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The Ratings Game: Spotify’s new TikTok dance unlikely to immediately boost financials, analyst says. But others see profits — and price hikes — ahead

Wall Street liked what it saw on Wednesday, as audio streaming service Spotify Technology introduced more TikTok-esque sweeteners to its platform. Read More...

Many musicians are struggling to manage life on the algorithm. But Wall Street, at least, liked what it saw on Wednesday, as audio streaming service Spotify Technology introduced more TikTok-esque sweeteners to its platform.

In its second “Stream On” presentation on Wednesday, Spotify SPOT, -2.41% executives introduced an array of new AI-powered, personalized features for users and artists: Personalized feeds, loaded with audio preview clips; personalized recommendations and more sophisticated search functions; a personalized AI DJ, which debuted last month; and short videos that artists can post to their profiles. Spotify is also allowing more independent artists access to Discovery Mode, which can more aggressively promote select songs — albeit with with a lower royalty payout attached.

“Our goal is not to steal time,” Gustav Soderstrom, Spotify’s chief product and technology officer, said at the presentation. “It is to help users save time.”

Raymond James analysts, in a research note on Thursday, said the revamp wouldn’t immediately boost financials for the company, which is still losing money. But they said the new features could strengthen its influence overall.

“While likely not immediately accretive to the financials, we think (the) announcements will make the platform an even more attractive venue for creators, and could potentially provide more ammunition for the company in negotiations with labels in terms of value-add,” they said.

JPMorgan analysts, meanwhile, said Spotify “is now past the peak drag from podcast investments in content & creation platforms/tools.” They said the platform’s podcast business could start to turn a profit this year or next year.

“We also believe a price increase to the individual plan in the U.S. is likely in the coming months, which we estimate could drive (more than $211 million) in incremental annualized revenue,” they said.

To get there, Spotify will have to navigate a weaker digital ad market, in the wake of company layoffs. Chief Financial Officer Paul Vogel, at a Morgan Stanley conference on Wednesday, said trends in ad demand were still “choppy” in the first quarter.

Spotify Chief Executive Daniel Ek last year floated the idea of a price hike on U.S. subscriptions. But any increase would come as rising prices — for things like hotels, gas, transportation and airfare — and equipment shortages make touring for all but the most popular artists more difficult.

And as analysts speculate on a price hike, artists have complained about the low pay — as in, a fraction of a cent per stream — provided by Spotify and other streaming services. During the “Stream On” presentation, Spotify said all-time payouts to the music industry were approaching $40 billion.

Spotify pays most of its revenue out to labels and others in the industry — money that filters down to the artists after others take their cut. But as Spotify contends with demands from artists and Wall Street, JPMorgan analysts warned that those royalty payouts “will weigh on margins longer-term” for Spotify.

And depending on who you ask, AI could serve either as an enhancement or a replacement to artists’ work. And with the popularity of bots like ChatGPT, executives are getting a lot more excited about how to use the technology.

During the Morgan Stanley conference, Vogel also said that feedback on its AI-backed DJ had been “great” so far. But he said it was too early to offer metrics. Still, he touched on the growing presence, and concerns, of AI’s role in making music.

“The other area of AI debate on music, of course, is what generative AI may mean to music creation,” he said. “And obviously there’s a lot of focus from the labels, especially Universal, on what’s happening algorithmically on Spotify and other places: How do you think about the opportunity with AI-generated music in terms of creating content and driving engagement and making consumers happy with what they’re hearing on Spotify, but also obviously addressing the artist’s concern around generative AI?”

He added that Spotify’s goal was to “create a product where creators are able to create and users get the best experience for them.” But he noted that machines — from player pianos to electronica — have taken on a greater role in making music over the decades.

“I think it’ll just evolve and we’ll have to evolve along with it,” he said.

Shares of Spotify were down 1.3% on Thursday. Over the past 12 months, those shares have fallen 8.2%. By comparison, the S&P 500 Index SPX, -1.85% is down 7.5% over that period.

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