Prof G Markets: Spotify’s First Year of Profitability + Is Google Losing its Edge?

25:36I can find anything on Spotify. And people say, well, Apple and Amazon have done the same thing. But to your point, they've really innovated. The rap thing, I thought, I'm not entirely sure how you connect rap to more revenues. I thought it was cool. And I like Spotify saying, by the way, you listen to Tom Petty and some DJs and that's about it. But how does that, I'm curious. I don't understand the mechanics of how that translates to more revenue. Tell me, young person, what is happening on Spotify? Well, they didn't connect it to revenues, but they connected it to user engagement, which that's what it's all about.

26:11It just creates heat and excitement. And I think possibly, I mean, full disclosure, I don't use Spotify because I've always used Apple Music and I've never wanted to go through the cumbersome process of transporting everything over. But when Spotify Rap came out, it was the first time I was like, maybe I should switch because this just sounds fun to have this little presentation about me and all of my music habits. So I think that would be the answer. Let me just give you a little insight into the role that streaming music plays in mating. If you're ever at home with your girlfriend and you're thinking, I don't want to have kids and I don't want to have sex.

26:54I know it's coming. I know it's wrong. Just play ad supported Pandora. Nothing says do not mate with me. You are taking the evolutionary pool down a couple notches if you have sex with someone who has ad supported Pandora. um i play i love i still have ad supported streaming radio and i think it's hilarious i play it i'm like oh my god the commercials are so bad listen to this commercial um anyways but back to uh i'm shocked i thought you would have had uh spotify i absolutely love spotify and also they have the best party just you know they have the best party at canad oh really i'll take you you can be my date i would love that invite well let's just go over some some of the numbers here because I think they're pretty incredible.

27:43So Spotify's monthly active users hit 675 million, beat estimates by 10 million, which means that one in 12 people on earth is on Spotify. Premium subscribers grew 11 % year over year. That was despite the price hikes. Average revenue per user up 5%. First profitable year in the company's history, which I think is a very big deal. And stock is now at an all-time high, $620 per share. We should probably think about what could go wrong for Spotify. I think one potential issue is this growing public resentment towards Spotify, and specifically towards Spotify and how they pay their artists. So a lot of people say that Spotify squeezes their artists.

28:31They don't pay them enough. They reward the top 1 % and the other 99 % get screwed. And that's timely because Chapel Roan, who just won the Best New Artist Award at the Grammys, she actually called this out. She didn't call out Spotify specifically, but she called out the whole music industry of which, of course, Spotify plays a huge role. So let's just listen to what she said. I told myself, if I ever won a Grammy and I got to stand up here in front of the most powerful people in music, I would demand that labels and the industry profiting millions of dollars off of artists would offer a livable wage in healthcare, especially to developing artists.

29:16Well, isn't that fucking precious? Well, here, if you, you know, and if you get in front of a group of kids in high school, tell them not to be music artists because it's a shitty industry with too many people fighting over too few revenues and a series of platforms that are developed in a monopoly. So, okay. The notion that's great virtue signaling, you know, good for you. And it's not going to mean dick. It's not. These guys are doing their job. If you wanted, all right, are you sincere? Pull your shit off of Spotify. Are you really sincere about helping an event? Call your friends. You know, do you hang out with Beyonce?

30:02Do you know Taylor Swift? And pull your shit off of Spotify. Because as long as you have oligopolies, they're going to extract more and more. And they find that the best way to get retention is to just consistently recommend Taylor Swift over and over. And the notion that she's going to bully the record labels, Spotify is not worth more than all the record labels. So if she really wanted to have an impact, let me do some virtue signaling. When Spotify decided to not fact check Joe Rogan, who would have one legitimate doctor on one day and then an illegitimate doctor the next day and create all sorts of vaccine hesitancy and false equivalences, I called them and said, we're pulling Prov G off of Spotify.

30:46I pulled my shit down and to cost us somewhere between a quarter of half a million. So yeah, put your money where your fucking mouth is. Pull off of Spotify. But this notion that you're going to shame people in the audience to paying artists who aren't making them any money more money. Yeah, good luck with that. Have at it. No, I completely agree with you. And I think this just, it reminds me of all the dynamics that we've seen in Hollywood. And the reality is altists have been getting screwed since the dawn of time. And, you know, historically, it's been the record labels that have screwed their artists.

31:23And I think back to the 1950s, this is probably the most famous examples where you had all of these incredible Black musicians who were suddenly dominating the charts, and then none of them got rich because they signed these shitty deals that ultimately rewarded the owners of the record labels. So, you know, this is this dynamic of of artists getting screwed to an extent is nothing new. But I don't think, I mean, a lot of people are blaming Spotify for this, saying that they just don't pay them enough and blaming the business model. I really don't think you can blame Spotify for this. Because all you have to do is look at the financials.

32:02You have to remember, this is Spotify's first ever year of profitability. So for the 16 years before this, Spotify was losing money. They were losing money to pay employees and to pay for technology and, yeah, to pay their artists. And so I'm not trying to, like, make a sob story for Spotify, but I think all I would say is this is a business and the business has to make money. And this year was the first time they ever did that. But the other side to this, you know, one other way that they could have paid their artists more or they could pay their artists more would be to massively raise prices for the consumer.

32:43But actually, they haven't done that. And in the past 16 years, the price has gone from$9.99 to$11.99. So actually, on an inflation-adjusted basis, Spotify actually got cheaper. and then you compare that to things like Netflix, Netflix has more than doubled its prices in that same amount of time. So, you know, I'm sure someone's being greedy here. I'm sure, you know, I'm sure the record label has screwed some artist here or there. But the fact that Spotify is getting wrapped into this, like as the big bad company that's just sort of ruining the music industry, I just don't think that is true. And I think ultimately what this is is that, as you say, being a struggling artist is a bad business.

33:32It just doesn't really work. And in almost all industries, it only starts to make you real money when you hit the 1%. And finally, Chapel Roan has done that. And I don't think she's going to be giving her money away to the other 99%. I think she's going to be, you know, claiming her check from whichever record label she's signed to. So I have a very boomery outlook on this. Sounds like you do too, and it sounds like we're just in fervent agreement. We need a different term than boomery. Look, the digitization of markets results in a consolidation of win or take most environment. You digitize retail, you end up with one company with 50 % of all e-commerce.

34:14You digitize connections and socialization online, you end up with one company, Meta, that owns two-thirds of all social interactions online. You digitize information, one company ends up with 93 % share of search. You digitize mating and online dating, and 80 % to 90 % of all swipe rights happens amongst the 10 % of most attractive males, right? Men are less choosy, women are more choosy, they all want the same guy. And the same thing's happening on these channels. When you digitize a platform, Taylor Swift gets more listen, more listen time than all of classical music now. I think Taylor Swift is bigger than classical music or jazz, the entire genre.

34:59And it's because the algorithms, they consolidate and they say, okay, when everyone has access to everything, the very best, and Taylor Swift is the very best according to hopped up 14-year-olds on sugar, they consolidate the market. Now, I don't know if there's anything you can do. The only things you can really do about this on a systemic level is to make sure you have a really robust FDC and DOJ that makes sure there's a lot of competition such that you transfer money back from the monopolies to the artists, to the means of production, to the labor force. The other thing you can do is have minimum wage of 25 bucks an hour such that if these people have side hustles, they're at least making a good living.

35:37But let me just clue young people in. The world does not owe you your passion. And you don't have the right, the birthright to make music. You have the birthright, in my opinion, to have healthcare. I mean, let's start there. Healthcare, universal childcare. You don't have a birthright to be an independent music producer or independent musician and make money. The vanity industries will always have an overinvestment in human capital, and there'll be a small number and increasingly, unfortunately, small number of people. What I think you have to do is say, okay, if you're the backup drummer on a Kellogg's ad, they have to pay you at least 25 bucks an hour.

36:18Anyways, I think this is a social issue and we need to break up monopolies of which I'm not sure you could say Spotify is a monopoly. Everything's going hunger games. The winners leave it a remarkable life and everyone else dies a slow death. And if you want to change that, you have to make systemic change at education levels, antitrust levels, but believing that somehow shaming the record labels or Spotify into paying people nothing. You know why they pay these people nothing? Because they can. And they'll keep making music. And by the way, the only way it gets better is if it becomes such a shitty business that just people don't go into music and over time they have to pay them more.

36:58Right. Anyway, I think the market, I don't want to say the market's doing its job here, but the solutions are societal. They come out of D.C. They don't come out of like virtue signaling at the Grammys. We'll be right back with a look at Google's earnings. If you're enjoying the show so far, hit follow and leave us a review on Prof G Markets.

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39:02We're back with ProfG Markets. Google's fourth quarter earnings largely disappointed. Revenue grew 12%, which was the slowest pace since 2023. Growth in the cloud division also slowed from the previous quarter. Still, CEO Sundar Pichai highlighted the company's accelerated investments in AI data centers with plans to increase capital expenditures to$75 billion this year. That's up from$52.5 billion last year. The stock fell 7 % following that earnings report. I just want to quickly touch on why the stock fell so much. By the way, that was Google's fifth worst trading day in 10 years. It erased$200 billion in value.

39:45So you would think based on that, that Google had a dreadful quarter. Actually, on the whole, it was fine-ish. Revenue up 12%, roughly in line with expectations. Net income up 28%. It beat expectations. The problem, as we keep on seeing with big tech, was this one number, which was the cloud revenue, or you might call it the AI revenue. and that was$12 billion up 30%, but most importantly, lower than what Wall Street predicted. And I think in 2025, if you are a big tech company and you're not smashing expectations in AI specifically, your stock is immediately going to drop. It's just a non-starter.

40:32This is, by the way, exactly what happened to Microsoft the week before. They had decent earnings. AI revenue missed. $200 billion in market cap erased overnight. Right. Let's get your reactions to Google's earnings, I guess, particularly this obsession with the cloud revenue and missing on those estimates. Yeah, look, it's impossible to ever count them out. They have five separate businesses that do more than$30 billion in annual. This is a really robust business, meaning that while their kind of core businesses search, they have five companies that could be$100 billion plus market cap companies.

41:08They're very diversified and they coordinate, cooperate with each other, which is probably not a good thing. But between Google search, the display ad network, YouTube and subscriptions, that's YouTube premium, Google Play and then cloud. They just have some amazing businesses. The analysts here made the analogy. It's like having the revenue power of five Starbucks or five visas. The thing that I think was the scariest thing in here was one, analysts pointed to the fact that their cloud business was not growing as fast, which they saw as an indicator they haven't figured out a way to monetize AI from the company that had most of the IP around AI.

41:44I think the scarier number here is that for the first time their market share, the scariest number for Google shareholders, I should say, or for Alphabet shareholders, is that for the first time their market share of search dropped below 90%. And so what I'm hearing from some young people is they have totally abandoned Google search and are now just using AI, that they just get more. And I've found myself getting impatient with Google search and just going to chat to BT or Anthropic and typing in a question. And I find it just it doesn't give me 500 links to make me sort through them. It just says it tries to give me it tries to answer the question.

42:23right because google right now it's it's a query but it's an also an invitation to throw a bunch of shit at me that's not accurate that you think you can further monetize and take me to another place whereas chat gpt although it hallucinates and as does anthropic it attempts to actually answer the question in one shot and so you could see the stock if that if google search share drops below 85 percent in the next 12 months i think you get the stock really get hammered because what that means is that their ultimate toll booth, it's losing its power. And at the same time, they announced an increase in CapEx from 58 billion to 75, which the market didn't like.

43:00But I still think this stock and this company have so many amazing, at the same time, YouTube is growing. We've said this before that Netflix isn't the premier streamer. It really is YouTube if you're talking about video. But I think fears around AI, they haven't figured out an AI strategy to monetize and to search dipping below 90%, I think analysts are going to keep watching what's happening to search share. Because I could see an environment where if there's enough applications and these AI guys continue to raise this kind of capital, I think you could see in a year their search volume go from 90 % to 70%.

43:40I think I disagree on these points. And I think the market share, the search market share is an important point that has to be tracked. And we'll see what happens. But I can just say from my experience, I do use ChatGPT, but I would say it's 95 % Google and 5 % ChatGPT. And maybe 1 % other tools. So search is still an incredibly valuable product to me. And I think it's still an incredibly valuable product to many others. And I think that's why you're seeing their search revenue is continuing to grow quite steadily. On the cloud revenue point, I think it's important to note the reason Google missed on cloud this quarter was not because there wasn't enough demand.

44:30It was because they couldn't keep up with supply. They literally don't have enough compute, which you know you might say okay well that's another problem but then you realize well actually they're about to invest 75 billion dollars into data centers this year which solves exactly that problem so you know i see the stock dipping because everyone's getting all wigged out about this cloud revenue thing but to me i see it as kind of a good problem there's too much demand and now they're investing in meeting that demand so i see this i think we're being they're being over punished for those cloud numbers.

45:06I also think they're being over punished for DeepSeek, which we can get into. But, you know, 25 times earnings, lowest P multiple in all of tech. Meanwhile, you've got Apple at 37 with what, 2 % revenue growth. And you got Google over here growing at 12, 13, 14%. I think that it's perhaps being over punished here. I like your take better than mine. I would draw the comment. I think your take is better than mine. The thing you said there that stuck out was 25. Cheapest company in tech, the diversification of the revenue streams. I like how you couch it against valuation and that it's arguably the cheapest of the big tech players.

45:47And the reason I love Alphabet is because it's impossible not to find a business that's not only meeting expectations when you have five different businesses. But the reality is they have five different businesses. They're hugely diversified and their ability to coordinate and cooperate and share data to the users and the advertisers detriment is extraordinary there. They're kind of the only other company that can gather this much, hoover up this much data and then use it to increase prices or rents on people is Meta. And these guys have it. They also have the second largest operating system or actually the largest operating system, but the second most profitable in mobile with Android.

46:29So this is one of those stocks, I think, especially this price, you just own it. You better own it. You just own it. By the way, just on YouTube,$10.5 billion in ad revenue, up 14%. It is still the fastest growing unit in the Google ad business. It's still bigger than Netflix. And I pointed out it's the most popular TV streaming platform in the US. It is now also the most popular podcasting platform, too. more popular than Spotify, twice as popular as Apple podcasts. So this thing is just growing so rapidly and it's already a behemoth. It's already way bigger than Netflix. I'm so, I mean, we've been bullish on YouTube for a while.

47:16I just, I remain extremely bullish on YouTube. YouTube is now the largest podcast distribution platform. The more people are listening to podcasts now in terms of listenership on YouTube than they are on Apple or Spotify. Yeah. And then just one final point here we should touch on is this CapEx. I think there were a lot of questions following DeepSeek as to whether big tech would be pulling back from all of this AI CapEx spending. The answer we've gotten from this round of earnings is a resounding no. It's kind of crazy. You've got Google spending$75 billion, way up from last year. You've got Meta spending$65 billion, Microsoft,$85 billion.

47:55Amazon, more than$90 billion. This is more than$300 billion in CapEx, all coming down the pipeline for 2025. It's all going to go to AI, which presumably means it's all going to go to NVIDIA, pretty much. So I'm just looking at what's happened with DeepSeek here. I'm struck by the extent to which DeepSeek did not affect the AI CapEx story, at least in this round of earnings. Maybe that's going to change next quarter and they're going to switch things up. But so far, at least, the plan is basically completely unchanged. Let's take a look at the week ahead. We'll see the consumer and producer price indices for January.

48:37We'll also see earnings from McDonald's, Shopify, Reddit, and Airbnb. Scott, do you have any predictions? You're a big shareholder in two of those companies. Yeah, they've opened good, especially Reddit. Jesus. God, why didn't I buy more? That was so obvious. Come on. You did well. You haven't got well. Dude, I'm glass half empty. Haven't you figured that out? Anyway, so my prediction is the following, and I didn't have one, but you inspired one. I think Joe Rogan is about to be displaced. I think that the new number one podcasters will either be Mel Robbins because she's just so talented at connecting emotion with psychology.

49:14I think she's outstanding. But my outside shot here is I think that the new Joe Rogan is Steve Bartlett, Diary of a CEO. And it's for the reason you stated. And that is the first thing I did, literally, when I landed in London, a friend of mine said, there's this Brazilian party at 5 Hertford. And I went and it was like an amazing party with hot people, everyone. And I'm like, I love London. It's been downhill since then. And then the next day, the first thing I did, This is all true. As I went on this podcast to this young, handsome guy who was supposed to be, he was like the number 10 podcaster in the UK.

49:51But I thought, oh, I want to get to know people in the UK. And it was Diary of a CEO. And I think I've been on his show four times now. And the thing that just blew me away, and this is two and a half years ago, was he had probably six people in the room and five of them were focused on camera work. He had lighting, obviously amazing sound, but swivel cameras and cameras on sleds, getting different shots. And he forces everyone to come into the studio, as does Rich Roll, actually. And the result is just these podcasts that are just kind of visually arresting and do really well. And he also was testing, A-B testing like crazy buttons.

50:33And I don't know if you've seen his promos, but - They're incredible. He'll do something where I'll say, you know, the secret to happiness is, and then I'll like, boom, cut away and say, tune in. You know, he just spends a ton of time optimizing for YouTube before it was cool. And the result is he's now the number one podcaster in Europe. And I think he's number nine in America. I think he's going to be number one because he understands the medium of YouTube. He's weaponizing and leveraging what is now the biggest distribution platform in podcasting. That's YouTube. So my prediction is the new Joe Rogan or the person who's going to displace Joe Rogan as the biggest podcaster in the world is Stephen Bartlett from Diary of the CEO.

51:16But you're missing someone. Ed Elson? The two of us. We're investing in video. We don't have swivel cameras yet, but we're working on it. Yeah, I think we can get that. I don't want to be that big. I want to have enough money just to have a second jet and unlimited supply of ketamine, but I don't see us as the number one podcast. I think that, I think we want to be, we could be number one in business. We're talking about, by the way, in a meeting today, folks, we're talking about Ed going daily. We're talking about doing a daily Prop G markets to talk about the markets because the news keeps coming.

51:47But I think we could be number one in business. We're in the top 10 in business and occasionally pop into the top five. But that guy, David Ramsey, who keeps selling expensive mutual funds and saying that you can pick a mutual fund. We could beat the Ramsey network. Surely. Yeah. We got to do that. I love shitposting our competition. That's so classy, isn't it? That's so big of me. But anyways, let's go back to my prediction where I can actually lift up young people. Diary of a CEO, Stephen Barlett. He's the new Joe Rogan. This episode was produced by Claire Miller and engineered by Benjamin Spencer.

52:19Our associate producer is Alison Weiss. Mia Silverio is our research lead. Isabella Kinsel is our research associate. Drew Burrows is our technical director. And Catherine Dillon is our executive producer. Thank you for listening to Prof G Markets from the Vox Media Podcast Network. Join us on Thursday for our conversation with Alice Hahn, only on Prof G Markets.

52:50In kind reunion As the world turns And the dark flies In love, love, love

53:20The key to good leadership is to motivate people and give them a vested interest in the success of the company. I'm announcing today that we're doing really well. And if the company and individuals such as yourself continue to perform like this, because I want to create motivation, that there's a really good chance if you guys continue to show the same type of talent and commitment that I'll be able to get a second plane.

53:46So that's, but I want you guys. I always know when it's coming. I don't want to promise anything. You start looking down at the floor. I just know it's coming. It's not sullen. It's my age. You're getting I'm happy. But if you continue to perform like this, daddy might be able to get a golf stream. I want to motivate you. I want to keep you in the game. Super exciting. I promise to send you photos. Okay. That's seriously, Ed, something to look forward to. Now get out there, little soldier. Last lap alert. The Daily Tech Showcase roars into Richmond Raceway October 14th. And the biggest names in tech are in the driver's seat.

54:27Apple, AWS, Meta. It's the main event for education, government, healthcare, manufacturing, and enterprise leaders ready to hit the gas on innovation. Time's running out. Claim one of the last few spots at daily.com slash VA25 before the checkered flag waves.