Spotify CEO Calls AI ‘Cool and Scary’ as It Hits Music Industry

During the quarter ended in March, the company laid off employees and reorganized its top brass, saying it aims to become more efficient this year following an intense period of spending. Spotify also introduced a new video feed for its app in a bid to boost user engagement. It overhauled its landing page to recommend music, podcasts and audiobooks to users via short clips, similar to TikTok and YouTube Shorts.

The streaming company reported 515 million monthly active users, up 22% from a year earlier. That topped company expectations by 15 million and marked its largest-ever first-quarter growth. Spotify said that growth came across nearly all age demographics and from both developed and developing markets.

Paying subscribers, the company’s most lucrative type of customer, were up 15% to 210 million, also beating the company’s guidance.

Shares of the Stockholm-based company rose 5.1% on Tuesday.

Spotify Chief Executive Daniel Ek discussed on a call with investors and analysts the potential impact of artificial intelligence on streaming music. “I don’t think I’ve ever seen anything like it in technology, how fast innovation and progress is happening in all the really both cool and scary things that people are doing with AI," he said.

Last week, a song created using generative AI replicating Drake and The Weeknd’s vocals was pulled from streaming platforms after a copyright infringement complaint from Universal Music Group NV. Universal said the training of generative AI using its artists’ music on streaming platforms was a breach of its agreements with the services and a violation of copyright law, and said the platforms have a “legal and ethical responsibility to prevent the use of their services in ways that harm artists."

The song, “Heart on My Sleeve," was played 600,000 times on Spotify, and versions have been surfacing on YouTube and TikTok.

Mr. Ek said the company is trying to strike a balance between allowing innovation on the platform and protecting artists’ copyrighted work, adding that it could lead to the creation of more music, which would benefit Spotify.

He also discussed the company’s role in supporting artists’ original work. “We take that role of guardian, the artist creativity and the support that we are doing for artists and creators very, very seriously," he said.

Free cash flow, a measure of the cash a company generates from operations and viewed by many investors as a proxy for performance, was 57 million euros, equivalent to $63 million, compared with €22 million a year earlier and negative €73 million in the prior quarter.

For the first quarter, Spotify swung to a loss of €225 million, or €1.16 a share, from a profit of €131 million, or 68 European cents a share, a year earlier. For years, executives have said the company will give priority to investment over profit as it works to attract users around the world and expand into new forms of audio. Last fall, the company indicated that profitability is expected to improve this year as it moves on from a period of heavy investment.

In January, Spotify laid off about 600 employees, or roughly 6% of its workforce, as part of broader cost cutting after a spending spree during the pandemic. The company on Tuesday said severance-related charges associated with the layoffs added to operating expenses in the quarter. The company said higher personnel costs during the quarter were driven primarily by its head count expansion in 2022.

The company said it anticipates improvement in operating expenses in 2023 and beyond.

Average revenue per user for the subscription business in the quarter slipped 1% to €4.32, and fell 2% on a constant-currency basis. The metric has been pressured as Spotify attracts new subscribers through discounted plans and lower prices in emerging markets. Price increases for its family plan in established markets, including the U.S., have helped boost subscriber revenue but investors are waiting for Spotify to match the price increases Apple Inc. and Amazon.com Inc. made on individual plans.

Mr. Ek said Spotify would like to raise prices in 2023, but that it is still in negotiations with its label partners on the matter.

Subscriptions, which make up most of Spotify’s revenue, climbed 14% to €2.71 billion. Revenue from advertising grew 17% to €329 million. Ad revenue, which has become a particular growth area for Spotify as it expands its podcast business, accounted for about 11% of total revenue for the quarter—a small downtick from prior periods.

In all, first-quarter revenue increased 14% to €3.04 billion, slightly short of the €3.1 billion the company expected. Spotify said that was due to macro-related variability in the ad business.

At a company event in March Spotify said it struck a deal with National Public Radio, by which the podcast publisher will use Spotify’s ad marketplace to monetize its shows. Part of Spotify’s ambition in podcasting is to make money from its own shows, and expand its advertising revenue by selling ads across other networks’ and publishers’ shows.

The company is also loosening the exclusivity arrangements of some of its podcasts, and will begin distributing to other platforms shows that have been available only on Spotify—a move aimed at increasing the audience and ad potential of its shows. It is a shift in strategy for the company, which has relied heavily on paying to carry content exclusively to draw in podcast listeners. Spotify is now the top podcast platform by listeners in the U.S., according to Edison Research. Exclusive deals with stars including Joe Rogan and Emma Chamberlain remain in place.

For the current quarter, the company guided for monthly active users to grow to 530 million and premium subscribers to grow to 217 million. It said it expects revenue of €3.2 billion.

News Corp’s Dow Jones & Co., publisher of The Wall Street Journal, has a content partnership with Spotify’s Gimlet Media unit.