Spotify Technology SA (NYSE: SPOT) Q3 2021 earnings call dated Oct. 27, 2021
Corporate Participants:
Bryan Goldberg — Head of Investor Relations
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Paul Vogel — Chief Financial Officer
Presentation:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the Spotify Q3 2021 Earnings Call. [Operator Instructions] After the speakers presentation, there will be a question-and-answer session and instructions will follow at that time. [Operator Instructions]
I would now like to hand the call over to your speaker for today Bryan Goldberg, Head of Investor Relations. Bryan, the floor is yours.
Bryan Goldberg — Head of Investor Relations
Great. Thank you and welcome to Spotify’s third quarter 2021 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 afterwards, Daniel and Paul will 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 hashtag Spotify earnings Q3 ’21. Analysts can ask questions directly into Slido and all participants can then vote on the questions they find the most relevant. We ask that you try to limit yourself to one to two questions and to the extent you will follow-ups, we’ll be happy to address them time permitting. 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 letter to shareholders and in filings with the Securities and Exchange Commission.
During this call, we will also refer to certain non-IFRS financial measures, reconciliations between our IFRS and non-IFRS financial measures can be found in our letter to shareholders, 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.
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
All right. Hi, everyone. And thank you so much for joining us. And I’ll start by sharing what I hope you all saw in our shareholder letter. The business is doing really well and I’m pleased that we continue to deliver across the areas that are fundamental to our growth and long-term strategy.
We had a very strong quarter. I’ll quickly speak to MAU before taking — talking about a few longer-term trends that I’m really excited about. Importantly, as I indicated last quarter, we had started to see MAU strengthening in the last half of Q2 and I’m really pleased that this trend continued throughout Q3. I believe the choppiness in the first half of the year was primarily due to COVID and is now largely behind us. All signs show that we’re back to consistently delivering against our forecast, but we’ve also learned from the last two quarters and are responding faster to changes.
Most notably in key markets like India, where we’re now seeing a nice recovery. That’s all to say that as we head into what’s historically our biggest quarter of the year, we’re all hands on deck to make sure the positive trend continues. And I feel really good about where we stand across all of the other aspects of the business overall.
And as you can see this quarter, our ads revenue continues to surpass even our own optimistic expectations. This I think, clearly proves the potential for ads to be the second big revenue driver for the future of our business. Not only did we have our biggest quarter ever for ads in Q3, but 2021 will mark the first time we will surpass EUR1 billion in ad revenue. While this is a significant milestone, this business is accelerating with much more room to run. Excitement from advertisers for the podcast industry has increased substantially over the last year, and we’re ahead of our plans for podcast monetization. Audio ads on the Internet are now becoming a bigger part of advertisers media mix overall.
And to take advantage of this growing demand, we recently unveiled Spotify Audience Network enhancements for advertisers and added anchor creators to the mix. And this gives advertisers more opportunities to connect with listeners and enable podcast creators to earn from their work in new ways. This latest announcement is only one example of our focus on increasing the velocity across the business. In this case, unlocking more inventory as advertisers and creators alike are realizing the value of podcasts ads.
Looking long-term on our product and our platform, which is where I tend to focus, my confidence is — in the opportunity still out there is unwavering. This is especially true when I think about how well we are positioned, despite still being very much in the early days of this audio journey. A good reminder, Linear Radio still has a 46% share of audio listening in the US alone, this despite consumption shifting steadily away from it. In this year, more than 60% of all audio ads spending will go to traditional radio. I think this clearly shows that we have plenty of room to grow both in listening time and in our effective monetization. And the US is one of the most advanced markets. So internationally, there’s even more growth ahead of us.
And with that context in mind, I want to highlight a few areas of our platform strategy and as a reminder, any improvements on our platform will ultimately help increase listeners listening hours, and subsequently, our effective monetization.
So let’s look at podcasting. We started our journey three years ago in podcasting with a catalog of about 185,000 podcasts. And we were really nowhere compared to the largest players in the industry. Today, we have 3.2 million podcasts on the platform, a growth rate of over 1,500%. But despite the fact that we’re still a relatively new entrants, previous data indicated we have become the top platform for podcast consumption in 60-plus countries. And now, according to Edison research and our own internal sources, we recently became the number one podcast platform US listeners use the most.
Given the US represents the largest podcast market globally, I think this is quite significant. I am confident to say that we’re a leader not only in podcasting, but in the burgeoning audio space on the Internet. So why did we succeed this fast? Well, obviously our content investments have helped a great deal. But it’s also another proof point of the impact our platform improvements and product innovations are having on our business overall and the velocity of shipping matters.
From the recent launch of interactivity enhancements like polls and Q&A, to the release of enhanced listening features a new original programming around the world, we fought hard to gain new listeners. And our success is not attributable to just one thing, by literally hundreds if not thousands of improvements that we’re working on in parallel for the benefit of creators, users, and advertisers alike. And because it’s a trend that is progressing so significantly, you should expect us to continue to invest to keep up with the demand.
So why does this velocity matter so much for Spotify? Well, I believe that we will ultimately determine — that will determine our long-term success. If you are slow, you better be right most of the time. But if you’re fast, you can test and iterate more, which creates a culture of innovation. And at Spotify, we want to constantly iterate and improve. And there’s no question that we will always have competitors. And some of them will be good, but I believe we will be better, because we’re focused on our stakeholders, the creators, and consumers and we prioritize speed and we adapt quickly.
So by constantly improving our user experience, users will not only come to Spotify, but we will retain them. And if we retain our users, we will bring more creators to the platform to share their content. Better content means more advertisers and all of these things coupled together, users, creators, and advertisers unlock the power of our flywheel.
And with that, I’ll turn it back to Bryan.
Questions and Answers:
Bryan Goldberg — Head of Investor Relations
Thanks, Daniel. Again, if you’ve got any questions, please go to slido.com hashtag Spotify earnings Q3 ’21. Once your question is entered, you can edit or withdraw your question by selecting the option in the bottom right. 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 Rich Greenfield on advertising. Advertising revenues as a percentage of total revenues hit 13% for the second time ever, given ad revenues are growing multiples of subscription revenues, what do you think the mix of your revenues will be in five years? And how should we think about that mix shift impacting margins?
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Maybe, I’ll talk about the size of this and Paul can, kind of, chime in on the impact on margins. So I’m really excited about ads. I think we have had a tremendous quarter with 75% growth year-over-year. But this is just the beginning, as I stated in my opening remarks. Long-term, I believe at the very least, this should be 20% of our revenues. But it might possibly be a lot more than that 30%, 40% even over the next five to 10 years. So we’re very excited about this being the second big revenue driver for Spotify and are obviously investing behind that both in product and platform improvements, but also as you may have read in hiring staff across the world that helps service these advertisers.
Paul Vogel — Chief Financial Officer
Yes. And then from advertising in general, as Daniel said, it was up 75% in the quarter. We saw really nice, healthy gains on the music side, it was up significantly on the advertising side. And then podcasts advertising growth was in the triple-digits. So we’re seeing it across the board, which really interesting is that the increased inventory is bringing increased demand, the demand is really high across all of our products. Podcasting is helping significantly on that.
And then from a margin standpoint, obviously, the podcasting margin is helpful over time. We think having a fixed cost nature of the podcasting business and being able to grow that advertising will help margins. But additionally, just bringing more advertising into the platform we’re seeing the free music margins move up, as well as you guys are aware, our free music margins are below our premium music margin. So to the extent that we can drive incremental advertising across not just podcasting, but music in general that will help margins as well. So margins were healthy up almost 1,000 basis points year-on-year on the ad side and overall gross margin in the quarter was at the high-end of our range and really significant.
Bryan Goldberg — Head of Investor Relations
Alright. Our next question is going to come from Matt Thornton on marketplace. Can you update us on how the two-sided marketplace is performing versus plan in 2021?
And secondly, given Spotify ‘s reach, engagement, and contextual awareness, do you think Spotify has an important part to play as a marketplace for live to drive better awareness, conversion and consumption in that part of the ecosystem?
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Yes. Overall, very excited about the progress with marketplace. We continue to see a very strong engagement with artists, teams, and labels across the board. I think a huge testament to that is just how performance these formats have been during this testing period. Many artists are seeing uplifts of 50% or even a 100% on their campaigns. That is obviously driving even more demand from teams and more teams, who want to try this product.
So I think the best way I would characterize it is much of last year was really around finding product market fit. I think we have proven that product market fit now and are scaling this nicely across the board and iterating the product for all the demand and feedback we’re getting from across the creative community. And then as you think more broadly on marketplace overall, I think you are totally right to point out that there is a lot more we can do to service our creators and musicians on the platform and live is obviously one of those opportunities that we think a lot about. We did experiment quite a bit with virtual, sort of, live shows during the pandemic, we saw really nice results from that.
I do think long-term, we can be a very important part of that ecosystem too in enabling more fans to discover more live shows and allow artist, of course, to interact with them in that way too. So that’s something that the team is working on and we’re thinking about what the right experience is. So that’s definitely a future upside for us.
Paul Vogel — Chief Financial Officer
And then just from a financial perspective, marketplace has been a contributor. It was a nice contributor last year and it’s grown probably better than we thought in 2021 as well. So it has contributed to gross margin improvement and we’ve been really pleased with how it’s grown over the last couple of years.
Bryan Goldberg — Head of Investor Relations
Okay, next question from Mike Morris on advertising. So other advertising platforms have cited Apple’s iOS privacy measures and supply chain disruptions as negatively impacting 4Q growth prospects. How do Apple’s changes impact your advertising offering if at all? And are you anticipating macroeconomic headwinds to slow your rate of growth in the fourth quarter?
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Yes. For us, it didn’t really have much of an impact. We did — like a lot of people we’re very aware of it. We have a very big brand business, which wasn’t significantly impacted at all. And the fact that we are — have a ton of first-party data with all of our users being logged into the service really helped us grow. So we didn’t really see much of an impact at all. We don’t see much going forward, although we’ll continue to monitor it. And Q4 for us, the biggest impact on Q4 will just be continued growth in podcasts and in inventory. We know the demand is there, we know the advertisers are there, so for us it’s just continue to expand the inventory available for advertisers.
Bryan Goldberg — Head of Investor Relations
Okay. Next question from Mario Lou on podcast creator tools, so we understand the plan is to give 100% of paid podcast subscription revenue back to creators through 2022. And that podcast share of overall consumption hours reaching an all-time high in the third quarter. That being said, how should we frame the revenue and margin upside from the starting in 2023 and beyond?
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Yes. So I think the best way to think about this is probably to think about the engagement of content as being the base layer of Spotify. And that today is monetized primarily through subscription income and now to a larger extent, advertising too. But the way we envision this platform going forward is that you should think about all of these additional modalities across this Spotify portfolio, of course, paid podcast being one of those that allows creators to segment either their entire population of users into a paid podcast or even a subset of their super fans for various products and upsell them.
All of these products long-term will be accretive to the Spotify business, and I think of them more as a platform business model where these are higher-margin businesses on top of this base level, sort of, content service that we have. So we’re very excited about that. And especially in the context when you think about all the engagement that’s going on, that’s a lot of opportunities to upsell people to other propositions, which will be higher margin opportunities for Spotify.
Paul Vogel — Chief Financial Officer
Yes. I don’t have much more to add on to that other than what Daniel said. Again, we’ve given out long-term targets. We haven’t given out anything specifically on 2023, but we do expect that these types of products overtime will be additive to the overall business.
Bryan Goldberg — Head of Investor Relations
Okay, another question from Rich Greenfield. This time on product testing. You’ve been testing a lower-cost subscription plan that’s ad-supported. Does the signal recognition that either; one, the price point needs to come down to drive the next 200 million premium subscribers; two, the ad-supported opportunities to compelling to focus on ad for usage or; three, a combination of both?
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
So maybe just as a general comment, we pretty much test all variants of all products that you can imagine. And this is very much a test that we’re running in some markets to learn more. But I think the higher order importance of Spotify is always to increased growth. So to the extent that that could increase growth, we will look at it for that reasons too.
And then the second order that we would evaluate any successful test for would be if this is obviously accretive to the business or not. But the primary focus for the business is still very much on growth. I think the safe way to characterize if we would roll something like this out is, we would certainly do it to drive growth first and foremost. And secondly, look at the, sort of, accretiveness on the business level.
Bryan Goldberg — Head of Investor Relations
All right. Next question comes from Matt Thornton on the Spotify Audience Network. So can you talk about: one, what creator and advertiser feedback has been so far? Two, what inning or part of the football match are we in terms of being fully or widely launched or available with Spotify Audience Network? And three, what the next milestones are?
Paul Vogel — Chief Financial Officer
Yes, I can take that one. So the feedback has been really, really strong. We’re super encouraged. If you look at Megaphone in particular and Spotify Audience Network, we’ve got 50% more podcasts in the ecosystem than we did when we — since acquisition of Megaphone. One in five advertisers are now using the product as well. We’re super excited about — the feedback has been really great. We’ve seen a number of partners, who have seen performance go really well and have given us incremental inventory throughout the quarter, because of performance that we’re giving them is higher and they could see other places and in some cases, higher than they’re getting in their own direct sales force.
So we feel really good about it. It obviously led to a big portion of the growth as I think I mentioned earlier, podcast advertising in general was up triple-digits year-on-year. So we’ve seen that growth really — become really strong. And in terms of inning, it’s hard to know, I would say we are in the very, very early days. As Daniel mentioned, we think advertising will be north of 20% of our business, if not significantly more in the long-term, since that would imply we think we have a long way to go on the growth of the advertising business overall.
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
My only addition to that is I appreciate that you made it a football references too, so…
Bryan Goldberg — Head of Investor Relations
All right. With that, we’ll go to the next question from Maria Rips, question about car thing. Are you able to share any updates on how the launch of car thing has performed so far? And then more broadly, how strategically important is this functionality to driving engagement, especially now that consumers have been spending more time in their cars again?
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Yes. So overall, I would characterize us as being early days with car thing, but maybe sharing a little bit more context on our thinking. Obviously, there are three big modalities that’s driving audio consumption. On the goal with mobile devices in people’s homes through mostly connected speakers and TV screens, and then in the car. And especially here in the US the car is obviously a massive thing. And so car thing is our effort in trying to see how the next-generation of car entertainment systems could look like. And it was very much launched as a test to see if we can increase the engagement that consumers are having in the car instead of these sort of mobile phones connected through Bluetooth speakers and honestly quite dangerous from a driving experience. And so far, the response that we’re seeing among consumers is very, very encouraging. We’re seeing super high engagement in the products. We’ve seen more than 2 million people sign up for getting a car thing.
The number one constraint for us at this particular moment, which should not surprise those of you that are following consumer electronics is the chip shortages that are — that we just can’t make enough of them to get them out there in consumers. Long-term, I think the big question here is obviously in this test we’ve been focusing primarily on just increasing engagement. And now we’ve just rolled out this ability for consumers to also buy the product. And very, very early days overall, I think the best way to look at this as we’re still device agnostic, and we want to be on all device. But this is another great opportunity for consumers that care about having a great music entertainment system to get one through Spotify.
Bryan Goldberg — Head of Investor Relations
Next question from Doug Anmuth on MAU with third quarter MAU growth up double-digits year-on-year in all geographies for all regions. Have you recovered all of the second quarter MAU shortfall?
And then secondarily, have advertising campaigns resumed across all geographies or are you still experiencing MAU weakness in certain countries?
Paul Vogel — Chief Financial Officer
Yes. I think we feel really good about the MAU growth. We’re back on a growth trajectory line and back on the curve where we would expect to be. So I think that’s really encouraging for us. And I think as Daniel mentioned on the last quarter, we saw strength in the back half of 2Q. We’re very pleased that we came in at the higher end of expectations in Q3. So we feel like we’re back on track for MAU. And if you look at our guidance for Q4, our expectation is to top 400 million users by the end of the year, which should be pretty significant milestone for us.
In terms of the campaigns, yes, we did turn some of the back on. So as a reminder in Q2 and a lot around COVID and what was going on globally, we pulled back on some of our marketing, particularly in markets like India. We did turn that back on and we did see significant growth return in India. We also hadn’t spent a ton in some of our newer markets to return some of that on as well that performed really well. So in general, we feel like we’re back on track and yes, the marketing plans did perform well in Q3.
Bryan Goldberg — Head of Investor Relations
Okay. We’ve got a question now from Batia Levy and it’s on Churn. Can you provide color on Churn trends in the market that saw price increase recently?
Paul Vogel — Chief Financial Officer
Yes, we were — we’ve been really pleased with the markets where we’ve seen price increases both from a gross intake perspective and a churn perspective. So everything is pretty much been in line with our expectations, if not slightly better.
Bryan Goldberg — Head of Investor Relations
Another one from Maria Ripps this time on Shopify. Can you talk about how additive this new partnership could be to the artists on the platform both from an engagement and revenue standpoint, and also can you comment on your plans for broader launch with Shopify?
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Yes. Toby and I joke about the confusion of the names by the way. So that was fun to see among consumers. There is literally people on the Spotify platform that thought we had launched a shopping network. So that was fun. Yes, I mean, overall, as I’ve said, a few times now, but I’ll try to repeat. Our goal is very simple, we want to allow creators to have more ways for them to express themselves, more ways for them to interact with our Audience, moving them from casual fans all the way up to super fans and then more ways for them to monetize those relationships.
So as part of that goes, the partnership with Spotify — Shopify is very interesting from the sense that it allows creators to have more ways to monetize those relationships, especially with the fans that they have using and leveraging Spotify on the platform. This is early days, so it’s hard to say what the impact will be on the business. But at the very least, I do know that there has been a lot of creator excitement around this, and we’re seeing more and more artists onboard their merchandise and their shops by the day on our platform. So excited about the early progress. And long-term, this will be just a bigger part overall of that interaction between fans and creators.
Bryan Goldberg — Head of Investor Relations
Okay. we’ve got a question now from Deepak on our subscription business. Your premium subscriber growth has decelerated to the mid-teens range this year as net ads moderated, can you talk about where you see opportunities to re-accelerate subscriber growth in 22?
Paul Vogel — Chief Financial Officer
Yes, I think if you look at our subscriber growth in general, I think we feel really good and healthy. We’d exceptional growth last year at over 30 million net subscribers and we’ll do a little bit less than that this year. But if you look at the average growth in subscribers over the last three years, we’ve averaged between 25 million and 30 million net, around 27 million, and we feel pretty good about that and where the trend line has been for subscribers.
And for us there’s always puts and takes. I think we still believe there’s growth in our developed markets in North America and Europe. And we see lots of growth still ahead of us in LATAM and rest of world. Some of those markets take some time to come online. We often have to drive their free MAU side first before the subscriber side comes. But I think we feel again like we’re pretty much all on track and on trend with where we’d expect to be heading out of ’21.
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Yes. My only addition is so when you look at it, many of the newer markets are obviously in some of the emerging markets. And in many of the Western Worlds, we are accustomed to credit cards and other things. So a huge part of the opportunity set goes into innovation around models. So as an example, in Southeast Asia, we’ve been playing around with daily plans and weekly plans to great success. I think we’re still early on though. It will take us a good amount of more quarters before we are at the maturity we are in most of the Western world.
But this is something that we’re paying attention to as the subscriber base over the next coming years will be coming from many of these markets to have India, Indonesia, many of the other Asian markets as well, where I think a lot of that innovation will play a very meaningful role in driving more subscribers to it. So think about it like it took us a few years to learn how to do subscription well in the Western markets. We’re now in the similar phase where we’re learning to do that in Southeast Asia and the Asian markets as well.
And I think this is very similar just to kind of set expectations how some of these other platforms have fared too. I think most of us has been very strong in the sort of developed markets, North America, Europe in Spotify, that’s clearly the case. I think some of the other content players are seeing the same thing too. We’re all now trying to figure out how to learn — how to do these in Southeast Asia. And we will crack the code. I’m a 100% sure of it. I just can’t tell you exactly when, but lots of good experimentation is going on.
Bryan Goldberg — Head of Investor Relations
All right. We’ve got a follow-up from Deepak on our advertising gross margins. Could you provide some additional color on the underlying core music margin in the ads business, and what can you tell us about the impact of podcast costs dragging that margin down?
Paul Vogel — Chief Financial Officer
Yes. So I’m not going to break out the margins by product, but I will say gross margins were up year-on-year on the ad side. What we’ve seen is advertising has grown. We have some margins, particularly in the ad side that where we’ve historically had low margins get helped by the increased advertising on a royalty basis. So that’s been helpful. Podcast in general are still a drag on overall gross margins.
Although the drag was less than we forecast, given the strength in podcast advertising in general. And then when you look at revenue — if you look at revenue per listening hour, it is growing pretty significantly on the platform and costs for listening hour is not. And so we’re starting — we’re seeing that trajectory really play out, which over time will help flip those gross margins on the podcasting side to be positive. And our expectation is meaningfully positive overtime.
Bryan Goldberg — Head of Investor Relations
Okay. Another question from Mario Lu, and it’s on the Spotify Audience Network. How big of a driver will adding podcasts from Anchor creators be in the coming weeks, and what penetration rate do you expect to achieve to be in the Spotify Audience Network overtime?
Paul Vogel — Chief Financial Officer
Yes. I don’t know what the penetration over time will be. I would say aggregating into anchor podcasters is a big opportunity for us to add incremental inventory into the ecosystem, which we think will be very bullish, because as I’ve said, a couple of times, we know the demand is there. So for us it’s really about adding incremental supply into it. We’re also launching new markets, I believe it’s four new markets. They will have access to this as well. So the combination of both the anchor podcasters, but also the new market growth should be pretty significant for us. Again, we’ve been optimistic with how it’s gone. We talked about how strong advertising was in the quarter, and adding both the anchor podcasters as well as new markets into the environment should be pretty supportive of our further growth.
Bryan Goldberg — Head of Investor Relations
Okay, we got a question now from Steven Cahill on operating expenses, R&D, and sales and marketing and G&A came in as a lower percentage of revenue this quarter, given the investments you’re making in advertising user interface, etc., is this a trend we should extrapolate and how do acquisitions like megaphone hit the P&L versus organic investments?
Paul Vogel — Chief Financial Officer
Yes, I would say on the operating expense side, we did benefit from social charges being the reduction of the reversal of the accrual, which we’ve talked about helped us. So our opex was up around 17% ex the social charges judgment adjusted versus about 12% on a reported basis. So that does distort the numbers a little bit.
I think if you take a step back and you think about the growth in the opex line items. I think you can assume that R&D as a percentage of revenue will continue to be at these levels, if not potentially increased slightly over time as we continue to invest in the business. I think you’ll see some — the leverage on the G&A and then more variances on the sales and marketing side, depending on what’s going on and where we are in different life cycles of innovation and product launch and those types of things. So hopefully that’s helpful.
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
My only addition to that would be to say I think we’re seeing tremendous leverage specifically in R&D and the products improvements that I spoke about in my opening comments. And I think the testaments in podcasting from three years going from nowhere to being the leader just shows how when we’re committed to building something out, how well we can do in a reasonable time frame.
So I think you should expect that when we do see great R&D opportunities, we will invest behind those, and ad sales now being one of those things, clearly we’re expanding our ad sales force with the success that we’ve had an advertising too. So, I hope investors and analysts alike see that’s the investments we’re doing make a lot of sense for the business and that should give you confidence that will keep on investing and keep yielding great results in the coming years.
Bryan Goldberg — Head of Investor Relations
Okay. The next question is going to come from Justin Patterson on the creator opportunity. Daniel, you’ve brought many more creators onto the platform over the past year. What do you see as the key lever or levers towards bringing the next wave of creators on board and for markets like the US and Latin America? How has having O&E podcast affected smaller creators joining Spotify?
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Yes, so I alluded to some of these comments earlier too, but I think the primary thing for us is we need to lower the barriers for our creators to express themselves and interact with their audiences on the platform. So right now, it is still that you — the publishing from, for instance, Anchor onto the platform does take some time. You’re not getting, sort of, immediate feedback back from your audience on the Spotify platform. There are many, many ways that we can just remove a lot of friction and increase the ability for creators to express themselves and interact with that audience. That is where we’ll bring the next generation of creators onto this platform aand they’ll start experimenting degree.
Just evidence of that data point would be the video podcasting efforts we just did the other day, massive, massive interest from creators in doing that. And already, you should be starting to see lots more videos onto the Spotify platform as creators start experimenting with those things. So new formats, reducing friction in those formats, and allowing creators and consumers to interact on the platform are the key drivers.
And then as it relates to O&E, I think it’s — the best example, I have is that it’s really providing a nice halo across the board. All creators see these big creators having successful on the Spotify platform and that obviously drives a good amount of them wanting to be like them and wanting to see if they can also make it. So I think it’s a nice thing that you’re seeing these big podcasters having great success on the platform because that drives more people to want to be successful in the platform too.
Paul Vogel — Chief Financial Officer
And then just a follow-up. I think we often get lots of questions on the podcasting side of the monetization side and the revenue side. But Anchor, which was a acquisition of ours about 2.5 years ago or so, three years ago. There’s been a huge boost to the growth in podcasters and creators on the platform. So over 80% of new podcasters on our platform are using the Anchor platform and our understanding is that Anchor has about 50% market share across the entire podcast industry in terms of usage. It’s been a huge help and a huge driver to the creators in the creative process.
Bryan Goldberg — Head of Investor Relations
Okay. Our next question comes from Ben Swinburne on advertising. While the radio advertising TAM is a big opportunity that would seem the scale and technology that you can bring to advertisers goes beyond traditional broadcast radio. Do you agree and can you give us a sense of the kind of advertisers and ad budgets you’re seeing today spend on Spotify?
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Yes. I absolutely agree, Ben. I think this is very much similar to the trend that the print ads we saw in the old media world. And when they became digital, became a lot more effective and that increase the overall ad ecosystem and didn’t just translate into a one-to-one. I think that’s very much going to happen in audio ads too. And maybe just to set the scene for a moment before I get into talking about the specific advertisers and ad budgets we’re seeing today and Paul can chime in on some of that.
But the future of computing the way I see that is one where — what we’re really building here is a way to augment everyone’s experience. You can imagine walking down the street and that’s you are hearing that by knowing and understanding location as an example, we should be able to target that there is a great offer in close proximity of where you’re walking down the door. That’s obviously going to be a tremendous opportunity and in VR or AR world in that future as well, there is a combination to provide both display and audio in combination to provide an even more immersive ad experienced that helps advertisers convey their messages and convey their brand stories.
So I think long-term, what we’re building here is very complementary to all the other ad platforms that exist out there, and really uniquely positioned against all the other app platforms that are out there. And the TAM should far outstretch what the current ad ecosystem looks like. How — exactly how long that will take and exactly what shape and form that will take, that’s obviously more difficult to pan out. But we’re building step by step, and as I spoke about in my opening comments, this is all about rate of improvement and focusing on that philosophy for us because that is what we know will drive towards that future.
Paul, do you want to talk about the existing advertisers in our budget?
Paul Vogel — Chief Financial Officer
Yes, I mean, as we talked about, they can continue to rise. We’re seeing bigger buys, I think as I mentioned earlier, when it comes to Megaphone in general, we’re seeing incremental budgets, incremental asset, and we’re actually monetizing it at high rates and so that’s coming in. And we’re seeing just big overall spend from bigger brands. I can get you more specifics offline Ben, in terms of actually who those are.
Bryan Goldberg — Head of Investor Relations
Great, okay. We’ve got time for two more questions. The next one’s going to come from Eric Sheridan, and it’s on the ad-supported business. Can you give us more granularity on the dynamics in the ad-supported business in the quarter? How would you characterize the level of ad impression and CPM growth you saw in the third quarter? And then also, how should we think about the sustained long-term dynamics of supply and pricing? And then finally, how should we think about the incremental gross margins in the ad business as it scales?
Paul Vogel — Chief Financial Officer
Yes. So in the quarter, we mentioned the growth was both a combination of impression growth, and CPM growth. Impression growth was the big majority of the growth and incremental driver. CPMs grew, I would say that probably grew more out of just the demand as opposed to anything we’re doing to try and move prices — pricing up. But even with the CMP impression growth we had, real demand growth that led to both. It was significant, and again but the impression was the bigger part in the quarter.
Long time we’ve talked about this, the demand is there, it’s on us to continue to find new ways to grow supply through new content and expanding of our products as I talked about moving span more globally and growing overall inventory through usage and engagement. And then I think — and then pricing will follow from that.
And then on the gross margin side, again, I think we’ve talked about this, but right now, despite the significant growth that is still a drag on margins over time. I think our belief is that if you think about where our gross margins are now, that the podcast business should have higher gross margins than our consolidated gross margins, where they are right now, and should be a driver of incremental growth and margins in the long-term.
Bryan Goldberg — Head of Investor Relations
All right. And our last question is going to come from Doug Anmuth on podcasting. Can you provide any updated thoughts on your podcasting strategy including content acquisition, monetization, or distribution? And what are the next steps towards scaling penetration of MAUs?
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
Yes. So content acquisition keeps on increasing across the board. I think we had over 100 new originals across the world this quarter alone. So we’re tracking very nicely on that. And then I say, alluded to and talked about in one of my earlier responses, we’re also trying to increase the overall number of creators participating on the platform by lowering the friction and enabling them to express themselves in more ways. So video was a great example of that and more Q&A impulse, our other ways that really drive more creators towards the platform, so that’s great.
Monetization front, it’s really all across the board. You see span with Anchor now moving into that, you have our paywall product that allows creators to monetize their relationships in a very different way. I think we’re just, just in the early days of allowing new forms of monetization, even the Shopify forum could be very interesting, and very material to podcasters as well.
And then on the distribution side, I read that as some sort of platform improvements. The biggest opportunity we still have is about enabling more discovery. So I’ve talked about this in prior earnings call, but one of the big things that we’re still trying to learn and improve upon is just providing an even better discovery experience on podcasting, it’s a different format. Consumers are thinking differently about it after trying it out. And so for us, this is all about enabling more ways to highlight that. We did an acquisition, I believe in the prior quarter that was one of those products will help out with that discovery. We’re building that out. Lots of things in the pipeline that we’re toying around with as it goes to that.
But I do believe that we will really, really re-imagine that podcasting experience around discovery and enabling a lot more consumption that way too, which will of course drive more creators to the platform, which will of course drive more MAU s to the platform too. So it’s really across the three buckets, as you said, attracting creators by investing in tools for them, building out more monetization tools and building out more platform improvements.
Bryan Goldberg — Head of Investor Relations
All right. Thanks, Doug. That concludes our Q&A session for today’s call. I’m going to turn it actually back over to Daniel for some closing remarks.
Daniel Ek — Founder, Chief Executive Officer and Chairman of Board of Directors
All right. Well, thanks, Bryan. So I want to close by stating something that I’ve said to our team recently. Audio is our right to win and while we’ve been relentless in our pursuit of being the world’s largest audio platform, it is still early days and we’re just getting started. The industry’s only just starting to grasp the magnitude of this opportunity as we continue to remain focused on unleashing new experiences that demonstrate the future we envisioned for audio.
And each improvement we bring and every innovation we offered to listeners and creators drives this flywheel to move faster with a greater impact. And when we see opportunities to do more and go farther and faster, we will continue to invest. And it’s really wonderful to see it all coming together for us like it did this quarter.
I will be talking more about the quarter on our podcast for the record, which will go live on our platform tomorrow. You will also hear more about our ads business from Dawn Ostroff and Jay Richmond. So I really hope you tune in and thanks again for joining us this morning.
Bryan Goldberg — Head of Investor Relations
And that’s concludes today’s call. A replay of the call will be available on our website and also on the Spotify app under Spotify Earnings Call replays. Thanks everyone for joining.