Good morning and welcome to Spotify's Third Quarter 2023 Earnings Call and Webcast. All participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the call over to Bryan Goldberg, Head of Investor Relations. Thank you. Please go ahead.

Thanks, operator, and welcome to Spotify's Third Quarter 2023 Earnings Conference Call. Joining us today will be Daniel Ek, our CEO; and Paul Vogel, our CFO. We'll start with opening comments from Daniel and Paul and afterwards, we'll be happy to answer your questions. Questions can be submitted by going to slido.com, S-L-I-D-O.com and using the code #SpotifyEarnings Q323. Analysts can ask questions directly into Slido and all participants can then vote on the questions they find the most relevant. If for some reason, you don't have access to Slido, you can e-mail investor relations at ir@spotify.com and we'll add in your question. Before we begin, let me quickly cover the Safe Harbor. During this call, we'll be making certain forward-looking statements, including projections or estimates about the future performance of the company. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed on today's call, in our shareholder deck and in filings with the Securities and Exchange Commission. During this call, we'll also refer to certain non-IFRS financial measures. Reconciliations between our IFRS and non-IFRS financial measures can be found in our shareholder deck in the financial section of our Investor Relations website and also furnished today on Form 6-K. And with that I'll turn it over to Daniel.

All right. Hey, everyone, and thank you so much for joining us. I hope you've had the opportunity to review our shareholder deck. Bottom line, it's a really exciting time at Spotify, and I'm super pleased at how the business is performing. It was a truly stellar quarter and one that clearly illustrates that we're making great progress against the goals that we laid out for you at our 2022 Investor Day. Q3 was our second largest quarter ever for MAU net addition. And as we look ahead to the end of the year, you'll also see that we're forecasting to hit another big milestone, reaching more than 600 million monthly active users at the end of the year, and this puts us well on our way to reaching more than 1 billion global users by 2030. And to put that number into context, 15 years ago this month, Spotify went live in France, Finland, Norway, Spain, Sweden and the UK. It's been a wild ride. Next, let's turn to the strength of our subscriber growth. We walked into 2023 thinking we would do just over 20 million in net subscriber adds for the full year, but we're actually on track to deliver 30 million, which is a significant beat from where we thought we would be. In fact, this will be the second biggest full year gain in net subs additions since going public. This momentum is especially significant when you put it in the context of the price increases that went into effect in Q3. And as we previously shared, because of our confidence in our product and our ever-expanding content offering, we felt the timing was right to raise prices across more than 50 markets. I know some of you wondered how we'd weather these increases, so…

Great. Thanks, Daniel, and thanks, everyone, for joining us. I'd like to add a bit more color on the quarter and then touch upon the broader performance of the business and our outlook. Q3 was a very strong quarter. MAU grew by 23 million to 574 million, and we added 6 million net subscribers finishing at 226 million. Both MAU and subscriber growth continued to be well above our historical trend and outperformed forecast. On the revenue front, we grew 11% year-on-year to EUR3.4 billion during the quarter. Importantly, our FX-neutral growth was 17% and accelerated 300 basis points versus the prior quarter's result, reflecting the early effects of the new pricing and accelerated advertising results. Turning to gross margin. Gross margin of 26.4% was above guidance by 40 basis points due primarily to favorability in our music business. Moving to operating expenses. Growth in the quarter was lower than forecast due mainly to lower-than-expected personnel and related costs as well as marketing spend. When combined with our better gross profit, we achieved an operating profit of EUR32 million in the quarter. We believe this is an important inflection point for the business as we start to see the benefits of our focus on speed and efficiency and progress towards delivering on the profitability targets we laid out to you at our Investor Day last summer. Finally, free cash flow was positive EUR216 million in Q3. Looking ahead to the fourth quarter, we are forecasting 601 million MAU, an increase of 27 million from Q3 and 235 million subscribers, an increase of 9 million over Q3. This has us adding about 112 million MAU for all of 2023, which is nearly 60% above our four-year historical trend and adding 30 million subscribers for the year, which is 12% above the historical trend. 2023 should finish with the highest net additions for MAUs and the second largest for subscribers in company history, but actually the largest if you exclude the impact of Russia. We are also forecasting EUR3.7 billion in total revenue, a gross margin of 26.6% and an operating profit of approximately EUR37 million. Turning to revenue. We are forecasting a 300 basis point headwind to growth given the strengthening of the euro relative to the dollar. Excluding this effect, our constant currency revenue will be closer to EUR3.8 billion, reflecting our expectation for accelerating currency-neutral growth to 20% year-on-year versus the 17% growth we delivered in Q3. This acceleration is aided by a full quarter benefit of the price increases we announced in Q3. In sum, we are very pleased with how we're tracking into year-end. While it's too early to give guidance on 2024, I do want to point out that we are confident in our path and expect another year of meaningful progress towards delivering on our profitability goals for the business. And with that I'll hand things over to Brian for Q&A.

Thanks, Paul. Again, if you've got questions, please go to slido.com, #SpotifyEarningsQ323. We're going to be reading the questions in the order they appear in the queue with respect to how people vote up their preference for questions. And our first question today is going to come from Matt Thornton on efficiency. Daniel and Paul, you've been successful in wringing out cost efficiencies across marketing, personnel and podcasts. Do you feel the business is at steady state now on the cost side or do you see more opportunity?

Yes. I'll start, and maybe Paul can fill in. Yes, we feel, as we walked into the year, just to level set and remind everyone, we talked about having a great product, but also needing to become a great business and to prove that out to investors. That's been very much the focus for Paul and myself and the rest of the management team throughout this year. And I think you're really starting to see this nicely being proved out with the delivery of this quarter's results. But it really is two parts here. One is the thing that I said in my opening remarks, which is we are focused, as always, on providing great consumer experience and creator experience. And that is what allows that top line growth to then translate into that business side. But the new part of the Spotify modus operandi is our focus on efficiencies. And we're starting to see some leverage here coming into play, but this is the state going forward. Paul and myself and the rest of the management team is constantly looking at how we can make improvements. And we're constantly finding new ways to bring more efficiencies out of the business. So I'm pleased with the progress so far. We've seen some improvements, but you should expect us to continue to look for more improvements going forward because that's just our modus operandi.

Yes. And I would just add, we're obviously very pleased to see some of the initial success with an operating profit in Q3 and guidance for operating profit in Q4 as well. And our expectations are now that we will consistently be in the black moving forward. Obviously, you never know what can happen in any one quarter, but we feel good that we're on a different trajectory, and we've hit an inflection point with respect to profitability of the business.

Great. Next question is going to come from Justin Patterson, a related question on efficiency. Daniel, you began the year restructuring business units with the goal of greater efficiency and product velocity. As we head towards 2024, where do you see the next areas to be more efficient while driving innovation? And Paul, how should we think about expense, puts and takes of audiobooks scaling?

Yes. As I mentioned in my last response, it's very much a focus, I think, across the base. And maybe just to highlight one example. So as the product and technology teams are working on this focus of efficiency, everyone at the company's tasked at it, everyone has their own deliverables. So we constantly end up finding ways where, for instance, we are on the compute side on our infrastructure side finding from engineers that there are better utilization patterns doing that, and they're able to save expenses as we're doing that. And that's then improving on the streaming delivery cost that we're ending up having. And this is just one example where it's not that we're looking for top-down initiatives as much as we're seeing a lot of bottom-up initiatives that are adding up to the numbers. You saw it also very clearly in our marketing spend. We were able to deliver better top line numbers, but with less spend because we're now focused on this efficiency goal and I think that's the power of the Spotify team and the work that everyone is doing. But that also gives Paul and myself great comfort in that there's great opportunities out there as long as we get the teams focused on it.

Yes. And then with respect to kind of the audiobook side of the question, let me take a step back for a second. If you look at 2023, we said from the start of the year that we expected to see gross margins sequentially improve every quarter 2023. Obviously, we have the benefit of knowing what we're planning to do throughout the year. And so we knew all the initiatives we're going to come in play, both the price increases and the launch of audiobooks. And so all that played into the commentary we had that we would see that sequential growth. And we're glad that, that's what we actually were able to realize and expected to realize in 2023. As you look into 2024, we expect to see a continued improvement in our gross margin trends and a continued improvement in our operating income trends as well. Obviously, there's some investment when it comes to the audiobooks business, but there's nothing about the launch that will derail our progress on the gross margin side or our progress on the operating income side are probably just as important, our progress on the free cash flow side. So hopefully, everyone noticed, we did EUR200 million of positive free cash flow in Q3. We feel good about the free cash flow trajectory as well in the business. And so we're very encouraged with kind of how 2023 is forecast to end and we're very optimistic with respect to the early indications of where we think 2024 will be.

All right. Next question from Rich Greenfield on our subscribers. Is this your first-ever North American subscriber loss? And is that due to churn from the price hike? And how does this inform future price hikes? And did premium churn subs shift to the free ad-supported tier?

Yes. So the first part of your question, we actually did not lose subs in North America. So I think what's going on here is the math is your coming up with a number that's based on three rounded numbers, right? So you've got a prior quarter number, a current quarter number that are both rounded as well as a percentage number that's rounded. So we actually grew subscribers in North America in line with expectations. Actually, all of our regions performed well from a subscriber perspective and relative to expectations, it was pretty broad-based across the board. So we did not lose any subscribers in North America. It was actually a good quarter there. And so I think it's just rounding. And if that's unclear, for anyone, please reach out to the IR team after and we can kind of walk through how that works. And then with respect to the price increase, as Daniel mentioned in his opening, we feel really good about how that went down. We have -- when you think about a price increase, there's really the two components you're always going to be focused on. One is anything that elevates churn. And then two, anything that impacts the gross intake in any way. And so what was great was the churn was right in line with expectations. And we talked about in the past when we've raised prices that churn had never been that material, and it was similar to this go around. And then I guess even just as importantly, we outperformed on the gross intake side, which is one of the reasons why we outperformed on overall subs. So churn from the price increase is right in line with expectations and then gross intake even better than expected, which led to the outperformance.

All right. Another question from Justin Patterson on AI. Daniel, Spotify has made a lot of progress with AI through DJ and the AI voice translation pilot. Could you talk about how you view these products affecting listener engagement and creating opportunities for creators? In turn, what type of monetization opportunities does this create for Spotify?

Yes. I think the primary way we look at AI is that and certainly, through the tools that you're mentioning, it is about increasing engagement with the service by creating even more compelling value. And the primary way we think about that is, of course, leveraging AI to create or augment already amazing content. So a great example would be through AI DJ, which mimics some of the behavior on radio, that's -- that companion that provides context around the music you're hearing and X is doing an amazing job in providing context, cultural context all of the things that you love radio for, but now coming through a personalized DJ for you. I think that nicely scales what AI can do. It can personalize things. It can contextualize things. It can provide this thing at a scale that would be impossible to do by humans. And then on the AI voice translation part, it is a meaningful one because if you fundamentally think about Spotify, the more content we have on the service the generally better engagement we start seeing because the more likely it is that we're able to serve up something that consumers love. And so the AI voice translation thing is amazing, both for creators and consumers. For consumers, especially in non-English language content, they generally have a lot less content to consume. And for many other creators, this is an ability for them to be able to go with their content through many more geographies that they currently aren't able to penetrate at all. And so this is one of those things where you've heard me say this before, but the win thing is what we look for at Spotify something that's great for creators and great for consumers. It's usually great for Spotify, and this is exactly that. And then the primary way you should think about these initiatives, it does create greater engagement. And that greater engagement means we reduce churn. And that, of course, greater engagement also means we produce more value for consumers. And that value to price ratio is what then allows us to raise prices like we did this past quarter with great success. And we're constantly focused on improving that ratio all the time by just adding more and more and more value for consumers. And I think that's what you can see with our top line growth coming into the year with MAUs growing very nicely. And then eventually, segueing itself into better subscriber growth, which then, of course, leads to better revenue growth. And so it's kind of this trifecta things, but it really starts with improving the consumer and creator value proposition, which we're focused on and AI can be a real enabler there.

All right. Another question from Matt Thornton on growth drivers. What are the key incremental drivers of growth as we look into 2024? For example, can marketplace grow faster than the core business? Do you expect audiobooks to move the needle in 2024? Is ticketing and merch at all material yet? What about a full global rollout of a new UI, AI DJ or anything else?

Yes. Maybe I'll start, and then Paul can chime in. So I think for 2024, just to set the expectation, it is about delivering on the core. And I think, hopefully, investors should be able to see now that the core has plenty left to offer when it comes to growth. And we feel really good about the growth we've had in 2023, and we can nicely see that segueing back into 2024. And that's, of course, delivering against all of the things we already have. So our advertising business on one hand, seeing more scale there, which will drive more efficiencies. You mentioned marketplace. We're heading very nicely there, too, on the business side, and we're offering more and more products to people on the marketplace side, which is seeing better and better results relative to all the other marketing spend that labels and artists teams are encountering, which, of course, is a great testament for meaning more and more artists will keep on investing with us there. And then on the product side, you're right in pointing out the new UI. It is being fully rolled out. So we're seeing great results with that. AI DJ has been rolled out to many more countries already, but that's the English language one. So you should definitely expect to see local versions of the AI DJ to allow for even more engagement. But that engagement, as I mentioned in my previous response, allows for more flexibility for the business. That allows for either more top line growth through a better proposition at a low price, which will mean we'll grow even faster or we have the ability, of course, if we produce a great value to raise prices again to keep that value and price ratio at a good clip. So there will be plenty of opportunities in 2024 for the core business to produce. And that's what you should expect. We are making great progress on ticketing and merch and all of these other fronts, too, but they are not yet material drivers, so I don't want any investor to have that expectation. But long-term, they will be and we're excited about them. But for 2024, it's about delivering on the core, which has plenty more to give.

Yes. And I would just add real quickly to Daniel's point. Obviously, we'll have almost three, four quarters of the price increase from a growth perspective on the revenue side impacting 2024. And then as Daniel mentioned, advertising business has improved throughout 2023. So we're hoping that advertising can continue to be a driver in 2024 as well.

I forgot to mention, by the way, on the audiobook side, which you asked about as well. So yes, we do think audiobooks will be helpful to the 2024 results as well, but it will be early days, of course. It's still in early product development -- early launch. And the primary focus is to bring it out in more markets.

Great. Another question from Justin Patterson. This one is on subscription pricing. Spotify is now delivering a lot more value through product innovation and the inclusion of audiobooks. It also seems like churn was minimal from recent price increases. So given these dynamics, how is your approach towards pricing as a lever changing versus what we've observed in the past?

Well, I think that there's two paths to mention. One was before this prior quarter and one is going forward. And we talked about this when we did raise prices that are -- we were adding a leg to the stool. So again to kind of bring everyone back and put context. We had plenty of growth drivers. We can grow in a market by keeping the price relatively low and grow top line that grows the market and grows our revenue. We can, of course, again, increase the engagement even further and have more advertising. That's another way to grow our business. And then we have the third lever, of course, which is to grow through price increases. We hadn't up until that point, used the lever of price increases to a great extent, we did. I feel really good about what we learned there. So it's definitely part now of the arsenal of tools we can deploy to keep growing the business. And I think you should expect us to use that when we see the appropriate dynamics. But the primary thing, again, just to level set with investors, why you're seeing the top line growth the way you are is because we're providing an amazing value to consumers. That is the primary thing we are focused on to keep on delivering amazing value. And then when we get to that amazing value, then, of course, we have more flexibility and we can choose to increase prices to get that value to price ratio in the right balance. So we definitely have a lot more opportunities going forward, and we feel really confident given what we've learned in this price increase.

All right. Next question is going to come from Benjamin Black on gross margin. You've guided to sequentially improving gross margins for all of 2023. When we look forward to 2024, given the price increases and improving profitability at podcasts, should a similar gross margin progression hold true?

Yes. So I'd say a couple of things here. One is, first on the podcasting side, yeah, we've seen the improvements in the podcasting business, and we talked about how that's been a drag on our gross margins, and we expect it to soon reach breakeven and then become something that's actually additive to gross profit. So we're on track on the podcasting side there, and that should continue to be helpful into 2024. Same with the music side in terms of incremental gross margins there as well. When you think about the audiobooks side of it, there's obviously some investment anytime you launch a new business. But again, as I said earlier, we feel really good about continuing to have a nice progression in gross margins into 2024. We'll give more specific guidance on the next earnings call. The only thing is when you think about sequential, we do tend to have some seasonality in Q1 versus Q4. Some years, it's more material than others. Obviously, advertising, it tends to be one of the slower quarters from an advertising perspective. But we are expecting gross margins to be improved in 2024, and we feel really good about hitting all the targets we talked about at the Investor Day and the significant progress we've already made to date.

All right. Next question is from Doug Anmuth on audiobooks. Can you talk about the cost structure and the economics of audiobooks? How should we think about the impact to gross margin in the fourth quarter and into 2024? And what gives you confidence in adoption by subscribers?

Yes. So I guess I'll just kind of read out what I said, which is, obviously, there's always going to be -- there's some costs whenever you launch a new product, but you'll see that the gross margins are up Q3 to Q4. And as I said a couple of times now, we do expect gross margins to be up again in 2024, and we expect to continue to see that nice progress we've made on the gross margin side and the operating profit side into 2024. And the confidence on adoption of subscribers. I'll start, maybe Daniel has some thoughts here. But I think as Daniel mentioned, it's early days, but we feel really good about the first couple of weeks to month in the markets we've launched in. And we just believe it's going to be a great product. It's going to open up more authors to more consumers. And what we've seen in the past is when we enter a business, the business becomes bigger, the podcasting business is a much bigger global business because Spotify is a part of that business now. And we think we're going to have the same benefit on the audiobook side, which will be great for authors and great for consumers.

Yes. And we feel great, again, as I mentioned in my opening remarks, with the adoption in UK and Australia. And just as a reminder to investors, we are planning to launch in the U.S. this coming winter as well. So you're definitely going to see us expand audiobooks. And already with this initial launch, it is positive. It's early days. But we're encouraged with what we're seeing. And the most important thing is when you think about the consumers that are trying out the experience, they're loving it and they're finding it a really natural part of the Spotify experience and a great value add. And that speaks to this earlier point we made about sort of consistently improving the experience by adding more things for creators and consumers alike. And then every now and then adding these verticals that just step -- make step changes in the value proposition that we're doing.

Okay. Next question from Rich Greenfield on marketing efficiency. You accelerated user and revenue growth while cutting marketing spend. Can you help us understand what's enabled this dynamic and whether you believe it's sustainable into 2024?

Yes, Rich, I would really make it a testament to this focus on efficiency as we talked about. Again, it is marvelous when team focuses on something here at Spotify. We tend to achieve it. And when Paul and I kind of set that objective for the teams, what started happening was they started focusing a lot more on the performance marketing mix, some of the initiatives that we were doing. We were pulling back from other things. We were doubling down on others. And we started seeing top line holding up and even accelerating at a lower marketing expense. And we've seen this trend now play out for a few quarters. Initially, I was kind of skeptical whether that would be able to keep going. But with the recent learnings, it seems very possible that is the case and that we are simply increasing our rate of learning at a great pace across the marketing team and that I think is a very positive sign going into 2024.

All right. Another one from Rich Greenfield on advertising. Advertising growth constant currency accelerated to 24% from low to mid-teens at the past couple of quarters. What's driving that acceleration? And how are you feeling about the time period ability to drive advertising towards 20% of overall revenues compared to 13% today?

Yes. So the quarter just saw a nice acceleration both on the music side and the podcasting side on constant currency. So it was across the board. We're doing a good job of selling. We're improving the tools or improving the automation side of the world. And honestly, we're doing a good job of selling across both music and podcasting. So having both of them in the ecosystem is really, really helpful, which I think we've talked about before in the past. And so that's been a lot of the driving growth. I don't really have any update to give you in terms of 20%. It's not necessarily a target we shoot for. I think what we've said in the past is we believe over time that advertising continues to grow, it could become 20% or more. But we feel good about the acceleration on the advertising side in Q3 and the trends kind of how they've improved throughout the year.

Okay. Benjamin Black on audiobooks. Audiobooks monetization is via overage charges. But how do you think about medium-term monetization of this offering? Will there be additional tiers with discrete payments for access? And at your Investor Day, you highlighted 40% plus gross margins for audiobooks. What's the bridge from this offering to hitting those targets?

Yes, I'll start, and maybe Paul can chime in. So I think, first and foremost, it's very early days on the audiobook side, but we're encouraged with what we're seeing. So you're right in that this is included in the premium offering. It is one of the benefits, obviously, that our members are getting and that, in turn, gives us more flexibility as a business that we talked about. Just as a reminder, however, the offering available for consumers is 15 hours a month. For consumers that hit that base or subscribers that hit that base of 15 hours a month, there is the ability to top up. So there's already today the ability for discrete payments where consumers can upgrade and we're already seeing consumers doing that in ways we probably wouldn't have imagined where some consumers are heavily upgrading and being really heavy audiobooks listeners already day one. But obviously, the base is very small. So it's impossible for us to say where that leads us long-term. But the ability exists, and I think it will be a part of our business, but we also, of course, think that being part of the subscription is what the real value is because it will expand the market of audiobooks. And we think consumers -- it's a format that consumer loves and that creates more value, which, of course, gives us more flexibility for our business. You want to talk as well about the bridge between audiobooks and the 40% we talked about?

Yes. So yes, we're not getting specifics of kind of how the monetization is going to work right now. But I think what I would go back to saying, which I think I've said a couple of times now, is there's obviously always an investment when you launch a new product. We don't think it's anything that's going to be a material impact our 2024 gross margin trajectory. And we think that there's -- it's not a long window until we see audiobooks really being additive to Spotify from a bottom line perspective. And we'll have more to talk about it moving forward.

All right. Next question from Doug Anmuth on podcasting. How should we think about the timing for achieving podcast gross margin profitability? And what are the biggest opportunities to improve podcast cost structure going forward?

Yes. So let me take the second part first. So I think as Daniel has talked about, for us, it's really a number of things. One is we're just continuing to look to try and be the most efficient we possibly can as a business. And so that's going to mean investing where we think it makes sense to invest and it's going to mean thinking about how we can be strategic in areas we can be more strategic. And so on the podcasting side, you've already seen us this year sort of right-sized parts of the business where we thought it made sense. But moving forward, we'll continue to invest, but we also think we're going to continue to get lots of efficiencies and that's through being smarter about where we spend that podcasting budget and also continue to grow the advertising on top of it. So we feel like we're on track. I think we gave at the Investor Day sort of a one to two-year time line to breakeven on podcasting. We're right in line with that time line. We should actually get to breakeven and podcasting pretty soon and we feel really good about the trajectory of the podcasting trends having gone from a pretty big drag a year ago to something that's a pretty minimal drag to something that should be positive to gross profit in the pretty short-term.

Yes. And maybe just, Doug, as an added reminder, unlike, say, the music business, which has more of a variable cost structure, podcasting has more of a fixed cost basis and a variable too. But the biggest proponent so far has been the fixed cost base structure. So what helps there is obviously, if you take down the fixed cost base structure, but the other thing that helps us more scale. So if you bring in more advertising dollars across that, you'll start seeing gross margins improving. So both of those things have been true. We've been raining back on some of the spending, but we have also increased the revenues on podcasting, too.

Okay. Next question from Benjamin Black on operating expenses. You obviously made some hard decisions on headcount reductions this year. When looking forward to fourth quarter and 2024, how should we be thinking about the pace of operating expense and headcount growth. And also, is there more room to tighten up expenses?

Yes. So I'm not going to give any 2024 guidance yet. We'll do that on the next quarter. So really, what I'll do is kind of reiterate what we said already, which is as a company and as a business, we want to be as efficient as we possibly can. And so that's something that is not a onetime thing, some of the changes we made in 2023, we're not sort of one-time in nature. This is the way we're running the business. We've talked about, we believe we have a best-in-class product, and we want to become a best-in-class business as well. And so we'll continue to look whether it's 2024 or '25 or '26, about how we can run the business as efficiently and effectively as we possibly can. And so that's just how we think about it moving forward. And hopefully, our expectation is that will translate into kind of hitting all the margin targets we laid out at the Investor Day.

Okay. It looks like Ben's got another one here on music economics. Without getting into the details from your price negotiations with the labels, I'm curious to hear how the win-win played out? Is it related to better economics on the ad-supported side, marketplace commitments, more flexibility to introduce new tier options by bundling services like audiobooks or anything else?

Yes. Well, as you know, Ben, we don't comment on the specifics around our negotiations with any rights holders. But what I can say in general terms is, and I've used this analogy before, when we renegotiate with our partners, this is something that's constantly ongoing pretty much every year. It is kind of trade -- it's like a trade agreement being renegotiated. There are lots of things in the agreement, lots of things that the labels want from Spotify, lots of things that Spotify wants from labels, including clearing up things like small things like lyrics, how it works, what the payment terms are, et cetera, new market entries, just a whole host of things. So it's not one thing. It is a lot of different things, including some of the things that you're talking about. The end goal of those things and why I talk about it as a win-win though is that I think the investor community focuses too much on this being a sort of one side win the other side has to lose. This is not how we view it. I've said this before, but I will repeat again. What has happened in the history of Spotify is that both sides win. So as the business grows, it also helps the labels and publishers greatly. And in doing so, we all get better economics with more scale. And so this is very much what both us and the partners are expecting going forward. We are very much doing this in symbiosis to drive the continued development of the music business. We're not trying to sort of score small points. And then the big question you may ask then, well, how should we assume that gross margin will keep on improving. And a big part of that is by providing more services for the industry. We talked about marketplace as a great example. Just to reiterate the point. Today, it is very expensive for a label to market an artist in all the various channels that they're doing. It's very hard through the changes that Apple and others made for tracking to happen. So it's very hard to attribute all the way through a stream, what's happening. Obviously, on the Spotify platform, we can do that directly from being at the point where people discover music to being at the place where people discover -- then consuming that music, which, of course, drives an unparalleled consumer experience and unparalleled marketing experience. That is a great way where we can help reduce the marketing cost for labels and obviously earn a share of that revenue back. That is why we're so excited about our gross margin projection. That was exactly what we said at 2018, and that is what is being played out in a pretty big way in our improved music gross margins as well. So it's not a sort of win-lose scenario. It is truly a win-win between us and the rights holders.

Okay. Next question is going to come from Mike Morris on subscription ARPU. Your constant currency premium ARPU growth trend improved from negative 3% last quarter to negative 1% in this quarter. Can you share more detail on the drivers? What do you think is a normal amount of drag from product or market mix? And how much price related positive impact was there in third quarter? And how much is implied in your fourth quarter revenue guidance?

Yes. So when you look at the ARPU trends, let's sort of take the product market mix. It's really been on the product side. We've continue to have just a slightly larger share on family plans quarter-over-quarter and year-over-year. So that's sort of the product mix, which has been sort of a very -- it's a small drag, but that's kind of where it's been. It's hard to guide where that's going to go if that's going to continue to increase or flatten out, but that's been the real reason of sort of the very kind of modest 1% or so, 1% to 2% impact on ARPU. And then there was a little bit of an impact from the price increase in Q3. We'll expect to see a much bigger impact in Q4. So if you think about the price increase and then you think about the fact that the price increase hit about 75% of our revenue base. We expect the price increase to be a positive mid-single-digit ARPU benefit to Q4. FX neutral benefit.

Okay. Another question from Doug Anmuth on marketplace. How should we think about current marketplace growth relative to the approximate 40% year-on-year growth you realized in 2022?

Yes. So I think as Daniel said, marketplace is one part of the equation and everything we've done. It has grown very nicely. We haven't given out specific numbers, but it continues to be a big driver of growth for us on the margin side. And it's really just about adding more value into the ecosystem. Our marketplace only works if it's working for the labels. So if our label partners feel like they're benefiting from Marketplace, then we'll benefit as well. And so that's been the case. We expect it to be the case and it has definitely been one of the components that's helped the music margin's improve.

Okay. Another one for Mike Morris. Again, on audiobooks, how much impact does audiobooks have on the fourth quarter gross margin guidance and what are the factors that drive audiobooks gross margin impact over time? What type of usage is required for the product to be accretive to gross margin?

Yes. So there is a small impact in Q4. As I said, anytime you launch a new product, there's going to be some investment there. But as I said, we continue to see gross margins up sequentially Q3 to Q4 and we expect them to improve again nicely in 2024 as well. It's hard to talk about the factors that drive over time because, as I said, as we -- as the business model evolves over time, we'll share more information on that and sort of same thing on the usage side. I think for us, right now, what we're really trying to drive is how has this become another great product for Spotify? How does it continue to grow usage and engagement. And we know that when people interact with more than one part of Spotify. They retain higher. They're more engaged. So we've seen it before in podcasting. People who use both music and podcasting, are more engaged. They spend more time on the service. They're lower churn, they retain higher. And our expectation is that audiobooks will be just one more factor that will help with all of that.

Okay. We've got a question from Zach Morrissey on other cost of revenue. Can you share more color on what's driving the improvement in other cost of revenue? Is there opportunity for further improvement in 2024?

Yes. I mean, again, that's a lot of the stuff that is the blocking and tackling of just trying to become a more efficient business that over time. We started to see some benefits. And so within that other cost of revenue, you've got cloud cost and streaming delivery costs, you've got customer service, you've got payment fees. So some of those just improve with scale, some of those improve with becoming more efficient and being smarter about how you run your business. And so we're always going to look for ways to optimize and become more and more efficient in those areas. But yes, that's part of some of the improvements you've seen is, again, just that greater focus on efficiency and making sure that our overall gross margins are improving. Obviously, the largest percentage of our gross margins has to do with royalties we pay to all of our different rights holders. But other cost of revenue is material, and we do focus on it, and it has been something that's improved throughout the year.

All right. And we've got time for one more question, and that's going to come from Maria Ripps on AI. It seems like across the space, generative AI-powered tools are improving advertiser creative and leading to better KPI performance. Is Spotify investing in generative AI to improve its products for advertisers? And if so, are you seeing any tangible improvements in ad performance?

Yes. So there are plenty of things we're doing, generally speaking to AI and machine learning to improve our advertising products, everything from improving, of course, targeting and so forth. But as you're speaking to generative AI specifically, I think the biggest single thing we could do and that we're experimenting with and the teams are experimenting with is enabling more opportunities for advertisers creative to be created. So let me expand on that for a moment. So if you think about our advertising format relative to, say, many others, it lives in this kind of a nice segue on the one end where it is not as easy to produce as text ads. What you see on other platforms. And it's obviously not as hard to produce as a video ad. And so we think there's an enormous opportunity for us to apply generative AI to create really compelling audio advertisements for marketers. And today, creating a great audio ad is something that's quite costly and quite expensive for marketeers to do. They obviously already make that investment when it comes to video because there's plenty of platforms that are available, but we're one of the few that offers audio ads in a big way on the scale that we're doing. So that's definitely a bit of a hurdle getting advertising on there. So what generative AI has the promise to do is, of course, to allow for that creative cost to come down. But not only that, but it allows you to scale that creative in unimaginable ways. So you can translate whatever creative you have lots of different languages. You can use the same voice actor, but instead of producing one or two ads, you can have 1,000 or 10,000 or even 100,000 ads that are individually…

Great. Thanks, Maria. And that's going to conclude our Q&A session on today's call. And so with that, I'm going to hand the floor back over to Daniel for some closing remarks.

All right. Well, thank you, Bryan. So in closing, as you can see, we're feeling very good about the progress and results. So lots of the actions we've taken over the last 12 months are really bearing fruit. And I feel very confident that we are well on our way of being both a great product and a great business. So thank you again for joining us. And as usual, please feel free to check out our For The Record podcast dropping later today.

Okay. And that concludes today's call. A replay will be available on our website and also on the Spotify app under Spotify earnings call replays. Thanks, everyone, for joining.

This concludes today's conference call. Thank you for your participation. You may now disconnect. End of Q&A: