Spotify's higher spending on marketing, AI features to hit profit

By Jaspreet Singh

Aug 4 (Reuters) - Spotify said higher marketing and development costs would hurt its profit in the current quarter as the Swedish music-streaming giant bets heavily on features powered by AI to attract users.

The company also projected third-quarter monthly active users below Wall Street estimates on Tuesday, blaming the weakness on product changes in emerging markets such as India and Indonesia that may help Spotify in raising prices.

"So examples would be sign-up changes, deprecation of old lower-end Android devices, carefully introducing some friction in the ad load increase with respect to increasing ad load and some limitations on our free tier as well," Co-CEO Alex Norström told Reuters.

Price hikes have become central in recent years to Spotify's push to prove it can convert its huge user base into meaningful profit. The company has in recent months also leaned on AI to fend off startups built around the technology, such as Suno.

On Tuesday, it unveiled a deal with independent-label group Merlin for its coming paid tool for fan-made covers and remixes that would let artists on Merlin-affiliated labels opt in.

Spotify already signed a deal with Universal Music earlier this year and is looking to sign up more artists.

The company is also aiming to bolster its appeal through new AI features and offerings such as "Reserved," which lets eligible subscribers buy up to two tickets to their favorite artist's concert before they are offered to the public for sale.

"We continue to expect marketing and AI-related investments to drive approximately €200 million in incremental operating expense for the full year," CFO Christian Luiga said on a conference call with analysts, adding he expects a moderation in expense growth in the fourth quarter.

Spotify shares were trading 2% higher after falling as much as 5% earlier in the session.

EXPENSES TO WEIGH ON PROFIT

Spotify expects operating income of €670 million ($770.97 million) in the third quarter, below estimates of €677.8 million.

Its monthly active users forecast of 788 million for the third quarter was below Visible Alpha estimates of 793.6 million, while its outlook for a 5 million increase in premium subscribers to 305 million was in line with estimates.

In the second quarter, it added 16 million monthly active users.

Spotify said 25% of its users overall are already using its AI features, including its conversational assistant for audio discovery "Talk to Spotify" and AI app "Studio by Spotify Labs".

Its operating income totaled €655 million in the second quarter, beating estimates of €639.2 million. Revenue rose 14% to €4.78 billion, slightly below expectations.

Its revenue forecast of €5 billion for the third quarter was above estimates of €4.93 billion.

($1 = 0.8690 euros)

(Reporting by Jaspreet Singh in Bengaluru; Editing by Leroy Leo)