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.
Bryan Goldberg: 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?
Paul Vogel: 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.
Bryan Goldberg: 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?
Paul Vogel: 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.
Bryan Goldberg: 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?
Paul Vogel: 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.
Bryan Goldberg: 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?
Paul Vogel: 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.
