Spotify's fourth-quarter shareholder letter is a classic of the pandemic-era genre. The audio streamer doesn't just highlight the "substantial uncertainty" in its forecasts, it points to "increased forecasting uncertainty" in 2021 "and beyond". In his remarks, chief executive and founder Daniel Ek references how uncertain things are for its business no fewer than eight times.
Bravely then declaring "a high degree of confidence" that it can "absolutely" meet the range of hard numbers it offers on subscriber growth, revenue and operating profit/loss – in Spotify's case, this is almost always a loss – Ek explains that he can only do so by being conservative. He hopes for more success than what he is, in effect, promising. But he doesn't want to forecast anything more ambitious because of one giant shadow, non-exclusive to Spotify: there's a pandemic on. The only certainty is uncertainty. And more of it.
Spotify isn’t alone, of course, in beefing up the caveats that are commonly found in quarterly shareholder updates like this. Across most sectors, the balance has shifted from the standard inclusion of a catch-all proviso to a lengthier admission that too much is up in the air for anyone to be rock-solid on anything much.
Several recent earnings reports have included a line that, translated, reads like this: “We’re less sure about the future than we were in the past, and we might be even less sure about it very soon. We remain optimistic and completely relaxed though. You still love us, don’t you?”
Fraught moment
Among media companies of all shapes and sizes, this is a fraught moment. The high-growth, high-spending ones need to base their plans on projections based on realistic assumptions, otherwise their high-wire performances could fast be undone. The struggling ones, crushed by Big Tech, still need visibility to manage their decline. In the middle, there is a plethora of companies with sort-of-viable, steady or surprisingly buoyant revenue streams that are anxious.
The problem they all face is that just as there was no data for how consumers would behave in a pandemic before the first quarter of 2020, there is not as yet any data for how they will behave in the second year of one. And as for how they will behave after one, that is anybody’s guess.
Like Netflix before it, Spotify is now flagging the pandemic's likely "pull-forward" effect on subscriber growth. In a pull-forward scenario, a lockdown-inspired bump in subscribers represents people who would have whipped out their credit cards at some point anyway, not "bonus" customers who never would have signed up if it wasn't for Covid-19.
Netflix enjoyed its biggest year of paid membership growth in its history last year, reaching 203.7 million subscribers by the end of it. The bulk of this growth was achieved in a stellar first half in which it added 26 million subscribers – almost as much as the 28 million it added throughout all of 2019. Tiger King wasn’t that good. This was a pure pandemic effect.
In the second half, its subscriber tally still swelled by a further 10.7 million, but by then the pace of growth had slowed exactly the way Netflix predicted it would once consumers got through “the initial shock” of Covid-19.
Bored consumers
Some might say a vast population stuck at home, with little to do and few places to go, bored and in search of distraction, provides ideal market conditions for a company that has spent big on podcasts and is busy trying to promote them.
Nevertheless, the impact of the pandemic on Spotify has been spottier, in part because lockdowns silenced in-car listening, in part because unlike Netflix it has some exposure to the advertising market, and in part because people desperately seeking entertainment could opt to become an “ad-supported MAU” (monthly active user), listening for free.
Spotify now has 199 million ad-supported MAUs and 155 million premium subscribers. The non-paying 199 million will, if previous trends hold firm, act as a funnel for the latter. Indeed, given those 155 million subscribers deliver more than six times the revenue generated by the 199 million ad-supported MAUs, a lot is riding on this pattern staying intact.
So when Spotify says it faces increased forecasting uncertainty compared to prior years “due to the unknown duration of the pandemic and its ongoing effect on user, subscriber and revenue growth”, its impressive free-to-premium conversion rate is one metric it will be tracking closely.
But at media companies chasing subscribers and looking to hold onto the ones they unexpectedly gained last year – news media groups, too, racked up a flurry of new sign-ups during the first wave – there is a sense that the crystal balls are, if not smashed in their entirety, just a little cracked.
Normal outlays
With new names entering the so-called streaming wars and some news groups only recently launching online paywalls, this was always going to be a period of consumer experimentation and market growth. Media companies often welcome new competitors – publicly, at least – on the basis that the newbies’ marketing efforts can help popularise the overall category, cementing in consumers’ minds the idea that media subscriptions are normal outlays to have.
Few expect this benefit to last forever, however. Speculation has already turned to who the winners and losers will be once consumers eventually start to rationalise the number of subscriptions they hold, cutting the ones that jump out on their monthly debit statements for the wrong reasons, and sending the churn rate for media companies skyward. The risk now is that this pruning phase could coincide with a naturally occurring post-pandemic plummet in demand.
Cancel at any time? The strongest media companies will be doing everything in their power to make sure the thought doesn’t even cross your mind.
