Earnings Call Transcript
Spotify Technology S.A. (SPOT)
Earnings Call Transcript - SPOT Q3 2021
Operator, Operator
Ladies and gentlemen, thank you for standing by and welcome to the Spotify Q3, 2021 earnings call. At this time, all participant lines are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session and instructions will follow at that time. I would now like to hand the call over to your speaker for today Bryan Goldberg, Head of Investor Relations. Bryan, the floor is yours.
Bryan Goldberg, Head of Investor Relations
Great. Thank you and welcome to Spotify's Third Quarter 2021 Earnings Conference call. Joining us today will be Daniel Ek, our CEO, and Paul Vogel, our CFO. We'll start with opening comments from Daniel and afterwards, Daniel and Paul will be happy to answer your questions. Questions can be submitted by going to Slido.com, using the code hashtag Spotify earnings Q3 '21. Analysts can ask questions directly into Slido and all participants can then vote on the questions they find the most relevant. We ask that you try to limit yourself to one to two questions and to the extent you have follow-ups, we'll be happy to address them, time permitting. If for some reason you don't have access to Slido, you can e-mail Investor Relations and we'll add on your question. Before we begin, let me quickly cover the Safe Harbor. During this call, we'll 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'll turn it over to Daniel.
Daniel Ek, CEO
All right. Hi, everyone. And thank you so much for joining us. I'll start by sharing what I hope you all saw in our shareholder letter. The business is doing really well and I'm pleased that we continue to deliver across the areas that are fundamental to our growth and long-term strategy. We had a very strong quarter. I'll quickly speak to MAU before talking about a few longer-term trends that I'm really excited about. Importantly, as I indicated last quarter, we had started to see MAU strengthening in the last half of Q2, and I'm really pleased that this trend continued throughout Q3. I believe the choppiness in the first half of the year was primarily due to COVID and is now largely behind us. All signs show that we're back to consistently delivering against our forecast, but we've also learned from the last two quarters and are responding faster to changes. Most notably in key markets like India, where we're now seeing a nice recovery. That's all to say that as we head into what's historically our biggest quarter of the year, we're all hands on deck to make sure the positive trend continues. I feel really good about where we stand across all the other aspects of the business overall. And as you can see this quarter, our ads revenue continues to surpass even our own optimistic expectations. This clearly proves the potential for ads to be the second big revenue driver for the future of our business. Not only did we have our biggest quarter ever for ads in Q3, but 2021 will mark the first time we will surpass EUR1 billion in ad revenue. While this is a significant milestone, this business is accelerating with much more room to run. Excitement from advertisers for the podcast industry has increased substantially over the last year, and we're ahead of our plans for podcast monetization. Audio ads on the Internet are now becoming a bigger part of advertisers' media mix overall. And to take advantage of this growing demand, we recently unveiled Spotify Audience Network enhancements for advertisers and added anchor creators to the mix. This gives advertisers more opportunities to connect with listeners and enables podcast creators to earn from their work in new ways. This latest announcement is only one example of our focus on increasing velocity across the business. In this case, unlocking more inventory as advertisers and creators alike are realizing the value of podcast ads. Looking long-term on our product and our platform, which is where I tend to focus, my confidence in the opportunity that still exists is unwavering. This is especially true when I think about how well we are positioned despite still being in the early days of this audio journey. A good reminder, Linear Radio still has a 46% share of audio listening in the U.S. alone; this despite consumption shifting steadily away from it. This year, more than 60% of all audio advertising spending will go to traditional radio. I think this clearly shows that we have plenty of room to grow both in listening time and in our effective monetization. The U.S. is one of the most advanced markets, and so internationally, there’s even more growth ahead of us. With that context in mind, I want to highlight a few areas of our platform strategy, and as a reminder, any improvements on our platform will ultimately help increase listening hours and subsequently, our effective monetization. Let's look at podcasting. We started our journey three years ago in podcasting with a catalog of about 185,000 podcasts. And we were really nowhere compared to the largest players in the industry. Today, we have 3.2 million podcasts on the platform, a growth rate of over 1,500%. But despite the fact that we're still relatively new entrants, previous data indicated we have become the top platform for podcast consumption in 60-plus countries. According to Edison Research and our own internal sources, we recently became the number one podcast platform U.S. listeners use the most. Given the U.S. represents the largest podcast market globally, I think this is quite significant. I am confident to say that we're a leader not only in podcasting, but in the burgeoning audio space on the Internet. Why did we succeed this fast? Well, obviously our content investments have helped a great deal, but it's also another proof point of the impact our platform improvements and product innovations are having on our business overall and the velocity of shipping matters. From the recent launch of interactivity enhancements like polls and Q&A to the release of enhanced listening features and new original programming around the world, we fought hard to gain new listeners. Our success is not attributable to just one thing, but rather the hundreds, if not thousands, of improvements that we're working on in parallel for the benefit of creators, users, and advertisers alike. Because this trend is progressing so significantly, you should expect us to continue to invest to keep up with the demand. Why does this velocity matter so much for Spotify? Well, I believe that ultimately, it will determine our long-term success. If you are slow, you better be right most of the time. But if you're fast, you can test and iterate more, which creates a culture of innovation. At Spotify, we want to constantly iterate and improve, and there's no question that we will always have competitors. Some of them will be good, but I believe we will be better because we're focused on our stakeholders: the creators and consumers, and we prioritize speed and adaptability. By constantly improving our user experience, users will not only come to Spotify, but we will retain them. If we retain our users, we will bring more creators to the platform to share their content. Better content means more advertisers, and all of these things, coupled together, users, creators, and advertisers, unlock the power of our flywheel. And with that, I'll turn it back to Bryan.
Bryan Goldberg, Head of Investor Relations
Thanks, Daniel. Again, if you've got any questions, please go to Slido.com hashtag Spotify earnings Q3 -21. Once your question is entered, you can edit or withdraw your question by selecting the option in the bottom right. We're going to be reading the questions in the order they appear in the queue, with respect to how people vote up their preference for questions. And our first question today is going to come from Rich Greenfield on advertising. Advertising revenues as a percentage of total revenues hit 13% for the second time ever. Given ad revenues are growing multiples of subscription revenues, what do you think the mix of your revenues will be in five years? And how should we think about that mix shift impacting margins?
Daniel Ek, CEO
Maybe I'll talk about the size of this, and Paul can chime in on the impact on margins. I'm really excited about ads. I think we had a tremendous quarter with 75% growth year-over-year, but this is just the beginning, as I stated in my opening remarks. Long term, I believe at the very least, this should be 20% of our revenues. But it might possibly be a lot more than that: 30%, 40% even over the next 5 to 10 years. We're very excited about this being the second big revenue driver for Spotify and are obviously investing behind that both in product and platform improvements, but also, as you may have read, in hiring staff across the world to help service these advertisers.
Paul Vogel, CFO
And then from an advertising general perspective, as Daniel said, it was up 75% in the quarter. We saw really nice, healthy gains on the music side. It was up significantly on the advertising side, and then podcasting advertising growth was in the triple digits. So we're seeing it across the board. What's really interesting is that the increase in inventory is bringing increased demand; the demand is really high across all our products. Podcasting is helping significantly with that. Additionally, from a margin standpoint, the podcasting margin is helpful over time. We believe having a fixed cost nature of the podcasting business and being able to grow that advertising will help margins. That said, we're seeing the free music margins improve as well, given the context that our free music margins are below our premium music margin. To the extent that we can drive incremental advertising across not just podcasting, but music in general, that will help margins as well. Margins were healthy—up almost 1,000 basis points year-on-year on the ad side, and overall gross margin in the quarter was at the high end of our range and really significant.
Bryan Goldberg, Head of Investor Relations
Our next question is going to come from Matt Thornton on marketplace. Can you update us on how the two-sided marketplace is performing versus plan in 2021? Secondly, given Spotify's reach, engagement, and contextual awareness, do you think Spotify has an important part to play as a marketplace for live to drive better awareness conversion and consumption in that part of the ecosystem?
Daniel Ek, CEO
Yes. Overall, I’m very excited about the progress with the marketplace. We continue to see very strong engagement with artists, teams, and labels across the board. A huge testament to that is just how well these formats have performed during this testing period. Many artists are seeing uplifts of 50% or even 100% on their campaigns. That is obviously driving even more demand from teams, leading more teams to want to try this product. I'd characterize it as much of last year was really about finding product-market fit. I think we have proven product-market fit now and are scaling this nicely across the board while iterating the product for all the demand and feedback we're getting from the creative community. More broadly speaking, we believe there is much more we can do to serve our creators and musicians on the platform, and live is obviously one of those opportunities that we think a lot about. We experimented quite a bit with virtual live shows during the pandemic and saw really nice results from that. I do think long-term we can be a very important part of that ecosystem, enabling fans to discover more live shows and allowing artists to interact with them in that way too. That's something the team is working on, and we're thinking about what the right experience should be. So, that's definitely a future upside for us.
Paul Vogel, CFO
From a financial perspective, the marketplace has contributed nicely. It was a nice contributor last year and it's grown probably better than we thought in 2021 as well. So, it has contributed to gross margin improvement and we've been really pleased with how it's grown over the last couple of years.
Bryan Goldberg, Head of Investor Relations
Okay, next question from Mike Morris on advertising. Other advertising platforms have cited Apple's iOS privacy measures and supply chain disruptions as negatively impacting 4Q growth prospects. How do Apple's changes impact your advertising offering, if at all? Additionally, are you anticipating macroeconomic headwinds to slow your rate of growth in the fourth-quarter?
Paul Vogel, CFO
Yes. For us, it didn't really have much of an impact. Like a lot of people, we were very aware of it. We have a very big brand business, which wasn't significantly impacted at all. The fact that we have a ton of first-party data with all of our users being logged into the service really helped us grow. We didn't really see much of an impact at all. We don't foresee much going forward, although we'll continue to monitor it. For Q4, the biggest impact will just be continued growth in podcasts and in inventory. We know the demand is there; we know the advertisers are there, so for us, it's just about continuing to expand the inventory available for advertisers.
Bryan Goldberg, Head of Investor Relations
Okay. Next question from Mario Lou on podcast creator tools. We understand the plan is to give 100% of paid podcast subscription revenue back to creators through 2022. That said, with podcast share of overall consumption hours reaching an all-time high in the third quarter, how should we frame the revenue and margin upside starting in 2023 and beyond?
Daniel Ek, CEO
Yes. I think the best way to think about this is by considering the engagement of content as the base layer of Spotify. Today, that is monetized primarily through subscription income and now to a larger extent through advertising too. However, we envision this platform going forward as one that should utilize all of these additional modalities across our Spotify portfolio, with paid podcasts being one of those that allows creators to segment either their entire user population into a paid podcast or even a subset of their superfans for various products and upsell them. All of these products in the long term will be accretive to the Spotify business, and I think of them more as a platform business model, where these are higher-margin opportunities layered on top of the base level content service we have. We're very excited about that, especially in the context of all the ongoing engagement, as there are lots of opportunities to upsell people to other propositions, which will be higher margin opportunities for Spotify.
Paul Vogel, CFO
I don't have much more to add to that other than what Daniel said. We've provided long-term targets, but we haven't given out anything specifically on 2023. However, we do expect that these types of products over time will be additive to the overall business.
Bryan Goldberg, Head of Investor Relations
Okay, another question from Rich Greenfield, this time on product testing. You've been testing a lower-cost subscription plan that's ad-supported. Does this signify either: 1. The price point needs to come down to drive the next 200 million premium subscribers; 2. The ad-supported opportunities are too compelling to focus solely on ad-free usage; or 3. A combination of both?
Daniel Ek, CEO
Maybe just as a general comment, we pretty much test all variants of all products that you can imagine. This is very much a test that we're running in some markets to learn more. But I think the higher order importance of Spotify is always to increase growth. To the extent that that could increase growth, we will explore it for that reason too. The second order we'll evaluate any successful test for would be whether this is, of course, accretive to the business. But the primary focus remains very much on growth. To characterize any rollout like this, I would say we would certainly do it to drive growth first and foremost, and secondly, look at its assertiveness on the business level.
Bryan Goldberg, Head of Investor Relations
All right. Next question comes from Matt Thornton on the Spotify Audience Network. Can you talk about: 1. What creator and advertiser feedback has been so far? 2. What inning or part of the football match are we in, in terms of being fully or widely launched or available with the Spotify Audience Network? 3. What the next milestones are?
Paul Vogel, CFO
I can take that one. The feedback has been really, really strong. We're super encouraged. If you look at Megaphone in particular and the Spotify Audience Network, we've got 50% more podcasts in the ecosystem than we did since the acquisition of Megaphone. One in five advertisers are now using the product as well. We're super excited about that. The feedback has been great. We've seen several partners who have seen performance go really well and have given us incremental inventory throughout the quarter because the performance we've provided them has been higher compared to their direct sales force. We feel really good about it; it has obviously led to a significant portion of growth. Podcast advertising in general was up triple-digits year-on-year, and we've seen that growth become really strong. In terms of innings, it's hard to say, but I would say we are in the very early days. As Daniel mentioned, we think advertising will be north of 20% of our business, if not significantly more, long term. That would imply we see a long way to go on the growth of the advertising business overall.
Daniel Ek, CEO
My only addition to that is that I appreciate the football reference you made.
Bryan Goldberg, Head of Investor Relations
All right. With that, we'll go to the next question from Maria Rips—a question about car thing. Are you able to share any updates on how the launch of Car Thing has performed so far? Additionally, how strategically important is this functionality to driving engagement, especially now that consumers have been spending more time in their cars again?
Daniel Ek, CEO
Overall, I would characterize us as being in the early days with Car Thing. Sharing a little context on our thinking: there are three big modalities driving audio consumption. The goal is with mobile devices, in people's homes through mostly connected speakers and TV screens, and then in the car. This is obviously a massive market, especially here in the U.S. Car Thing is our effort to see how the next generation of car entertainment systems could look. It was launched as a test to measure if we can increase the engagement that consumers are having in the car instead of using mobile phones connected through Bluetooth speakers, which is honestly quite dangerous from a driving perspective. So far, the response we're seeing from consumers is very, very encouraging. We've seen super high engagement with the product. Over 2 million people have signed up to get a Car Thing. The number one constraint for us at this particular moment, which should not surprise those following consumer electronics, is the chip shortages; we just can't make enough of them to distribute to consumers. Long term, the big question here is, in this test, we focused primarily on simply increasing engagement. We’ve just rolled out the option for consumers to buy the product. We're still in the early days overall. I think the best way to view this is we remain device agnostic, wanting to be on all devices. But this is another great opportunity for consumers who care about having a great music entertainment system to acquire one through Spotify.
Bryan Goldberg, Head of Investor Relations
Next question from Doug on MAU. With third-quarter MAU growth up double-digits year-on-year across all geographies, have you recovered all of the second quarter MAU shortfall? Secondly, have advertising campaigns resumed across all geographies, or are you still experiencing MAU weakness in certain countries?
Paul Vogel, CFO
Yeah, I think we feel really good about the MAU growth. We're back on a growth trajectory line and back on the curve where we expect to be. So I think that's really encouraging for us. As Daniel mentioned last quarter, we saw strength in the back half of Q2. We're very pleased that we came in at the higher end of expectations in Q3. So we feel like we're back on track for MAU. Looking at our guidance for Q4, our expectation is to top 400 million users by the end of the year, which should be a pretty significant milestone for us. In terms of the campaigns, yes, we did turn some of them back on. In Q2, due to COVID and global circumstances, we pulled back on some of our marketing efforts, particularly in markets like India. We did turn that back on, and we saw significant growth return in India. We also hadn’t invested a ton in some of our newer markets, but we turned some of that back on as well, which performed really well. Overall, we feel that we're back on track, and yes, the marketing plans performed well in Q3.
Bryan Goldberg, Head of Investor Relations
Okay. We have a question now from Batia Levy, which is on churn. Can you provide color on churn trends in the market that saw price increases recently?
Paul Vogel, CFO
Yeah, we've been really pleased with the markets where we've seen price increases, both from a gross intake perspective and a churn perspective. So everything has pretty much been in line with our expectations, if not slightly better.
Bryan Goldberg, Head of Investor Relations
Another one from Maria, this time on Shopify. Can you talk about how additive this new partnership could be to the artists on the platform, both from an engagement and revenue standpoint? Additionally, can you comment on your plans for a broader launch with Shopify?
Daniel Ek, CEO
Yeah. Toby and I joke about the name confusion—fun to see among consumers. There are literally people on the Spotify platform who thought we had launched a shopping network, which was amusing. Overall, our goal is very simple; we want to allow creators more ways to express themselves and interact with our audience, shifting them from casual fans to super-fans, and also more ways to monetize those relationships. The partnership with Spotify and Shopify is interesting since it allows creators to monetize these relationships, especially with the fans they have using Spotify on the platform. This is still in early days, so it's hard to gauge the impact on the business, but there has been a lot of creator excitement around this, and we're seeing more and more artists onboard their merchandise and shops on our platform daily. I'm excited about the early progress, and long-term, this will become a larger part of the overall interaction between fans and creators.
Bryan Goldberg, Head of Investor Relations
Okay, we have a question now from Deepak regarding our subscription business. Your premium subscriber growth has decelerated to the mid-teens range this year as net additions moderated. Can you talk about where you see opportunities to re-accelerate subscriber growth in 2022?
Paul Vogel, CFO
If you look at our subscriber growth in general, I think we feel really good and healthy. We had exceptional growth last year at over 30 million net subscribers, and we'll do a little less than that this year. Analyzing the average growth in subscribers over the last three years, we’ve averaged between 25 and 30 million net, around 27 million, and we feel pretty good about that trend. For us, there are always puts and takes. We still believe there's growth in developed markets in North America and Europe. Additionally, we see a lot of growth still ahead of us in Latin America and the rest of the world. Some of these markets take some time to mature. Typically, we have to drive the free MAU side first before the subscriber side follows suit. We feel like we're on track with our growth expectations heading out of 2021.
Daniel Ek, CEO
My only addition is that when success is observed in newer markets, a significant opportunity set emerges, particularly in emerging markets. In many Western contexts, we are accustomed to using credit cards and similar forms of payment. Therefore, innovating different monetization models becomes crucial. For instance, in Southeast Asia, we've experimented with daily and weekly plans, yielding great successes. However, we recognize that these markets require additional time. It may take a few quarters to reach the level of maturity we’ve achieved in Western markets, but we are making notable strides in understanding how to operate successfully in Southeast Asia and other similar regions. While it's taken us a while to learn how to handle subscription models effectively in developed markets, we are now navigating similar phases in Southeast Asia and assorted markets. Ultimately, I am confident that we will crack the code; I cannot say when precisely, but our experimentation is promising.
Bryan Goldberg, Head of Investor Relations
All right, we've got a follow-up from Deepak regarding our advertising gross margins. Could you provide some additional color on the underlying core music margin in the ads business? What can you tell us about the impact of podcast costs dragging that margin down?
Paul Vogel, CFO
Yes. I'm not going to break out the margins by product, but I will say gross margins were up year-on-year on the ad side. As advertising has grown, we have some margins, particularly on the ad side, where historically we've had low margins that are being helped by the increased advertising on a royalty basis. So that's been supportive. Podcasts, in general, are still a drag on overall gross margins. Although the drag was less than we forecast, given the strength in podcast advertising overall. When we look at revenue per listening hour, it is growing significantly on the platform while costs per listening hour are not as high. We’re witnessing that trend manifest, which will flip those gross margins on the podcasting side to become positive over time, and we anticipate this improvement will be meaningful.
Bryan Goldberg, Head of Investor Relations
Okay. Another question from Mario Lou on the Spotify Audience Network. How big of a driver will adding podcasts from Anchor creators be in the coming weeks? What penetration rate do you expect to achieve within the Spotify Audience Network over time?
Paul Vogel, CFO
I don't know what the penetration rate over time will be, but I would say aggregating into Anchor podcasters is a significant opportunity for us; it adds incremental inventory into the ecosystem. We think this will be very bullish because, as I've mentioned several times, we know the demand is there. For us, it's really about adding incremental supply. We're also launching new markets; I believe it's four new markets that will have access to this as well. The combination of both the anchor podcasters and the new market growth should be very supportive for our further growth. We've been optimistic about how it's gone so far, and we talked about how strong advertising was in the quarter, with the addition of both the anchor podcasters and new markets supporting our growth.
Bryan Goldberg, Head of Investor Relations
We received a question now from Steven Cahill on operating expenses. R&D, sales and marketing, and G&A came in as a lower percentage of revenue this quarter. Given the investments you're making in advertising user interface, etc., is this a trend we should extrapolate? Additionally, how do acquisitions like Megaphone hit the P&L versus organic investments?
Paul Vogel, CFO
I would say regarding operating expenses, we benefited from social charges being the reduction of the reversal of the accrual. So, our OpEx was up around 17% ex social charges, judged adjusted versus about 12% on a reported basis. That distortion does affect our numbers a bit. If you take a step back and look at growth in the OpEx line items, you can assume that R&D as a percentage of revenue will maintain these levels, if not increase slightly over time as we continue to invest in the business. The G&A will see leverage and variances based on our life cycles of product innovations and launches.
Daniel Ek, CEO
My only addition to that is that we’re observing tremendous leverage, particularly in R&D, owing to the product improvements discussed in my opening comments. The transition in podcasting—from three years ago, starting from nowhere to becoming the leader—illustrates how effectively we can achieve significant progress in a reasonable timeframe when we commit to building something. Expect that whenever we spot great R&D opportunities, we will invest behind them. Ad sales now being one of those areas, we are expanding our ad sales force due to the success we've had in advertising. I hope both investors and analysts appreciate that our investments are logical for the business and should instill confidence in our ongoing endeavors that will yield great results in the years to come.
Bryan Goldberg, Head of Investor Relations
Okay, the next question is from Justin Patterson on the creator opportunity. Daniel, you've brought many more creators onto the platform this past year. What do you see as the key lever or levers towards bringing the next wave of creators on board? For markets like the U.S. and Latin America, how has having original content and expertise affected smaller creators joining Spotify?
Daniel Ek, CEO
The primary factor for us is lowering the barriers for creators to express themselves and interact with their audiences on the platform. Right now, the publishing from platforms like Anchor takes some time, and immediate feedback from the audience isn’t readily accessible on Spotify. There are many ways we can reduce friction and enable creators to express themselves and engage with their audience. This will attract the next generation of creators to our platform. Evidence of this would be the video podcasting effort we carried out recently that garnered massive interest from creators. You should start to see increased video content appearing on the Spotify platform as creators begin to experiment with these formats. So reducing friction and allowing for interaction on our platform are the key drivers. As for original content, it serves as a nice halo effect across the board. All creators witness these big creators achieving success on the Spotify platform, which, naturally, motivates them to seek that same success.
Paul Vogel, CFO
A follow-up to Daniel's comments would be that we often receive numerous queries on the podcasting side regarding monetization and revenue. Anchor, which we acquired roughly 2.5 to 3 years ago, has significantly bolstered the growth of podcasters and creators on the platform. Over 80% of new podcasters use the Anchor platform, and it's estimated that Anchor holds about 50% market share across the podcast industry in terms of usage. It's been a tremendous contributor to the creator landscape.
Bryan Goldberg, Head of Investor Relations
Okay, our next question comes from Ben Swinburne on advertising. While the radio advertising TAM is a significant opportunity, it seems that the scale and technology you can bring to advertisers transcends traditional broadcast radio. Do you agree, and can you provide a sense of the kinds of advertisers and ad budgets you're witnessing today spending on Spotify?
Daniel Ek, CEO
I absolutely agree, Ben. This trend mirrors what we observed with print ads transitioning from old media to digital media, significantly improving effectiveness and increasing the overall ad ecosystem without merely translating it to a one-to-one conversion. The same will happen with audio ads. To provide context, the future of computing, in my view, is to augment everyone's experience. For instance, if you're walking down the street and we know your location, we can target an appropriate offer based on your proximity. This will be an enormous opportunity in VR and AR as well, blending display and audio to create an immersive ad experience that helps advertisers convey their messages and brand narratives. Long-term, what we're building is complementary to all other ad platforms and uniquely positioned against other app platforms. The TAM should far exceed the current advertising ecosystem. However, precisely how long this will take and the specific shape it will take is challenging to ascertain. We will build step-by-step, and as I mentioned in my opening comments, our focus is on improving rate and execution.
Paul Vogel, CFO
Yes, as we've mentioned before, we’re seeing an increase in larger spend programs. In the case of Megaphone, we're witnessing incremental budgets and assets, and we are monetizing them at high rates. The overall spending from larger brands continues to rise. I can provide more specifics offline if necessary.
Bryan Goldberg, Head of Investor Relations
Great. Okay, we've got time for two more questions. The next one's going to come from Eric Sheridan, and it's regarding the ad-supported business. Can you provide more detail on the dynamics in the ad-supported business this quarter? How would you characterize the level of ad impressions and CPM growth during the third quarter? Also, how should we interpret the sustained long-term dynamics of supply and pricing? Finally, how should we consider the incremental gross margins in the ad business as it scales?
Paul Vogel, CFO
In the quarter, we mentioned that growth was due to both impression growth and CPM growth. Impression growth drove the majority of the growth and was the incremental catalyst. CPMs increased, likely driven by demand rather than strategies to enhance pricing. The substantial impression growth paired with real demand led to significant gains. We've discussed this in the past—the demand is present, and it's our responsibility to create new ways to increase supply by adding new content and expanding our offerings, as I mentioned about shifting span globally and improving overall inventory through engagement. As for pricing dynamics, we expect that as we enhance content and supply, pricing will follow suit. Regarding gross margin, while podcasting remains a drag on margins for now, we believe our podcast business will yield higher gross margins than our current consolidated gross margins as it matures. This should contribute to incremental margin growth in the long term.
Bryan Goldberg, Head of Investor Relations
All right, and our last question is going to come from Doug Anmuth on podcasting. Can you offer any updated thoughts on your podcasting strategy, including content acquisition, monetization, or distribution? What are the next steps towards scaling penetration of MAUs?
Daniel Ek, CEO
Content acquisition keeps increasing; we had over 100 new originals globally this quarter alone, so we're tracking very well on that. As I mentioned earlier, we're also trying to increase the number of creators participating on the platform by minimizing friction and enabling them to express themselves in more ways. Video content is an excellent example of this. Monetization is occurring across the board. You see ad spend with Anchor growing, and we have a paywall product allowing creators to monetize their relationships innovatively. We're still in the early stages of introducing new forms of monetization, and utilizing the Shopify integration could prove very helpful for podcasters as well. Distribution entails several platform improvements. Our largest opportunity lies in enhancing overall discovery, which we’ve discussed in previous earnings calls. We're striving to provide better options for consumers to discover new podcasts. We recently acquired a service to facilitate discovery, and we'll be building that out. I’m confident that we will reimagine the podcasting experience around discovery, which will drive higher consumption and ultimately lead to an increase in creators joining the platform, thereby increasing overall MAUs.
Bryan Goldberg, Head of Investor Relations
Thanks, Doug. That wraps up our Q&A session for today’s call. I'll turn it back over to Daniel for closing remarks.
Daniel Ek, CEO
Thanks, Bryan. I want to close by stating something I’ve shared with our team recently. Audio is our right to win, and while we've been relentless in our pursuit of being the world's largest audio platform, it is still early days—we're just getting started. The industry is beginning to grasp the magnitude of this opportunity as we focus on unleashing new experiences that align with our vision for audio's future. Each improvement we implement and every innovation we introduce for listeners and creators propels this flywheel to move faster and create greater impacts. As we see opportunities to go further and faster, we will persist in investing. It’s wonderful to witness all that is coming together for us, like it did this quarter. I will share more about the quarter on our podcast 'For the Record,' which will go live on our platform tomorrow. You will also hear more about our ads business from Dawn Ostroff and Jay Richmond. Thank you again for joining us this morning.
Bryan Goldberg, Head of Investor Relations
And that concludes today's call. A replay of the call will be available on our website and also on the Spotify app under Spotify Earnings Call replays. Thanks, everyone, for joining.