Spotify (SPOT) stock fell 2.19% on December 30 and closed the trading day at $149.81. The stock dipped as investors responded to the news that Spotify would suspend political advertisements in the US in 2020.
On Monday, the S&P 500 also declined by 0.6%. Meanwhile, the Dow Jones Industrial Average fell 0.64%. Also, the Nasdaq Composite Index lost 0.67% at the same time.
Spotify to temporarily pause political ads
Last week, Ad Age reported that Spotify would stop selling political ads on its platform in early 2020. Spotify’s temporary ban would apply to its ad-supported service. The move would also include Spotify’s original and exclusive podcasts. Spotify’s political ad restriction would affect users in the US only. Notably, Spotify has never sold political ads in other countries.
Spotify’s move comes amid campaigns related to the US presidential election in November 2020. Therefore, the streaming giant might resume selling political ads in the future.
Eric Wilson, a Republican digital strategist, told Reuters that Spotify is not a widely used advertisement platform for elections. Meanwhile, Spotify told Reuters that “we do not yet have the necessary level of robustness in our processes, systems and tools to responsibly validate and review this content.” Spotify’s move would cover political groups such as political parties, candidates for office, and many other election-related officials. The music streaming giant would also restrict the sale of ads related to legislative and judicial outcomes.
Political ads and social media giants
Social media giants like Twitter (TWTR) and Facebook (FB) have been criticized for influencing voters through political ads on their platforms. Political groups spend millions on political advertisements that run on social media platforms. We believe that Facebook is the preferred social media platform for selling political ads due to its vast user base.
Facebook’s involvement in the Cambridge Analytica scandal emerged in March 2018. Facebook was accused of putting the personal data of around 87 million users at risk. The personal data of Facebook users was used to influence the 2016 elections. Facebook’s data leak issue pushed its CEO, Mark Zuckerberg, to testify before the US Senate and the European Parliament. Facebook’s scandal also put pressure on Twitter and Alphabet’s Google (GOOGL), as they use a lot of users’ data. Notably, Google uses personal data through almost all its apps, including Google Maps, Google location, Gmail, and others.
Therefore, the online giants are again under immense pressure to safeguard their platforms from misleading and fake information before the election. Like Spotify, social media giant Twitter banned political ads in October. In November, Google also had to make changes to its ad policy, amid pressure. Google said that it would not share data like public voter records with advertisers who target election ads. Facebook said that it would continue selling political ads on its platform. However, Facebook also hinted that it could make some changes to its ad policy.
Spotify is the world’s most popular paid music streaming service, with nearly 141 million ad-supported users in the third quarter. In the same quarter, Spotify had a total of 248 million subscribers. The company’s subscribers rose around 30% year-over-year in the third quarter, with 31% year-over-year growth in premium subscriptions. Spotify had 113 million paid subscribers at the end of Q3.
On the other hand, Facebook’s monthly user base was 2.45 billion in the third quarter. Facebook’s DAUs (daily active users) touched 1.62 billion at the end of Q3. In contrast, Twitter’s monetizable DAUs hit 145 million in Q3.
Spotify’s subscriber outlook
The company predicts that its monthly users will increase to between 255 million and 270 million in the fourth quarter. Spotify’s premium subscribers could rise to between 120 million and 125 million in Q4. The company expects that an increase in podcast hours will help grow its subscribers. We believe Spotify should consistently focus on product innovation as well as a higher retention rate to expand its subscriber base. A higher retention number would also help the company to withstand the competition from rivals.
The company faces fierce competition from Apple (AAPL) and Amazon in the music streaming industry. We note that Spotify and Apple Music offer identical subscription rates to their users. However, Spotify has a larger subscriber base than Apple Music. We anticipate, though, that the expansion of TikTok could act as a threat to Spotify’s market share.