Spotify Technology S.A. (NYSE:SPOT) 2022 Evercore ISI 2nd Annual Technology, Media & Telcom Conference Call September 7, 2022 8:00 AM ET
Company Participants
Paul Vogel – Chief Financial Officer
Conference Call Participants
Mark Mahaney – Evercore ISI
Mark Mahaney
All right. Welcome to Evercore’s first in-person annual tech conference. It’s good as hell [ph] to be back, seeing people in person, being back in New York, leaving the rolling blackouts in California. You and I escaped 100-degree plus weather, record high. Heat came in yesterday, 70 degrees and rainy; that’s a bit of a tradeoff. Anyway, I’m Mark Mahaney, Head of Internet Research here at Evercore ISI. I think this is being webcast. That’s why we have the mics. Paul Vogel, the CFO of Spotify. We have 35 minutes. I’m going to ask him a series of questions. I’ll leave a little bit of time at the end for questions. I’ll ask people just to raise your hands, we’ll get the mic to you. Paul, thanks a ton for joining us today.
And let’s first talk about the — if there is resilience to the Spotify model in a recession, so I’m asking you whether you’re already seeing signs of sort of consumer softness and how that would filter up in the model or in the revenue lines? Or if it hasn’t, what you would expect as an impact on Spotify were consumer to get a lot weaker in the U.S. and in Europe and in other markets?
Paul Vogel
Yes. First of all, thanks for having me, Mark. It’s good to be in person as well. Yes, so I mean, for us, if we start, let’s take a step back and look at it from a big-picture perspective. We exited Q2 in a really good place. User growth, subscriber growth that was sort of in line or better than expected. And so from a top line user KPI perspective, we haven’t really seen much through Q2.
We’re fully aware of what’s going on globally. But luckily for us, it hasn’t impacted our numbers at all. So we’ve had user growth. We’ve had subscriber growth. When we look at things like gross intake on the free side or churn on the premium side, we haven’t really noticed anything material at all in terms of any changes through Q2. Obviously, advertising is a bit up and down right now. It is for everybody. We talked about this coming out of Q2 that we saw the last couple of weeks of Q2 as being definitely weaker than the majority of the Q2 performance. And we’ve seen sort of that kind of up and down trend through Q3. But in general, we feel good about where the business was trending coming out of Q2 and we show the business is very resilient.
We’ve never really dealt with a recession before per se. And our growth has been so strong that any bumps that we’ve had — or that the markets have had over the years have never really impacted us. And so right now, we feel really good about where the business is.
Mark Mahaney
You would think that it’s not like people sign up for multiple music streaming services, I’m sure there’s a few that do, but it’s a really small edge case. Price point is relatively low. People need music. There is a free service. You would think that the business would be relatively resilient and that’s what you’ve seen so far, at least, on the MAU and the subscriber side?
Paul Vogel
Yes, 100%. And I think your point is an important one because I do think that when you think about a couple of the dynamics within the music streaming market, first off, for us, the dynamics haven’t really changed very much over the last 5 to 10 years, right? We’ve had competition. We face basically the same competitors for the last 5 or 10 years. So the dynamics that maybe are impacting other streaming services, maybe non-audio services where our competition has increased, the number of players has increased, there’s a lot more switching, a lot more churning between services, we haven’t really seen that. I mean we’ve basically been in the same type of environment for a long period of time.
We continue to add more and more products and services into the mix and we believe making the value for our customer even greater, right? So adding podcasting, adding better UI, better algorithms. So the actual value you get for what you’re paying has continued to increase. And so we feel that, that creates a very sticky product. And so far, that’s what we’ve seen through the numbers we’ve reported in ‘22.
Mark Mahaney
And then in the first half of the year, you had this acceleration in monthly average users. The net adds were higher in the first half than they were the prior year. Now is that just due to the fact that I think you had some — my recall is you had some softness because a little bit of a delay in rolling out marketing campaigns last year? Or is there a — is there something more interesting? Is there something more fundamental? There’s — they’re breaking into new markets. The product has somehow been improved. You’ve gotten better at launching in new markets. Why the acceleration in MAUs in the back half of the year? And how reasonably sustainable is it?
Paul Vogel
You did a very good job of actually highlighting a lot of the things that have worked. So first off, we are doing much better in a lot of our newer markets. So if you go back a couple of years when we launched the entire world, right? So we added about 100 markets. And it takes a while to ramp in those markets, right? And so if you — again, if you take a giant step back, Spotify, in most of the early days of our history, we always waited until we had — what we thought was a very, very good, almost perfect product to launch in the market, right? We made sure the product market fit was perfect. We made sure the UI was perfect. We made sure we had every license we thought we needed to have in that market and we launched. And you could argue there were times when people like, oh, you guys are later to some of these markets and some of your competitors. And that’s because we historically always waited to make sure that we had exactly what we wanted before we launch. And that got us up to kind of 80 or so markets.
And then when we launched another 100 markets, the philosophy was a little bit different, right? There’s a lot more of these markets. They are more spread out. Some of them are less developed. And we launched and not every market was perfectly tailored to exactly that market. But over time, we’ve learned what marketing works in some markets, what UI changes work in some markets, what product innovation we need to have in certain markets. And so we’ve seen that market growth. And so we’ve seen it from the improvement in the product. We’ve seen it definitely in the marketing efficiency. And so to your point, we definitely increased marketing this year as we’ve discussed, and we’ve talked about through the OpEx side of the P&L but it’s really starting to work, and we’ve really seen that acceleration in user growth from new market expansion. So it’s marketing, it’s new users, it’s product innovation.
And what people also need to understand, not to come out the wrong way, is there’s — a lot of things we do on the margin are little things to add up to big things, right? And so every time we launch a new product, every time we add innovation, every time we add a new change to the UI, the goal is to increase gross intake, but also improve retention or lower churn. And so every one of these little retention improvements is super helpful in terms of the overall aggregate growth in users. We’ve seen reactivation strong. We’ve seen new user growth strong. So top of funnel is healthy. And for us, historically, at Spotify when the top of funnel is healthy, it’s always a good sign for what’s going to come kind of 12 to 24 months.
Mark Mahaney
And one of the things that hopefully will come is that conversion into paid subscribers. It’s good to have MAUs. You monetize them through add revenue, get more revenue if you get a convert them in the subs. Historically, I think that’s happened. It’s a little hard to see us externally. You can see the curves better than we can or the cohorts better than we can. So just address if you’ve had this acceleration in MAUs, should that translate into acceleration into paid subs? Is that a reasonable expectation?
Paul Vogel
It will definitely translate into subs over time, and we’ve seen that historically. And so there’s always — the timings can sometimes be variable. But historically, when we see growth in users, we end up seeing growth in subs 9, 12, 18 months. It’s not always a perfect line and every line is not always the exact same, but we tend to see that. So I think we feel good about the fact that user growth will lead to continued subscriber growth over the long term. We’re still very optimistic on some of the target — all the targets, but the targets in specific you’re referencing with respect to what we said at the Investor Day, right, getting to 1 billion users and continue to grow users and subscribers. And we look at the market opportunity, when you look at payment-enabled smartphones in the markets we’re going to be in, you’re talking about $3.5 billion to $4 billion.
Again, you look at a market where we see there’s no reason why every user shouldn’t have some audio app on their phone, right? Most people listen to music, but if you don’t listen to music, we have podcasts and soon we’ll have audiobooks. And so we think the opportunity for us is only growing. As our product portfolio expands, it’s only going to grow. As we’re in more markets, it’s only going to grow. So we still see tremendous opportunity for growth both in our established markets and then in our developing markets.
Mark Mahaney
But in some of these newer markets where you’re growing MAUs, is the potential for paid subs lower for economic reasons?
Paul Vogel
I mean it’s hard to know. Some probably, yes. Some maybe not. And some of it just might — it must be a question of timing. But I think what’s interesting is when you think about the way the model will work, right, we think there’s still tremendous growth across all markets. Clearly, we’ll probably see more growth in some of our developing markets, right? And those markets are clearly going to monetize at lower levels in the early days. But we also see that there’s a tremendous opportunity to increase monetization in the markets where we’re already in. We think there’s a huge opportunity in our developed markets to actually improve monetization through a number of factors, which I’m happy to go through. And so there’s this kind of natural balance where we continue to grow, monetize, grow, monetize.
They don’t always necessarily come at the exact same time. So you grow in these markets. The markets become more mature. Then there’s more opportunities to monetize, which we have in our developed markets. And in developing markets, it’s really more about growing the users now, then the subs will come and then you can monetize with advertising and other things over time. So we actually feel like that balance is really in our favor.
Mark Mahaney
Okay. And so let’s go through that improved monetization because I think there is kind of an investor concern that you had a bit of an ARPU tailwind. I don’t know. I think it’s like last six quarters or something like that and FX has kind of blurred a little bit. But you have. That wasn’t the case for the first three years, whatever, as a public company. And now the concern is that as you mix shift and you bring in more paid subs from less developed markets that, that ARPU tailwind is going to turn into a headwind, but you’re saying monetization could actually rise. So why would monetization rise in developed markets?
Paul Vogel
So I think there’s a couple of areas. One is we do think over time, we will have opportunities for pricing. We’ve done it a little bit in the past. We haven’t done it more recently. We did it a little over a year ago. But obviously, the economic situation right now is also one where you’re going to be mindful of it, and it’s not something that necessarily we think we need to do right now. But we obviously think we have pricing over time. I think there’s lots of other opportunities to monetize, whether it’s tickets, whether it’s merch, whether it’s continuing to add more value into the ecosystem like audiobooks and then increasingly other verticals where we think there will be a big window, a big halo for opportunities for us to monetize in a different way.
And I think monetization isn’t just simply, oh, we raised the base price on X, right? I think there’s different opportunities to sell different ways to different consumers. I think there’s some products that will — we don’t — haven’t really been big in that we will, over time. I think a lot of people have seen the testing we’re doing on the ticketing side. We feel good about where that’s gone. The artists have been thrilled with the presales we’ve had and our ability to target and sell tickets to their super fans and get that audience engaged very quickly. What we’ve also seen is when people buy tickets through Spotify, they actually then tend to listen to more music of that — more of that artists on Spotify as well. So it has sort of this multiplier effect for those audience who are participating. So there’s, I think, lots of ways.
And I think there’s a ton of opportunity, again, like I said, in those developed markets as we add more and more of these services. And we also think there’s a huge opportunity in the advertising side, which I’m sure you’ll have some questions on, but we think it’s about, call it, 11%, 12% of revenue. We’ve talked about it should be north of 20% over time. And despite any kind of macro fluctuations, a quarter or 2 here and there, it’s not going to really impact where we think we can go over the next three to five years from an advertising perspective.
Mark Mahaney
Just real quickly on the ticketing side, I did buy my Jackson Browne tickets at the Greek Theater in Berkeley. The big Spotify gave me the heads-up that he was coming to town. Great. What are the economics like to you? Do you just get like a couple of bucks per ticket or…
Paul Vogel
Yes. We haven’t really talked about the economics, but I think — but the interesting thing is what you said, right? So Jackson Browne is obviously a very well-known artist, but later in his career, right? And so his ability to know where his fans are and know who’s still listening and where he could play is something that we are sort of uniquely positioned for.
Mark Mahaney
That was, I’m the only one?
Paul Vogel
Knowing where the old folks are.
Mark Mahaney
Okay. All right. Let’s switch over. What’s something that’s super key about low gross margin companies is that they can expand gross margins. The biggest — there were two bare arguments on Spotify at the time of the direct listing competition and the business model scale and the revenue doubled over four years and the gross margin didn’t move at all. And so the bear arguments were correct that there’s no scale to this business. And then you had this Investor Day and you actually disclosed that the core music business gross margins actually did rise from 25% to 28%. We didn’t know that until you disclosed that.
And so — and then you sort of gave an implication that gross margins should start rising, I think, next year as you kind of move beyond the early investment time into podcasting. So just be a little bit more specific. Like should we expect gross margins to start because part of this is elective, but part of this is structural? Should we expect gross margins out and then two-sided marketplaces start to become a greater contributor? Why should gross margins rise? Should we be able to expect 50 to 100 bps gross margin expansion each year for the next five years?
Paul Vogel
So let me unpack a bunch of that. So at a high level, yes, what we’ve talked about is some of the big investments, to your point, music margins have expanded more than people realize, right? And as you highlighted, it went from 25% to around 28% on the music side. A lot of that is a result of the marketplace tools and the two-sided marketplace, which we’ve talked about, and we’re starting to try and give you guys a little bit more of an understanding of the value that the two-sided marketplace is providing. But that gives you some indication where we’ve said for a long period of time that it’s not simply about changing headline rates with respect to label deals. It’s about offering more value in services where we’d be able to raise our margin because we’re offering more into the ecosystem.
And that’s what we’ve seen with our marketplace tools and that’s why you’ve seen the music margin go from 25% to 28%. And the reason that the overall gross margin has increased is because of the investments we’re making in podcasting. And we’ve talked about this. And you said, okay, well, why would you continue to invest in business if it’s having this material of an impact on your gross margin expansion? And the reason is a couple of things. One is we believe it is — it helps engagement. It helps retention. It helps user growth. And having that in the ecosystem, we’ve seen when people engage with both music and podcasting, they’re more likely to retain at higher rates, they’re more engaged, they spend more time on the service, all the things that keep them coming back. So that’s a big positive. The second thing is we do believe that the business model for podcasting is very strong over the long term. I said at the Investor Day that 2022 will be the peak in terms of the impact of podcast, the negative impact that podcasting has had on gross margins. So you should expect that the impacts — that, that drag from podcasting will improve in 2023. So all else being equal, that would be a good thing for our gross margins if nothing else changed, but the podcast drag got less. So we should see that over time.
And then in terms of the question on how linear the gross margin progression will be. I’m not — I would never give that number out because we’re a company that’s always going to continue to invest, and we’re going to invest for the long term. And I think looking at it over a 5-year period of time, we’re very confident that we can get to the gross margin targets that we mentioned. Whether or not we have more expansion in 1 year and less than another year will really be totally a function of the success we’re having on new product launches and changes. So as an example, we’re going to continue to invest in podcasting. And if we see growth internationally or growth other places, maybe in 1 year, we don’t see as much. In another year, we see a step function or vice versa. Same thing on audiobooks. As we launch audiobooks, we think a tremendous amount of innovation that can come in the audiobook space. And so we think that will also be, over the long term, very additive to gross margins. We think it has a structurally pretty good gross margin business. But again, there will be some investment, both on the content side and also on the UI side.
So it’s hard to know. I would never draw a straight line from where we are to five years and say, here’s how we get there. But I think from where we are to those five years, we’ll have some years with more expansion, some years with less. But in general, I think we feel really good about the trajectory to get there.
Mark Mahaney
You, at the time of the direct listing, I think you talked about 30% to 35% long-term gross margins. And then 1.5 years ago, I think you upped it to 35% to 40%. And it just seems like you’re so far away from that. I mean it sort of didn’t seem that realistic, frankly. So I — yes. So like you’re not getting there in five years.
Paul Vogel
Well, I think we’ll get north of 30%. And I think the — we’re not as far away — to your earlier point, we’re not as far away as people think we are, right? So when we said we would get to 30% to 35% gross margins, we said over the long term and we never gave a time frame. I think people assume that meant four to five years, but that was never really our expectation. But that being said, we do have a music margin that’s above 28%. And so if you think about where we were at the time of direct listing, we were basically a music business.
And so from the time of the direct listing to now, our music business gross margins have grown 300, 350 basis points. And so we actually are right on track with what we said we do with a direct listing. The big difference is we added in a separate major product with podcasting, which has been the drag on gross margins. And so we fully recognize that if you just look at it at the highest level, it is yet, to your point, like you’re four years into being a public company, why are we not seeing more gross margin expansion?
We look at it entirely differently, which is we’ve actually seen pretty nice gross margin expansion in the core music business, which was the business that we operated when we did a direct listing. We’ve had this drag from podcasting, which will flip to profitable over the next 12 to 24 months, which will then help drive gross margins higher.
And everything we do is about LTV and lifetime value, which we talked about at the Investor Day. And so we’re looking at the spending that we have, the investments we make. Are they additive to LTV? Are they helping us grow lifetime value of users? Are we seeing any improvements in all those things that drive LTV, retention, churn reduction and so on and so forth? And so we’ve seen all of that.
And so we actually feel good about where the model is right now. Again, we fully recognize if you just look at it at the highest level, it looks like we’ve had no gross margin expansion. But underneath the hood, we’ve actually had really good gross margin expansion on the business that we highlighted initially in 2018. We’ve moved forward with podcasting.
And the reason we’ve upped the gross margin is we actually believe that some of the newer verticals that we will launch, podcasting, audiobooks and others, should have structurally higher gross margins than the music business, which will help overall gross margins over time.
Mark Mahaney
Overall gross margins do get the 30% in five years?
Paul Vogel
It should.
Mark Mahaney
Okay. And then one of the big factors behind that music — core music margin, gross margin expansion has been two-sided marketplace. I think that’s the vast majority of the gross margin increase that you’ve seen. And so just like I think that’s just all margins. So let’s just talk about the two-sided marketplace. You’ve got these two products in their discovery mode and marquee. You surprised us a little bit by disclosing it was like $160 million in revenue, more than we thought last year, growing 30% this year. So that’s a little over $200 million, $210 million. Talk about the sustainability of that growth. Are all the major music labels and the minor ones excited about this? Are they more excited about discovery mode or marquee? So just rift on the two-sided marketplace opportunity for you?
Paul Vogel
Yes. So again, let me go back a little bit. So we first start talking about the opportunity with our marketplace and our tools and services that we can offer to the industry back at our initial Investor Day. The first one we had around the direct listing. I think at that point in time, nobody really knew or understood what we were talking about. And in fairness, we have been fairly opaque with what that is. But for a couple of reasons. One is there are some competitive reasons we don’t like to talk about it. There are some reasons in kind of the ranges we have with some of our agreements where it’s not super easy to kind of talk about in the simplest sense. But we wanted to make sure that — and as a result, for a couple of years, we kind of only gave indications that it was doing well without a lot of context behind it.
So one of the things that we wanted to do at the Investor Day was actually break it out from a gross profit standpoint. So I think you said it was $160 million revenue. It was actually $160 million of gross profit benefit to us. To Mark’s point, just so a lot of people understand, a lot of our marketplace tools and services are used by the labels. And so they’re actually not revenue. They’re not revenue benefiting. They’re actually our contra cost to some of the other payments we have, so they actually are benefited gross margin, even though they don’t show up in revenue. So ironically, if they were revenue product, our revenue would actually grow could actually be probably a lot faster, but it’s just not the way the accounting works. But it’s been a big driver; we have a lot of services on the marketing side that are working. Yes. And I’d say it’s –some labels are more invested than others. But more and more, we’re seeing people leaning in, artists are finding the value in our tools and so they start to recommend or say to their partners, hey, we want to be a part of this. And so we think there’s still tremendous growth.
As you said, it’s been the majority of the improvement in our music margins. But again, I think this is where you go back to — we try and be transparent. It doesn’t always work. So I’ll try and be able to be transparent again here is we’ve always said that when you look at the margins of the music business, it’s not simply — it’s not as simple as saying, here’s what the headline rate is on a label deal or what you think the headline rate is on a label deal and extrapolating out what our margins are going to be. There’s a lot that goes into the deals we have with our labels and our partners.
Marketplace is one where again, the headline rate hasn’t really changed for many of the major labels for a couple of years, yet we’ve been able to expand our music margins because we’re offering a value that is great for the ecosystem. We’re providing more value. So it’s not that we’re getting a better margin just simply because we’re taking more. We’re actually adding more into the ecosystem and people are leaning in and saying, this is value to us, and it works for both sides of the transaction.
And so that’s been really great. We think there’s still tremendous upside for us. And to your point, that is a big majority of how we’ll get those music margins up to 30% is continued growth in marketplace tools and services.
Mark Mahaney
How big could that be? So is there a 5-year goal for — we — Jane Lee and I do a lot of work on Spotify, and we tried to figure out how big this two-sided marketplace could be? We thought maybe there was a TAM of like $2 billion, thinking about the amount of money that the labels spend kind of on artist promotion but I can also see how the TAM could be expanded. So like if you’re really successful in five years, is this $1 billion contra COGS business? Or is it a $500 million contra COGS? Or is it a $300 million? How do — help us figure out how big it could be if you’re successful?
Paul Vogel
Yes, I think it could be big. We haven’t publicly put a number on it. But again, I think it’s about continuing to expand the tools and services, right? And so when you start thinking about merch and tickets and other things that we kind of put into marketplace, there’s definitely an opportunity for it to grow pretty significantly. I think what people have done in the past has tried to say, okay, well, how much have the labels or how much has a certain group of people just spent simply on marketing and that to the opportunity. And for us, our suite of marketplace tools is way bigger than just simply market. Marketing is a big component of it, and it’s been a big driver of it so far. But there’s so much more we can add into marketplace to help it grow.
And again, it will help the overall ecosystem. This isn’t simply Spotify, like our view is the only way we’re going to have success is if this is actually something that provides real value to labels and artists.
Mark Mahaney
And then, I just want to lock one more point and on gross margin. It seemed to me like there was kind of somebody lit a fire and Daniel really seemed to change his thought maybe on gross margins. At this Investor Day you had earlier this year, like he came right out and said these are the issues that investors have with our company. He talked about gross portion from the beginning, not too often you see CEOs do that. So is that — I guess, what we’re asking is did he really — did something happen? I remember the quarter before that, somebody said, why don’t you just stay — why aren’t you a — a private company because public investors are telling you they care about gross margins and you’re not indicating that you’re listening. And then he seemed to be listening. So was that a real change in his thinking?
Paul Vogel
So I think it’s not a change. I think a little bit was him addressing some of the misperceptions about our company. And so I think our belief is we’ve always stressed user growth and subscriber growth and revenue growth. And that’s always been — we’ve talked about it from the outset. I think if you go back to, again, your initial Investor Day, that was the biggest focus was on how do we continue to grow users. And I think actually, back then, Barry said, we will over-index on growth over profitability for a period of time. And so, I think there is this notion that we don’t care about having a successful business model and we don’t care about making money as a company. And it’s just not true. It’s not fundamentally true at all. Our goal is to build the best, biggest, long-term, most successful business model we can. And sometimes that takes time and sometimes that takes investment. And sometimes that investment is actually going to, to your point, hurt some of your profitability in the near term to actually set you up for a better profitable profile in the long term.
And so I think Daniel what he was saying is, and I think we all believe as a company is we’re still going to invest aggressively because we think the opportunity for what we can become is probably far greater than most investors believe or think. We believe we’re creating a different kind of company, a different audio company that has multiple verticals and multiple products that can be really successful. And we’ll do it in a way that’s going to generate real margin for us. And so, I think it was really about clearing up the misperception that all we care about is growth and all we care about is building a business with users itself without profitability as a backdrop. It’s just not true. But what is true is we will sacrifice, at times, the short term if we believe it’s going to be what benefits us over the long term.
Mark Mahaney
And I think that’s an important distinction to make. Let me ask two more questions, and then I’ll open it up. We will have five minutes after that for anybody who wants to ask you a question. So two last questions. Can you talk about this — the music segment and like audiobooks, and I think you’ve teased out that there’s two more verticals that are going to be announced. And is that next year, they’re going to be announced? And is that — did you…
Paul Vogel
No, we haven’t said.
Mark Mahaney
There’s more verticals. Any clues on what those verticals are? And just on audiobook, look, I’m a huge fan of audiobooks. But it’s kind of hard for me to see a I’m going to switch to Spotify. I’m going — I’m a build-up audible user and have been for years. And the audiobooks market has been around for a while. So it’s an interesting category, but I’m also not sure how big it really is and why Spotify is a play in there. So why is Spotify going to be a play in audiobooks?
Paul Vogel
Do you Spotify for podcast?
Mark Mahaney
Yes.
Paul Vogel
Did you — Spotify for podcast three years ago?
Mark Mahaney
No.
Paul Vogel
So there. So that’s exactly it. I think we gave you — when it comes to podcasting, we gave you a better experience. There was no reason for you to switch from the podcast, whatever you used for podcast three years ago to Spotify, unless we create an environment where it was better, easier for you. And so what do we do? You listened to all of your audio, it’s Spotify. We started adding in podcast. It was a better UI. It was a better experience for you as you started listening to all your podcasts on Spotify because it’s easier. And we think there are similar opportunities in audiobooks and other places where we can really innovate and create something that is different.
I mean, you have basically one player who’s controlled the entire market. It stifles innovation, it stifles change. And so we think there’s lots of ways we can add audiobooks into Spotify and create an environment that is very different than people have had in the past.
The second thing is if you think about podcasting again, when people look at the size of the market, if you go back a couple of years and look at where podcasting — where people had forecasted the podcasting business to be — the size of the podcasting market to be at the end of 2022, it is 2x the size that people thought it would be when — if you go back and say — and why is that? Well, we actually innovated in podcast and made it more enticing it more enjoyable for both heavy podcast users as well as casual podcast users. And now the podcast business is twice as big as people thought it would be and growing faster than anybody thought it would be. And now you’ve got more people wanting to play in the same game that we’re in because of what we’ve been able to do.
And we think audiobooks is a similar type of an opportunity. When you look at the book market, it’s $140 billion, something of that sort, right? And it’s podcast — or audiobooks are still a small segment of that. But in some of the most established markets where audiobooks are really popular, it’s up to half the market, right? So you think about it and say, can we help create a product and innovation where audiobooks will be better on Spotify, but also that the growth in audiobooks could far exceed what people’s expectations are because it’s just a better overall ecosystem?
Mark Mahaney
And then last one quickly in just a minute. Just talk about the advertising revenue opportunity. So this was a subscription business that reluctantly embraced advertising. But you’re now at $1.5 billion a year and had revenue, so you’re starting to get pretty chunky there. Like how much bigger could that get? Is there something that you’re doing that’s really starting to unlock growth on advertising across Spotify?
Paul Vogel
Yes. So we think the opportunity is still very big. It’s — depending on the quarter, advertising is, let’s call it, 11% to 13% of revenue for us, we’ve talked about, we think it should be north of 20% and possibly even higher than that over time. In order for us to hit some of our goals, it actually is going to have to be, right? We acknowledge that for us at some of our revenue targets and some of our profitability targets. Advertising as a percentage of our business is going to have to grow. Right now, it’s nice that 90% of our business is subscriber given some of — the stability in — with market uncertainty. But that being said, we are super bullish on the advertising opportunity.
A lot of it is on building out the tools for measurement and attribution and all the things that advertisers want. It’s making it easier to advertise in audio. It’s growing our users and growing our engagement, so there’s even more of an opportunity for advertisers to reach more users. And so it’s all of those things. But we’ve invested a lot; we’ve made acquisitions, most recently in chartable and pod sites where those are two different products that allow for when I talk about measurement and attribution and advertisers to be able to control their ad environments in a better way, in a more productive way. And so we’re still really optimistic about where advertising can go over the next three to five years.
Mark Mahaney
Anybody want to ask any questions? If so, raise your hand. Asham, get the mic right next to you.
Unidentified Analyst
One is audiobooks. Will it require upfront minimum guarantees the way that you did in music? The second question is on advertising international. I think it’s still virtually zero of revenue or starting to come online. How do you see that ramping over the next 2 years?
Paul Vogel
So we haven’t specifically said on the audiobooks. I will say that I think we’re optimistic that the publishers and authors are happy for a new entrant into the marketplace. And so they’re leaning in. And so I think we’re optimistic that there’s a big opportunity for us to help grow the audiobooks — the books market and the audiobooks market in general. But we haven’t said more than that.
And on the advertising side, it’s definitely bigger than zero, but the U.S. still dominates the advertising side for us. We have invested in people and personnel and sales, both in sort of our developed European markets as well as growing in some of our developing markets as well. There’s always a ramp-up here at time when you add in new people, and obviously, the macro is not the most favorable in the very short term. But over the long term, we actually think the investments we’re making right now are going to be super beneficial for us in terms of our ability to grow advertising outside the U.S.
And so we’ve made the investment now. We’re starting to invest in people and systems and operations to grow outside the U.S., and we think that’s going to be a much bigger part of our business moving forward.
Mark Mahaney
One last question. Anybody? You want to ask one?
Unidentified Analyst
Yes. Maybe just like — I want to kind of follow up on the audiobook because you made parallel to parallel book and the podcast. And I think had scaled margins pretty similar as well. But like for podcasting, it took four years to get to, hopefully, peak drag on gross margins. So what type of investments should we think about when you go into audiobook?
Paul Vogel
Yes. We haven’t said, yes, we’re going to start testing and trialing audiobooks very soon. So I would say, in the very short time, you should expect us to start to roll out. The first iteration of what audiobooks is going to be for us, I think there will be many iterations and innovations within audiobook. So the first one will come out, it’s going to come out reasonably soon. But I would say, don’t expect that to be the last change or improvement we make on the audiobooks offering. So we haven’t, again, really said much on the cost side. I think we were — are determined to be more transparent with any benefit or drag moving forward. I think, again, one of the crises we got, which was fair was we probably weren’t as transparent on the drag that podcasting was had — was having on the business, which we addressed at the Investor Day. But going forward, we’re committed to being a little more transparent with if a new vertical or in a product is having a benefit or a drag to be more transparent on what that is.
Mark Mahaney
Thanks, Jen. Okay, that brings the session to a close. Paul Vogel, CFO of Spotify, thank you very much for joining us today.
Paul Vogel
Thanks, Mark. Thanks, everybody.
Question-and-Answer Session
End of Q&A
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