growth there. The exact impact modeled for the benefits of any content is still fairly minor, so there is some conservatism baked into the MAU side concerning the benefit of podcast and new content.

Daniel Ek, CEO

One addition I would make is that the interesting factor isn't just about one show; it is when you are adding more and more things that only exist on Spotify. To the extent that we are looking at this, I’d say big events are fantastic and have a big impact, but both existing fans and new fans alike will benefit. This really focuses on adding more reasons for you to come to Spotify and be part of the ecosystem. I’m excited about both the launches we’ve already had and the coming announcements about other shows we're producing. There should be something for every person on the Spotify platform, and more and more of those shows will only exist on Spotify.

Bryan Goldberg, Head of Investor Relations

Okay. And then I have a question from Richard Kramer: What precisely are you hoping to gain from the Apple Antitrust case? What’s your ideal outcome? Given that 70% plus of U.S. subs are on iOS, how could that affect earnings?

Daniel Ek, CEO

Paul, maybe you can talk about the specific impact for us. But the most important thing for us is to create platform principles where it’s a more fair and equitable marketplace for us and other startups to engage and compete for consumers’ attention and wallets. We think this is important not just for Spotify, but for the broader ecosystem as well. The best service should win, not the one that had an existing platform that locks in consumers. That’s what we’re hoping for as an outcome. Maybe Paul has something more specific on the impact for us.

Paul Vogel, CFO

Nothing other than, as we've said in the past, we’ve grown really well in the face of competitive dynamics that aren’t ideal for us regarding how we can market and talk to our consumers within the iOS ecosystem. We feel very good about the growth we've had, despite limitations that Apple puts on us in our ability to market, promote, and convert users into subscribers.

Bryan Goldberg, Head of Investor Relations

Alright. And our last question will come from Ben Swinburne: Product mix shifts largely due to discounted and family plans continue to benefit users but weigh on ARPU and your year-over-year premium revenue growth, which is slowing. Why should shareholders view this trend positively for the long-term earnings power of the business and not as a sign of a maturing market?

Paul Vogel, CFO

I guess, I’ll start off if Daniel has any comments on this one. For us, we’ve been in a mode of growing market share. It's all about growing users and subscribers. We’ve talked about LTV, ensuring we’re adding subscribers that we believe will be profitable long-term. We continue to see success with our family plans and institution plans, helping us grow subscriptions and gain share. We have seen ARPU decline, down about 9% in the quarter as I mentioned; 7% excluding FX, with another 1% from a revenue reversal, so down about 6%. Long-term, we expect ARPU declines to moderate and start to move higher. But it's really about market share gains over near-term profitability.

Daniel Ek, CEO

The only thing I would add is that we look at product mix changes through the LTV lens. Many variables go into LTV, including retention and overall acquisition. We monitor for that, and as Paul said, we’ve mostly focused on growth. With the scale of the platform, we gain more benefits; it’s easier to market to existing consumers when we’re doing something like a podcast, as those consumers market to new ones. We’re seeing this virtual cycle of more people joining the platform based on that. Long-term, we are very bullish, still early in our journey of going after the audio platform of the world, measuring billions of consumers. The radio industry today is north of $50 billion; most of that is advertising – a small portion of Spotify’s business, but it will be a much bigger one overall. Additionally, looking at existing audio products, we see monetizing at higher ARPUs than Spotify in those marketplaces. The Spotify product and content mix improves daily, giving us confidence that we will be a significant player in subscription and have pricing power going forward. The combination of growth remains our priority given the billions. Yes sure. In closing, we had a very strong quarter. I’ve never been more bullish about our today and future opportunities. Still, billions of people have yet to discover our on-demand music streaming or listen to a podcast. Many more we aim to reach in markets worldwide where Spotify doesn’t yet exist. Speaking of podcasts, the last thing I wanted to say is to check out Spotify’s new 'For the Record' podcast coming out this Friday. Paul and I will share additional thoughts about the quarter and discuss my philosophy on growth, innovation, and risk-taking. Feel free to check that out; shameless plug. Thanks again for joining us this morning. This is an exciting time to be focused on audio; we are just getting started.

Bryan Goldberg, Head of Investor Relations

Thanks again everyone for joining. The replay of the call will be available on our website and new for the first time also on the Spotify App under Spotify Earnings Call Replays. Thanks again.

Operator, Operator

This concludes the Spotify Q2 2020 earnings call. We thank you for your participation. You may now disconnect.