Spotify Says AI Remix Tool Has ‘Strong Momentum’ and AI Investments Are ‘In Our Control’

Spotify said on Tuesday (Aug. 4) it added one million more new premium subscribers in the second quarter than expected, which helped to offset a slight miss on its guidance for total monthly user growth and helped meet revenue growth targets.

Spotify’s total 777 million monthly average users generated 14% revenue growth of 4.777 million euros, in line with earlier guidance. The streamer beat guidance on its all-important gross margin, which expanded by 193 basis points to 33.4%, and on operating income, which totaled 655 million euros.

This was the first time Spotify’s co-CEOs Alex Norström and Gustav Söderström had spoken publicly to investors and analysts following the company’s investor presentation day in May, and they said new products like their ticket reservation, AI playlisting and remixing tools showed strong momentum, while investments in AI and marketing were “entirely in our control.”

Operating expenses rose 3% to 941 million euros on investments in technology, including AI, and marketing, the company said. The company’s stock was down 1.5% to $479 a share at 1 p.m. in New York.

Here are the highlights from Spotify’s second-quarter earnings and key takeaways from a conference call held by its top executives.

Artist Adoption vs. Label License Agreements for AI Remix Tool

Indie label collective Merlin announced it is joining Universal Music Group (UMG) in licensing the music of artists and creators who opt in to be remixed by certain Spotify premium subscribers using AI tools. Artists, songwriters and others covered by Merlin and UMG’s agreements must agree to participate, and Spotify says they will compensate and credit them through the soon-to-be-launched tool.

Asked by analyst Rich Greenfield if they were surprised more artists were not consenting for their music to be used for the initiative, Söderström said they know many are skeptical of AI music, but they are seeing strong momentum for the idea.

“What we’re doing is something different, and artists see that our products are about real artists, not fake artists, and in the case of remixes, real artists with real voices,” Söderström said. “This thing doesn’t exist, and artists remain excited about that, and consumers remain excited about that.”

Although he did not give a timeline, Söderström said they expect to roll out a preview of the AI Remix model to some users, which will allow them to trial the product before they have a complete music catalog.

“What we will do is allow fans of a certain artist to start making remixes with songs from that artist,” collecting feedback from users to inform and improve the model, he said. “We have now 777 million people and music fans to do reinforcement learning with, which is why we think we’re very well positioned in this business. So that’s kind of what you should expect as the next step. We’re going to launch the product when it’s ready, and we think it’s good enough and it has the right appeal to consumers.”

Söderström said they do not need licenses with every major music company when they launch, reminding listeners that Spotify did not have permission to stream certain acts, including the Beatles and Metallica, when it first launched. “We would like to have as many artists as possible, obviously, but we don’t expect to have all artists.”

Nearly 100,000 Tickets “Reserved”

Reserved — Spotify’s ticketing initiative that identifies an artist’s most passionate fans and holds a pair of concert tickets for them — was used for nearly 100,000 tickets since it launched on June 23. Running in partnership with Live Nation and Ticketmaster, eligible premium subscribers get notified when they’re able to reserve tickets to shows by artists like ROLE MODEL.

“For some tours, we sold through 100% of our allocations, and Live Nation upsized them mid-run,” Norström said, calling Reserved “one of the most wonderful improvements… in our history. The biggest fans get first access. Artists get their most dedicated audience in the room, and every seat we fill makes a Spotify subscription more valuable.”

Expenses are “entirely in our control”

As investors have grown concerned about Big Tech companies’ investments in AI, Spotify’s executives looked to head off those fears, saying that though their operating expenses grew by 3% from a year ago, they are under control.

“The operating expense growth is not coming from people; it’s coming from compute and marketing,” Söderström said, following comments about the company’s AI efficiency gains. “Both of these are variable and entirely in our control, and we will continue to invest in AI on our terms.”

Spotify is vendor agnostic, meaning it uses models from Anthropic and other AI companies, and strictly controls its usage of these platforms and consumers’ usage, “which means that the cost curve is also under our control,” Söderström said.

Spotify is introducing “friction” to free users’ accounts in countries like India, Indonesia

Spotify says its ad-supported tier has grown faster than expectations in emerging markets including India and Indonesia, and they are introducing changes to try to convert more of these users to premium subscribers.

“We’ve made changes like, you know, tweaking the sign-up to get higher quality MAU throughput,” Norström said. “We’ve deprecated a lower-end Android device support, which builds the business and makes it more efficient for us. We’ve carefully introduced some friction in both ad load and some limitations in our free tier. All of these things are positioning us for more monetization.”

Norström said that while this will affect MAUs in the third quarter, they believe it will ultimately increase their subscription penetration in emerging markets similar to the increases it has seen across Latin America.

“We do not expect it to come at the expense of our subscriber growth,” Norström said.