Spotify’s Q2 results suggest ATT outweighs macroeconomic weakness

In an interview on Stratechery last month, I made a comment that I left unsubstantiated and that a number of people investigated with me privately:

In fact, I think that’s actually a big risk right now, and I think it’s one of the reasons why I find this idea that ATT hasn’t had any impact, “It’s all macro” or “It’s all TikTok” and these companies are just whining, I think that’s a dangerous line of thought, because I think the primary risk that people aren’t appreciating right now is that actually we’re overestimating the macro impact and we’re underestimating the ATT impact.

Curiosity related to this comment has been along the lines of: how could the impact of ATT be underappreciated or miscalculated more than a year after it was launched? As I speak to in the marketing winter series, three factors have coalesced to impose considerable challenges for the digital marketing environment:

  1. A weak and potentially worsening macroeconomic environment caused by the war in Ukraine and persistently high inflation;
  2. A reversion to pre-COVID engagement norms for consumer technology products;
  3. Apple’s App Tracking Transparency (ATT) privacy policy.

The consequences of this adverse environment are manifest: digital advertising platforms like Snap, Meta, and Google are aggressively cutting costs, and even TikTok has engaged in targeted restructuring.

As I note in the first entry in the marketing winter series, it’s difficult to parse the individual effects of each of these factors. But as I hint in the exerpt above, I believe that ATT’s impact on advertising performance has been substantial and potentially accounts for the preponderence of the commercial drag that ad platforms and advertisers alike are experiencing now. Although it reached a majority scale on iOS devices in Q3 2021, ATT’s effect has mostly been palpable since Q1 2022, given the seasonal lift in revenues that advertising-dependent businesses generally see each year in the fourth quarter, as well as the lag in depletion of usable data for targeting algorithms, which operate against historical data that didn’t evaporate with the introduction of ATT. This timeline coincides with the general deterioration of public tech stock prices, which, again, has been driven by more than just ATT.

But is it possible to determine how much of a role ATT played in this? Does a business exist that can isolate the impacts of broader economic weakness and the COVID overhang without negative exposure to ATT?

Spotify is perhaps the closest thing. Spotify is almost totally immune from the operational limitations of ATT because its own ads platform — which inserts audio ads into streaming sessions — targets contextually and doesn’t utilize the hub-and-spoke model of targeting that ATT disrupts. And notably, Spotify’s Sales and Marketing expense in Q2 2022 was just over 13% of revenue, meaning it isn’t wholly dependent on performance advertising for growth. And that growth in Q2 2022 was impressive: MAUs increased by 19% on a year-over-year basis while total revenue increased by 23%, with ad-supported revenue increasing by 31% (and 28% on a quarter-over-quarter basis).

But, curiously, while ad-supported MAUs increased by 22% on a year-over-year basis, they only increased by 2% on a quarter-over-quarter basis, versus 3% growth in premium subscription MAUs. In other words: Spotify’s premium subscription userbase grew faster from Q1 to Q2 than its ad-supported userbase while ad-supported revenue grew much faster than premium revenue from Q1 to Q2.

Users would be expected to churn from premium subscription products in reaction to a severe macroeconomic slowdown, yet that’s not evident in Spotify’s Q2 2022 results: Spotify’s premium subscription userbase grew faster in the quarter, from a much larger baseline, than its ad-supported userbase. So why did Spotify’s ad revenues grow so precipitously in the quarter? One explanation is that ad dollars fled from the platforms that utilized user-level behavioral targeting — and were thus most susceptible to the damages of ATT — to contextually-targeted ad platforms like Spotify.

If macroeconomic weakness was the primary driver of a slowdown in consumer tech, a reasonable expectation is that advertising and premium subscription revenues would decrease across the board in response to a pullback in consumer spend. One might also expect premium subscribers to churn in favor of ad-supported product tiers for the same reason. This is not what is exemplified by Spotify’s Q2 results, which prompted a 14% jump in the company’s stock price on revenue and subscriber beats.

A critical caveat is that Spotify is just one company, and what I’m presenting is just one data point that can’t be considered conclusively representative of a broad and diverse consumer technology market. That said, Spotify’s Q2 results provide support for the notion that ATT, rather than macroeconomic factors, plays the more significant role in the turmoil many ad platforms and advertising-dependent companies are currently experiencing. Spotify’s ad platform is a net beneficiary of ATT because it targets contextually, and its premium subscription product would be a net victim of macroeconomic weakness given the ease of downgrading to the ad-supported product tier. Given that Spotify saw unexpected growth in premium subscriptions while also growing ad revenue disproportionately to subscription revenue, its results suggest that, across the three factors contributing to the marketing winter identified above, ATT is the most poignant.