Spotify’s Audiobooks Push: Wall Street Dissects How It Differs From Its Podcast Initiative

Georg Szalai
·7 min read

What does Spotify’s big push into audiobooks with a new offering giving paid subscribers 15 hours of free listening per month mean for the music streamer’s business and financials? That was the topic of Wall Street debate following the company’s unveiling of its plan that was rolled out in the U.K. and Australia on Tuesday, with other markets, including the U.S., expected to follow this winter.

Rather than having to buy audiobooks à la carte, premium subscribers will now be able to listen to more than 150,000 audiobooks from all the major publishers up to a limit of 15 hours each month. After that, subscribers can opt to add on 10 more hours or purchase the book. “I’m so excited to bring some of the same tools that have helped the music industry and podcast industry as well now to the audiobook industry,” Spotify CEO Daniel Ek said at a Tuesday event in New York.

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Spotify launched its audiobooks business in September 2022, following the acquisition of audiobook production platform Findaway in November 2021. The company has been positioning its move into audiobooks as the next step in its business model, after heavily investing in the podcasting space, which has weighed on its margins but has helped with user retention.

No surprise then that Wall Street analysts dissected the audiobook initiative and its impact on Spotify’s subscriber and financial trends, as well as competitive implications. The company had ended June with 551 million monthly active users and 220 million paid subscribers.

“This is a very differentiating product offering, in our view, which should drive greater user engagement, retention, and payer conversion for Spotify, as it provides a compelling value proposition and flexible user experience (e.g. encourages trying new titles without committing to the whole book),” argued Evercore ISI analyst Mark Mahaney in a report.

Addressing the potential earnings impact, the expert said “we believe that this product launch is likely baked into management’s fiscal year 2023 gross margin outlook,” adding that he continues to expect sequential gross margin improvements in the second half of 2023 and in 2024. “On a standalone basis, we expect audiobooks to generate higher gross margin than the current music business for Spotify.” Overall, Mahaney reiterated his “outperform” rating on Spotify with a $195 stock price target.

Guggenheim analyst Michael Morris similarly maintained his “buy” rating on Spotify shares with a $160 price target, summarizing in the title of his report how he expects the new initiative to be unlike the firm’s push into podcasting.

“We believe (the) announcement is a different circumstance versus podcasts in 2018 given 1) the audiobook market is relatively more established to date, 2) Spotify has not established any original and exclusive (O&E) audiobook licensing agreements to date, and 3) existing technological infrastructure is already in place to support this offering,” the expert wrote. “We believe the costs incurred with the updated offering have been considered in management’s current guidance and do not expect the incremental costs to materially change the company’s near- or intermediate-term financial trajectory.”

Wells Fargo analyst Steven Cahall also saw reason to remain bullish on Spotify, on which he has an “overweight” rating with a $250 stock price target. “We think this improves customer value, is unlikely to disrupt margin progression and could factor into future label discussions,” he said about the audiobooks offering in his report with the title “Let’s Book It.”

Addressing financial implications, he argued that “Spotify is a game of inches as it relates to showing gross and operating margin improvement in the fourth quarter and 2024,” adding: “We think Spotify’s prior guidance for sequential margin improvement fully contemplated this inclusion of audiobooks, which we believe has been in the works for quite some time.”

Cahall also noted competitive implications. “This evolution creates a more seamless audio product across books/podcasts/music, challenges Amazon’s Audible more directly (for $15 per month Audible subs get podcasts, some books and one token towards a bestseller/new release) and potentially casts a spotlight onto Spotify versus iOS in preventing audiobook purchases (part of a longer-running feud),” he offered.

The expert even sees potential implications for Spotify’s relationship with music labels. “Recall that Spotify is raising prices in most markets. There’s much debate on whether price increases impact label royalties, with most (including us) concluding that royalties are basically unchanged, though there is likely more on the table (e.g. marketplace, lyrics/videos, HiFi),” Cahall wrote. “One potential implication is whether any premium revenue will be carved out of royalties for audiobooks.”

The Wells Fargo analyst’s conclusion was that investors should take a look at the stock. “Spotify is among our favorite ideas in media despite strong performance year-to-date,” he highlighted. “We think podcasts are approaching break-even, cost control is priority number 1, price increases drive operating margin leverage and the product continues to get new features.”

Morgan Stanley analyst Benjamin Swinburne has an “overweight” rating and $185 stock price target on Spotify, noting that this is “based on its position as the market leader in streaming audio, conviction in its focus on building to meaningful profits over the next few years, and a view that its earnings potential
is not reflected in estimates or valuation.”

So how does the audiobooks move fit into this thesis? The expert shared three takeaways.

“Increasing the value of Spotify to users should directly translate into increased earnings power over time,” was his first. “Spotify’s ability to not only maintain a global leadership position in streaming but to add to that position has been driven first and foremost by its product leadership,” he explained. “Core to our ‘overweight’ thesis is a view there remains a long runway for user growth and there is untapped pricing power. By building more value into its audio service for users, including further differentiating it from the competition, Spotify should see lower churn and increased pricing power.”

Second, Swinburne sees no “incremental risk” to Spotify’s financial targets, arguing that this product launch was likely “factored into both 2023 guidance and the intermediate and long-term plans laid out last summer” at an investor day.

Finally, the Morgan Stanley analyst described audiobooks as “a different risk/reward than the podcast push in 2020.” His argument: “When Spotify went into podcasting in 2020, it did so in an ill-defined market and took a multi-year view to building scale including through exclusive (often expensive) licensing agreements and studio acquisitions.” These upfront investments came with a multi-year goal of growing advertising revenue, with Spotify targeting breakeven “sometime next year,” he explained.

Audiobooks are a different business. “The audiobook market is roughly $5 billion today but the global book market is $140 billion,” noted Swinburne. “Spotify and its more than 500 million monthly active users represent a significant increase in distribution potential for the audiobooks business. There are some markets, including Germany, where audiobooks is 50 percent of the overall book market.”

Beyond Wall Street, Mark Mulligan, music industry analyst at MIDiA Research, also shared his take on the latest news on Wednesday. “Spotify’s audiobooks move is another brick in the audio wall,” he summarized his takeaway in a blog post, calling the development “simply the latest step in a journey that has seen streaming become the 21st century’s take on radio.”

This has been achieved via “the steady addition of non-music content (podcasts and audiobooks especially) and a growing emphasis on programmatic lean-back consumption,” he explained. “As with all change, when it sits in an extended period of transformation, its immediate impact is often under-recognized. Audiobooks are the completely natural and logical progression for Spotify (and other digital service providers), but they are also another waymarker in the journey away from being a pureplay music service.”

The COVID pandemic boosted audiobook consumption. “Audiobooks had been around for a long time already, with Audible leading the charge, but it was the sudden increase in non-allocated time that people found themselves with that triggered a coming of age for the format,” Mulligan highlighted. “Listening surged, including of podcasts, but as normal life slowly returned, audiobook consumption dipped again, though to a higher point than pre-pandemic levels.”

The expert also highlighted the financial and strategic benefits that Ek and his team likely have in focus. “Just as with podcasts, audiobooks represent an opportunity for Spotify to develop original content and improve its margins,” he wrote.

Mulligan also addressed other companies’ audiobook ambitions. “In many respects, Audible never really managed to push the format out of its niche foundations, with weekly active user penetration still stuck at around 10 percent (first quarter 2023),” he argued.

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