Artificial intelligence dominated Spotify’s Q1 earnings call on Tuesday, as the company was quizzed about the opportunities AI presents in improving lagging ad revenue, as well as the legal ramifications of AI-generated music.
The opportunities and risks associated with AI-generated music were thrust into the spotlight last week when a track called “Heart on My Sleeve,” containing AI-generated vocals that sound like Drake and The Weeknd went viral.
The song, created by TikTok user @ghostwriter877, made its way onto Spotify, Apple Music and YouTube, prompting music label Universal Music Group (UMG) to urge music platforms to stymie the spread of music that draws from the work of other artists.
The track was eventually removed from Spotify but with nebulous legal justification. “Heart on My Sleeve” is an original song that UMG doesn’t own the copyright for, although it was able to copyright claim a sample at the start of the track.
While Spotify’s legal responsibility to prevent AI-generated music from existing on its platform is hazy, CEO Daniel Ek told investors that it has embraced its ethical responsibility — but remains open to innovating with generative AI.
“These are very complex issues that don’t have a single straight answer,” he said. “We’re in constant discussion with our partners, creators and artists and want to strike a balance between allowing innovation and protecting artists.”
He added that Spotify will likely be more lenient on AI used to augment tracks instead of impersonating artists.
AI could also be used to fuel musical creativity and simplify song production, he said.
“We think it’s great culturally but also benefits Spotify because the more creators we have on our service, the better it is and the more opportunity we have to grow engagement and grow revenue,” he said. “There’s entirely new potential products that can happen where you could have users creating their own music and perhaps Spotify could be a conduit of that.”
Spotify unveiled an AI-powered DJ that curates music for users in February.
Growing users, shrinking spend
Ek outlined the opportunities AI presents in growing revenue as Spotify navigates weakened ad revenue.
While ad-supported revenue grew 17% YoY to €329 ($361 million) in Q1, it dropped from €449 ($492 million) in Q4 2022. Advertising accounted for around 11% of total revenue in Q1, compared to 14% in Q4.
Spotify’s total revenue also dropped from €3.17 billion ($3.44 billion) in Q4 to €3 billion ($3.26 billion) in Q1, although YoY it is up 14%.
Chief financial officer Paul Vogel told investors the company was “slightly behind on the ad side” by “about €20 million.”
“The quarter was choppy again. Incrementally, throughout the quarter, it got a little bit better,” Vogel said. “We feel we have momentum heading into Q2, but we had similar trends heading into Q1 as well.”
Spotify said it will continue investing in improving its ad tools and still aims to derive 20% of its total revenue from ads, but Vogel didn’t speak to when it expects to hit that goal and cited macroeconomic factors as a barrier.
Spotify beat its projections in monthly active user count, premium subscriber growth and operating loss reduction in Q1 2023 as it continues to tighten its belt.
The audio streaming platform grew its total monthly active user count to 515 million, surpassing guidance by 15 million and posting 22% year-on-year growth, the largest Q1 growth it has seen and the second largest all-time growth it has seen behind Q4 2022.
Premium subscribers grew 15% YoY to 212 million, three million ahead of guidance. However, Spotify’s ad-supported user pace continues to outpace its premium subscribers.
Spotify beat its projections by the biggest margin when it came to reducing its operating loss. It posted an operating loss of €156 million ($171 million) in Q1, beating guidance by €38 million ($42 million). It posted a €231 million ($251 million) operating loss last quarter.
Last quarter, Ek admitted to overhiring, which resulted in operating expenses rising 44% YoY. In January, Spotify laid off nearly 6% of its global workforce, or just under 600 people. At the same time, the company announced the voluntary departure of Dawn Ostroff, chief content and advertising business officer, whose responsibilities were assumed by Alex Norström, co-president and chief business officer.
Spotify’s Ek said the company will continue reining in its investments, particularly in podcasts, which have been a drag on the company’s gross margin as it spent hundreds of millions of dollars on podcast programs and creators to build out the new medium, despite its contributions to ad-supported revenue.