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CNBC Exclusive: CNBC Transcript: Spotify Founder, Chairman & CEO Daniel Ek Speaks with CNBC’s “Squawk on the Street” Today

CNBC

WHEN: Today, Thursday, February 3, 2022

WHERE: CNBC’s “Squawk on the Street”

Following is the unofficial transcript of a CNBC exclusive interview with Spotify Founder, Chairman & CEO Daniel Ek on CNBC’s “Squawk on the Street” (M-F 9AM – 11AM ET) today, Thursday, February 3rd. Following are links to video on CNBC.com: https://www.cnbc.com/video/2022/02/03/spotify-ceo-daniel-ek-discusses-fourth-quarter-earnings-amid-18percent-stock-slide.html and https://www.cnbc.com/video/2022/02/03/spotify-ceo-daniel-ek-addresses-joe-rogan-podcast-controversy.html.

All references must be sourced to CNBC.

JIM CRAMER: Joining us now is Daniel Ek, Spotify Chairman, Founder and CEO in a CNBC exclusive. Daniel, you know that we’re in a market where it’s not what have you done for me lately, but what are you going to do for me lately? So, can you explain to us why you think that the first quarter is not nearly as important as Wall Street thinks it is.

DANIEL EK: Well, thank you, Jim, so much for having me on. Let’s just start with our Q4, 406 million users, 180 million subs. It was our biggest quarter ever when it came to growth, and we pretty much beat on every metric. So, I’m incredibly proud of that. Now that said, Q1 just frankly matters a lot less to our business overall than the other three quarters. So, I think maybe investors are reacting to that, but I feel really, really confident in our overall growth trajectory.

CRAMER: Now, one of the things that did bother me was in your premium subscriber growth, it grew 16% year over year, 180 million in the quarter up from 172. But what I’m looking at increasing Daniel that we’re trying to figure out how much a user is worth. We used to be very excited about a user, maybe they’ll gravitate to premium. Can that number go higher if you add new content?

EK: Yeah, absolutely. I mean, we’re looking at the sort of value ratio of per hour of listening so if we can increase the hours that our customers are listening, then obviously we feel that the value of that they’re getting up the service increases and that gives us leverage to overtime increase our prices. But we shouldn’t also forget that Spotify is not a one sort of revenue stream company anymore, we’re two revenue stream company, and you saw in Q4 that advertising hits over 15% of our revenue up from less than 10%  at the beginning of 2021. So, we feel really good that over time, our ARPU, our average revenue per user will increase whether it’s with both advertising and subscription.

CRAMER: Alright then let’s let’s just briefly touch on Joe Rogan. I know my cohosts have a lot to say about it too but obviously a firestorm looks to be addressed. The people who were complaining in the medical field seem to be satisfied with what you’re doing. At the same time, if you had to look at who is thinking about withdrawing from your system, what percentage of that might be of your entire mosaic? And how upset are people about royalties versus actual censorship?

EK: Yeah, look, I mean, obviously there’s a lot of conversations out there about Spotify and that’s certainly true. But if you look overall, I like to point that out, Spotify now has 11 million creators and when you look at our music business, 2020 we paid out $5 billion to the music industry. 2021, that number was $7 billion. This is the first time we’re actually talking about that number. So we’re we paid out more than $30 billion to the music industry and is over a quarter of the entire music business globally, overall. So I feel really good about where we are and you know that we’re a material income source for many artists around the world.

CRAMER: One other question I think people don’t understand the mosaic of your business. The monthly average users by region, North America is not as significant yearly. And then you have other countries that I remember, your previous CFO told me about, I were to look at let’s say India, would I see a monthly average user that would actually send North America below 20% a year from now?

EK: Yeah, I mean, it’s great point that you’re mentioning India. I mean, India is really a rocket ship for us and you certainly saw that in Q4 too. We feel really good about where we are. We entered the market just shy of three years ago and are now one of the biggest music services in the entire country. But looking at the whole region if you think about India, Pakistan and Bangladesh, we’re talking about 2 billion users. So, in the coming years, I can’t speak to next year but in the coming years, the next five to 10 years, that region in itself is going to be massive. I like to think about, you know, we used to talk about China 10, 20 years ago as this kind of, yeah, it’s a big opportunity but doesn’t matter for the business. I think every business now realize that there’s an enormous amount of consumer demand and dollars that Chinese customers are spending on goods and the same will happen in the Southeast Asia region too.

DAVID FABER: Daniel, it’s David. You know, I want to go back to gross margins or talk about them for a moment. I think it was back in 2017, and I know a number of investors have been with you for a long period of time, you pointed to, you know, targets and they were years out of 30% plus margins. You’re still around 26 and I just wonder is that day ever going to come that you’re going to be able to deliver on those long-term targets you talked about back in 2017?

EK: Yeah, absolutely. So, the investor day was actually in 2018 but I think it’s important to point out that back then we were a music company. And when I look at this, we’ve really expanded the opportunity also on the top line for the company. So, we’re now talking publicly about getting to over 50 million creators of this company and over a billion-user opportunity. And I feel more confident than ever with our audio first strategy that we’ll, we’ll get there. And when you look at that business long term, that business will be substantially bigger than the one that we were talking about in 2018 and that’s what we’re investing and that means that sometimes gross margins may be quarter to quarter impacted by that growth. But I think it’s important to say also that in 2021, the growth targets that we set out on the, on the promise of investing in content, in podcasts, we have far exceeded those estimates and that guidance that we gave out and I think that was evident as well in our Q4.

MORGAN BRENNAN: I want to go back to the, I want to go back to this Rogan situation for a minute because cultivation of content creators is so key to the long-term growth of Spotify, which I know you’ve been talking about quite a bit, but are you concerned that you run the risk of actually alienating talent that is crucial to those long-term goals of more than doubling monthly active users and growing those gross margins? I don’t just mean musicians that maybe haven’t at least until recently brought in that much of the revenue. I mean, those very valuable podcasters like a Rogen as well.

EK: Yeah, absolutely. You know, overall, I think the big balancing act that we’re trying to do as a company that’s just critical is balancing creative expression with, of course, the one about the safety of our users. And that’s also why we published this weekend our policies, and really for the first time did that and that’s probably on our half something we should have done earlier and that’s on me. But we have them out there now so that everyone can look at these policies and understand what goes on our platform. And our goal, obviously, is to have as much content as we can and we’re going to try to do everything that we can to build the best possible experience for creators where they can interact and engage with their fans and monetize those relationships.

CRAMER: Alright Daniel, you understand I think there are many people who are trying to figure out whether you are a pandemic stock, so to speak. Peloton being the worst example, but a lot of companies where people were cooped up, they were listening, they were looking for something to do, they move to a house and as they did work, they took Spotify and now they’re, that group of people is no longer growing. When you look at how many users you have or are getting, you understand that people are very concerned that the first quarter represents an opening quarter in the worldwide economy and that what you might be thinking is that Spotify won’t do as well and it’s not just business as usual. How do you address that concern?

EK: No, I totally understand that, Jim. But what I would say is actually, it is true, we were impacted by the pandemic and you saw that in our last year in Q1 and Q2, but if you look at the back half of that year, the Q3 and Q4 numbers, you know, those were really just outstanding numbers. In Q4 specifically, we had our record, it’s the biggest quarter in history when it comes to growing our overall number of users. So I think that really bodes well for 2022. And all the top line metrics that we’re seeing is makes me just be very confident in our overall growth trajectory. Now, just want to go back and say that, you know, I said this in the opening, but Q1 just frankly matters a lot less than the other three quarters for us. So that’s how you should look at this.

BRENNAN: Daniel, I do want to get your response to the White House Press Secretary’s comments yesterday about everything that is going around on around the debates about misinformation and how Spotify is handling it.

EK: Yeah, well, again, what I would say is that when you look at what the scientific community have asked us to do, it was really around three things and all of those three things we delivered this weekend. So, if you think about it, the step one is obviously publishing our policy. What is it that you’re actually taking action on. And the second thing is the COVID advisory tags, so all content now on Spotify, it has and will have in the coming days, a COVID advisory tag that talks about how we can push that to a COVID hub where there will be a lot more information from experts and health authorities next to all content no matter who you are that talks about COVID-19 and that’s really what the scientific community was asking about as well so I feel good about that. But obviously, I think it’s important to point out that as platform goes, this is an evolving safety landscape. And obviously, we’re going to evolve with that too and that’s a dialogue that we’re constantly having with authorities, with experts, with the medical community, as well of course with the legal community. So, this is an important topic, but I don’t think it’s unique to Spotify. I think it’s true for all platforms and obviously we take our role here very seriously.

FABER: Daniel, David, again, to sort of end this off, you know, talking about margins again obviously something that would get them up is raising price. You’ve done it in certain markets at certain times but I do wonder, would you consider raising price again, or how should we think about, you know, where pricing is right now? The likes of Netflix, for example, been pretty aggressive lately in raising price.

EK: Yeah, David. I mean, the way we looked at this is we provide an excellent value for all of our customers across the world. So over time, we definitely think that there’s a lot of opportunity to raise prices. We’re going to carefully look at the market and when it makes sense. There’s obviously a lot of things that’s happening in the economy right now and I think you can see that not just on Spotify, but really across the whole kind of streaming industry. If you look at the video business, for instance, I think you can see that there’s definitely been a reaction to those type of price increases so it’s something that we’re thinking about, and I definitely think that there’s room for us to raise prices, but we’re going to be very careful about doing it so that it really goes against our long-term growth objectives and that’s the key. We don’t try to manage this business quarter by quarter. We’re trying to manage it across really the multiyear opportunity that we see and we’re still very early in that opportunity. This is going to be a gigantic business. We’re talking 50 million creators, and over a billion users. There are very few of those platforms on the internet and that’s what we’re investing behind.

CRAMER: I want to thank Daniel Ek, founder and CEO, and obviously a man who did not necessarily have to come on given the Joe Rogan status but did and with I felt some very fine answers. Always good to see you Daniel. Thank you.

EK: Thank you so much for having me on.