Spotify saw podcasting as a panacea. Instead, it generated a lot of costs.

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Spotify is far from reaching its goals, and getting there seems increasingly difficult.

Gabby Jones/Bloomberg

Streaming companies have gone to great lengths to distance themselves from


netflix
,

after its stock fell more than 35% due to disappointing results on April 20. The leaders of the music streaming leader


Spotify Technology

made it clear after reporting earnings this week that it’s not like Netflix – it has more content and a different business model.

Nonetheless, shares of Spotify (ticker: SPOT) fell to new all-time lows after posting disappointing results on Wednesday, and they are down more than 50% for the year. It may not be Netflix (NFLX), but Spotify is falling short in a way that bodes ill for the stock.

Barrons pointed out some of the holes in Spotify’s bull case in a 2019 cover story (“Spotify Stock Is Risky Because the Music Industry Isn’t Changing Fast Enough”, April 19). Back then, Spotify was trying to be more like Netflix. Management realized that it wouldn’t be able to increase its profits enough if it continued to pay music labels 70 cents on every dollar earned from streaming. So, he started spending heavily on podcasts, hoping that owning the content would keep him more revenue and also increase subscribers.

Today, Spotify is far from reaching its goals, and getting there looks increasingly difficult. In 2018, the company said its goal was to increase gross margins to 30%-35%. But margins have stuck around 25% since then. Low margins mean low profits, if any. When it started operations in 2018, Spotify was expected to make an annual profit by 2020. Investors are still waiting. Analysts do not expect positive earnings per share before 2023.

Like Barrons expected, podcasting was no panacea. The medium has grown in popularity, but is still overshadowed by radio and television advertising.

Additionally, the economics of podcasting is significantly different from that of music streaming.

Spotify’s music streaming service is an easy-to-navigate user interface that connects artists with listeners and discreetly takes a cut of every transaction. Like other modern technology platforms, its software sorts content and services offered by other people. Its podcasting business also has its own algorithms, but it also involves a lot of talent management and content moderation. Buying exclusive access to podcasters is expensive, and investors always need to know when the company will have to write a check to a popular podcaster next. For example, Howard Stern’s contract status has always hung over


Sirius XM Funds

(SIRI).

Spotify has spent hundreds of millions of dollars on podcasts and podcast software, including $200 million for exclusive rights to the Joe Rogan Experience. Spotify’s ad-supported business, where it tracks podcast costs, actually posted a negative gross margin in the last quarter. Spotify said it didn’t expect the podcasting unit to be profitable this year, although it’s “not far off”.

All that spending on podcasting hasn’t generated a wave of new listeners. Spotify was regularly adding 5-10% more monthly active users a quarter before podcasts became a big part of the business. These days, its user growth rate has fallen below 5% in four of the past five quarters.

In Spotify’s early years, investors were willing to ignore its lack of profits due to scorching user growth. Without this growth, its valuation compresses rapidly. Spotify once traded for more than five times its projected sales. Today, with the stock at around $104, it costs less than two.

Spotify may not be Netflix, but one analyst thinks it could be following in the footsteps of another tech company:


Twitter

(TWTR). “Given the lack of investor support,” wrote Brian White of Monness Crespi Hardt, “we believe Spotify should consider going private or operating under the umbrella of a larger corporation.”

Write to Avi Salzman at [email protected]

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