Earnings Call Transcript - SPOT Q4 2020

Operator, Operator

Ladies and gentlemen, thank you for standing by, and welcome to Spotify’s 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, Head of Investor Relations

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 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 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, CEO

All right. Thanks, Bryan, and hi, everyone, and thank you so much for joining us. Despite the global uncertainty of 2020, it was a remarkable year for Spotify. Following 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. 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, and it’s 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 caused 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 shift 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 opportunities it creates. And as a reminder, our approach to forecasting is to only forecast what we are at a very high degree of certainty we will achieve. Given the uncertainty we face today, I suspect that our full-year 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’s 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 the 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 where the true payoff of 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 podcast 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, we 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 app 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 app business accelerated finishing above forecasts. In our mature markets, our largest issue was that we were inventory constrained. And while this sounds like a good problem to have, it is difficult for us to predict how quickly we can open up new inventory. I expect that as the category of audio apps matures and more radio dollars 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, 2021 brings 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’ve long heard me say that it’s coming, and I’m more confident today that that is 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 the capabilities or is as well positioned as 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, Head of Investor Relations

Great. Thanks, Daniel. Again, if you have 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, respecting how people vote up their preferences for questions. And our first question today is going to come from John Egbert of Stifel. The high end of your 2021 subscriber guidance suggests you’ll add fewer net new subscribers this year versus 2020. You noted churn should decline in 2021, but do you expect the newly announced price increases to represent a material headwind to subscriber growth in 2021? What factors should we consider here?

Daniel Ek, CEO

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, it did create some pull-forward effects throughout the year. That means that there are more uncertainties 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. Specifically, with the price increases, Paul can probably address that to a greater extent. But we have seen a 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, CFO

Yes, I would 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 pulled 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 helped 2020. And in hindsight, we didn’t really call it a specific quarter where we thought the benefits of people being at home and the tailwinds to streaming weren’t 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 on our part, how much was some pull-forward from kind of the tailwind that streaming had in general in 2020. But we do believe that each quarter probably saw a little bit of pull-forward as well. And when you go back and look at where we started 2020, where we ended, we finished about 4 million plus or minus above where we thought we were when we started the year. So definitely some better execution there, probably some pull-forward based on the tailwind that streaming 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 we normally have. There are lots of initiatives. I would say, uncertainty isn’t always a bad thing. There are lots of things that could break positively, and there are some things that could be more challenging. But there are just probably more of them in 2021 than we have experienced in years past, and that’s 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 or uncertainties, where if they break positively, we could do better. So again, we’ve given 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, Head of Investor Relations

All right. 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 upside to the business compared to global investments community to scale over the coming years?

Daniel Ek, CEO

Yes. Overall, we are very pleased with 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 is moving online and into on-demand. That is the eye on the fires, the one that we are changing, and that’s still what we are kind of looking at. As we look at that universe, though, the primary thing that we have been focusing on, as we got into this audio-first strategy, was how to turn our massive user base on Spotify today into podcast listeners, and extending our platform into becoming the de facto podcast player for a lot of these users throughout. And as evident, I think from this quarter compared to even last, we keep on extending the number of users on our platform that are using podcasts on the platform to now a quarter of them that are 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 the exclusivity strategy that we have. But we are in the early days in the sense that there are many, many more exclusives that we have in the pipeline for 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 bring to Spotify. There will be more and more reasons to come to Spotify. That’s one thing for sure, but it’s sort of a near-term uncertainty in terms of the effect of that.

Paul Vogel, CFO

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 podcast usage was highly correlated with improvements in retention and user growth, but we, at that point, couldn’t really prove out the causality. I think in those shareholder letters, we did mention that we now feel reasonably confident that we can prove out the causality of having a podcast and the benefits it is having on user growth and retention and then having podcasts is a positive contributor to 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 that podcast is having on our platform.

Bryan Goldberg, Head of Investor Relations

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 regard?

Daniel Ek, CEO

Yes, we are very interested in obviously paying close attention to everything that’s 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 announcement here. But there are plenty more things to come in the coming months and this year as well when it comes to creator to fan engagements.

Bryan Goldberg, Head of Investor Relations

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, CEO

Yes. We always take a large amount of time to try to analyze the market, and South Korea is certainly not an exception to that rule. 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 studying the 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 understand the content that we have in many of the domestic markets; we try to bring in 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 will certainly play a very valid role 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 a major contributing factor to why the user experience is better, and why I think South Korean consumers are very excited about Spotify.

Bryan Goldberg, Head of Investor Relations

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, CEO

I think we are in the early days of seeing the long-term evolution 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 we will have all different models, and that is the future for all media companies since you will have ad-supported subscription and various models sort of in the same space all incorporated in the future. And you should definitely expect Spotify to follow that strategy and that pattern. So I think it is early days to specifically look at how that could play out, but obviously, if that were to work, the margin profile would be different from how we do with music.

Bryan Goldberg, Head of Investor Relations

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 podcast users compare to the overall base, and can you share the churn difference between podcast users and non-or light users?

Daniel Ek, CEO

Paul, do you want to take this one?

Paul Vogel, CFO

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 of the increase 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 going to have a couple of issues: One is 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 and their churn 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 podcast users, but as I said earlier in my commentary, we are increasingly comfortable that podcasting is having a positive effect on LTV subscribers. And so, that is where the continued investment comes from.

Bryan Goldberg, Head of Investor Relations

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

Paul Vogel, CFO

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 has been 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 have a free tier, a paid tier, family, and student. 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 various other models that will play a role in Spotify’s future.

Bryan Goldberg, Head of Investor Relations

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, CEO

So, on the price increases, as we have talked about, we launched in 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 are obviously a number of factors that will go into price increases and whenever we launch them, the magnitude of the number of factors. Some of them are the maturity of the market, 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 than we did. We pulled back on that because of the pandemic, the uncertainty, and not wanting to raise that with consumers, given all that is going on. And so, when we talk about the unknowns in 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, Head of Investor Relations

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 paid?

Daniel Ek, CEO

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 take 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 to include also live performances as well. Those do not happen through Spotify directly, but they are facilitated so that artists can point consumers to those. I know that there have 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 principal of today, but we of course look very carefully at how it is going and what works better than what doesn’t evolve. And again, long-term our strategy, as I said, is to allow those creator to fan engagements to happen on the platform, in an even greater extent than what is currently happening.

Bryan Goldberg, Head of Investor Relations

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, CEO

Yes, I mean, what I would say is I definitely 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 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 remind 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 another. And that number now is, I would say certainly during 2021, we will be closer to a thousand people. So it is a tremendous kind of shift at the company and even in 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, Head of Investor Relations

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, CEO

Well, I can’t comment specifically on how our label deal terms look. We have said this before, but podcasting is a separate category and does not involve how we pay out for music royalties. I don’t know if Paul wanted to add something to that.

Paul Vogel, CFO

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, Head of Investor Relations

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, CEO

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. One is you have to take into consideration year-over-year and the impact of social charges 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 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 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. If we clearly probably spend more 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 efficiently as well. 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, lowering 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, and going into new categories; we are entering 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; we are still investing behind that bullishness, and that is what we should be expecting. And I think at a mature state, this will look very different than the first stage. So we are investing right now.

Bryan Goldberg, Head of Investor Relations

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, CEO

Yes, and just quickly, this is not a very uncommon practice for us; we typically launch, as I mentioned, with a very simple proposition in new markets, and then overtime we build on. That is something that has been incredibly successful for us to do. If you go back to almost all market launches, China follows the same pattern; we go in with very clear propositions for a very clear audience, and then broaden that proposition over time, 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, Head of Investor Relations

Okay, our next question comes from [Rich Greenfield] (Ph). There was a recent article about podcasters being disappointed in the anchor's ability to deliver sponsorship with ads, often for anchor, plus Spotify. What happened, and is this time while you bought Megaphone?

Daniel Ek, CEO

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 of monetization, including, of course, the ability for podcasters to monetize themselves, but then our Anchor monetization efforts that you mentioned, and now also with Megaphone as part of that. We are very bullish on the opportunity to provide meaningful ways for podcasters to 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 creators that are doing podcasts on the platform.

Bryan Goldberg, Head of Investor Relations

Okay. Another question in the queue from Mario Lu. 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 podcasters?

Daniel Ek, CEO

As we said in the past, we are never going to give you specifics of how any of our label 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, Head of Investor Relations

Another question from Richard Kramer. 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, CEO

Paul, do you want to take that one?

Paul Vogel, CFO

Yes. So look, I think from a payback is a holistic approach, and I think you mentioned a number of them in the question itself. When we look about, when you look at the investment in podcasts, whether it is something developed on our own or licensed or bought, 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 an 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 sales through it. There is a lot of nuance in there. Obviously, there are certain points and inflection points where you have enough content on a 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. We look at all of those factors to measure it. 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 the causality between having it and 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 to point. Sorry about that. I was saying that, if you go back in the past, we said if we continue to 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 we are seeing throughout Spotify and the benefits we are seeing, we are going to invest again.

Bryan Goldberg, Head of Investor Relations

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 podcast investments in 2021?

Paul Vogel, CFO

Yes. Let me address a couple of those. So with respect to ARPU, I think when we said there are improvements in ARPU year-over-year. When you look at it on an FX neutral basis, I think for the full year ARPU will probably be roughly flat. 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 are always lots of presentations regarding gross margin. If you look over the last couple of years, we have sort of hovered between 25% and 25.5% in gross margin. And then, we do have some control over 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, over time, 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, Head of Investor Relations

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

Paul Vogel, CFO

Yes, sure. So first and foremost, what I can’t speak to what anyone 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, subscription, and sponsorship as a feature for creators.

Bryan Goldberg, Head of Investor Relations

Okay. Another question from Richard Kramer. Given your podcast engagement definition is counting 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, CEO

It is not an issue; given in 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 space has continued to evolve materially every quarter, and it was up again in Q4.

Bryan Goldberg, Head of Investor Relations

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 has peaked? And then a follow-up for Paul: does the premium user guide for the first quarter of 2021 have seen any additional churn from the price increases?

Daniel Ek, CEO

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 are 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 complicates Spotify but complicates all the amazing creators we have on the platform, and our losses strengthen the proposition to them as well. So we are trying to optimize for growth, and there are 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 that we are now sort of flexing our muscles and adding a third party when we have experimented with it for quite some time. I should say as well, like we started two years ago. We did this in Norway two years ago. We have done it since in Argentina, Australia, and in many, many other markets throughout the time, but this is the time maybe where you are seeing it actually become 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 in particular, I will call it a couple of things. One is, last year in Q1, we 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 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 and 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 where we are headed in 2021. But Q1 does have some pretty challenging comps throughout the promotional activity we had last year and from the lack thereof in Q1 this year.

Bryan Goldberg, Head of Investor Relations

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, CEO

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 enhance 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 in 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, Head of Investor Relations

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, Operator

Thank you, everyone. This will conclude today’s conference call. You may now disconnect.