Spotify: audiobooks move speaks volumes about margin woes

Receive free Lex updates

We’ll send you a myFT Daily Digest email rounding up the latest Lex news every morning.

Bored commuters may find that listening to Jeremy Irons reading Brideshead Revisited brightens their day. Spotify’s newly-unveiled push into audiobooks is unlikely to have the same effect on beleaguered investors.

It is easy to see why the US-listed streaming platform is keen to pump up its volume in this segment. Its music subscription business is growing, with 551mn monthly active users in the second quarter of 2023, a 27 per cent increase on last year. But a big chunk of revenues is captured by labels and artists, leaving the distributor with relatively thin margins. Podcasts, which Spotify put a lot of store in, have turned out to be a costly distraction. 

As a result, Spotify is expected to lose €473mn at the operating level this year, says Richard Kramer, founder of Arete Research. The stock trades roughly where it opened upon its direct listing in 2018. The Nasdaq Index has doubled since.

Expanding into audiobooks means accessing a relatively small but fast-growing market. Global revenues were $5.4bn in 2022, according to WordsRated. The move also fits in with Spotify’s strategy of turning itself into a one-stop listening shop. 

Unfortunately, the economics of such a push will be challenging. In the initial phase, Spotify is giving away 15 hours of content monthly — call it a book and a half — to existing premium subscribers in the UK and Australia. The US will follow.

That’s great value for subscribers. A credit on Amazon’s Audible — worth one book — costs £7.99. It may well spur further growth. Yet it seems likely that Spotify will have to pay publishers for the content.

The end ambition, for Spotify, must be to increase subscribers first and then monetise them later. But here, too, it could end up in a disadvantageous position.

Publishing houses may cut it a good deal in hopes of encouraging the growth of a competitor to Amazon’s Audible. But, given its big head start, the purchasing power of that behemoth will be hard to rival.