Spotify turns cash machine as Ek exits CEO role, betting its future on AI-fuelled engagement

Strategy, succession and a changing of the guard

Spotify’s final earnings call with Daniel Ek as chief executive sounded less like a farewell tour than a baton pass at a company that believes it has finally cracked the economics of scale. Ek used his thirty‑second outing with investors to restate the long‑term playbook — solve for both consumers and creators, lead with technology, and ignore quarter‑to‑quarter noise — as he formally steps back into the role of executive chairman.

The transition, in practical terms, has already happened. Co‑CEOs Alex Norström and Gustav Söderström have been quietly running what they call a single “eTEAM” operating structure for some time, pulling the entire VP and SVP layer into a three‑hour weekly session to synchronise priorities and “land planes” across the organisation. The cultural emphasis is shifting towards meticulous planning in an age where, as Söderström put it, “productivity is on tap” via AI and the bottleneck becomes knowing what to build rather than how to build it.

For investors, the handover comes at a moment when Spotify looks less like a speculative growth story and more like a cash‑generating platform with optionality. Over the past three years, management has compounded revenue at 17% FX‑neutral, grown gross profit at 20%, and expanded operating margin by 18 percentage points, ending 2025 with roughly €3bn in free cash flow and a 17% cash margin.

A quarter that closes the profitability debate

CFO Christian Luiga’s numbers sketched a business now visibly on the right side of operating leverage. Fourth‑quarter revenue rose 13% year on year in constant currency to $4.5bn, an acceleration versus the prior period. Premium subscription revenue climbed 14%, powered primarily by subscriber growth and underpinned by what management repeatedly described as “consistently low churn”, even amid successive price increases.

Advertising — long the laggard in Spotify’s mix — is beginning to look less like an experiment and more like a second engine. Ad revenue grew 4% year on year in Q4, or around 7% once the drag from ongoing “podcast optimization” is stripped out. Norström described the decision 18 months ago to rebuild the ad stack — abandoning rented infrastructure in favour of a high‑performance, self‑serve, biddable platform — as “deep surgery” that temporarily hurt growth but has delivered “record levels of advertisers” and denser auctions.

Gross margin reached 33.1%, up more than 80 basis points year on year, helped by content‑cost favourability. Operating income of €701m beat guidance by €81m, with about €67m of that driven by lower social charges tied to share‑price movements and the rest from margin outperformance. Free cash flow came in at $834m for the quarter, and the balance sheet closed with $9.5bn in cash and short‑term investments after $433m in share repurchases.

For the full year, revenue grew 13%, gross profit 20%, and operating income by more than 50%, yielding a 13% operating margin. Free cash flow improved by roughly $600m to a record DKK 2.9bn, even as Spotify settled into a pattern of returning capital: $510m in buybacks in 2025 and a commitment to retire a SEK 1.5bn convertible note in cash this March. Luiga reiterated that capital allocation still starts with reinvestment in growth — the “flywheel” that Norström references almost reflexively — but buybacks remain a tool to offset dilution and opportunistically reward shareholders.

Growth at global scale

Beneath the financials, the scale of Spotify’s audience is now approaching macro‑indicator territory. Q4 delivered the highest quarter ever for net additions in monthly active users, pushing the service to more than three‑quarters of a billion people globally. Norström noted that Spotify now counts about 3.5% of the world’s population as paying subscribers and openly floated a future in which penetration could reach 10–15%.

If the flywheel begins with MAUs, Wrapped is the seasonal gust of wind that now seems to matter not only for consumer excitement but for the income statement. The 2025 edition was “record‑breaking,” with more than 300m users engaging — up 20% on the prior year — and over 630m social shares, a 42% increase. Day one of Wrapped marked the single biggest subscriber‑intake day in Spotify’s history, underscoring the extent to which the product has become both a cultural ritual and an acquisition lever.

This consumer scale is increasingly mirrored on the supply side. In 2025 alone, Spotify paid out more than $11bn to music rights holders, once again claiming the title of the largest single source of recorded‑music payments globally and bringing cumulative payouts to nearly $70bn since launch. In podcasting, video shows have proliferated to more than 530,000 on the platform, and video consumption is up over 90% since the launch of the Spotify Partner Program. The Golden Globes’ inaugural “Best Podcast” award — won by Spotify and The Ringer’s “Good Hang with Amy Poehler” — offered a cultural validation that the medium, and Spotify’s place within it, has fully entered the mainstream.

Audiobooks, meanwhile, remain early but promising. Spotify has tripled its audiobook catalogue in two years to more than half a million titles and expanded into 14 markets, recently adding the Nordics and Monaco. Norström said leading publishers credit the platform with bringing in new listeners and driving double‑digit growth in audiobook consumption. The company’s decision to back physical book sales, via a partnership with Bookshop, reflects a broader thesis: for consumers, formats are interchangeable expressions of the same narrative, and a credible book strategy must straddle audio, digital and print.

AI as both product and process

If the balance sheet tells one story, AI tells another: how Spotify intends to defend and deepen its moat in a landscape roiled by generative tools and new entrants promising “AI music”. Söderström’s prepared remarks and extensive sidebars framed the current moment as merely the latest in a series of macro shifts — from broadband to smartphones, personalization and the connected home — that have historically served as tailwinds rather than threats to Spotify’s model.

Two themes stand out. First, management is adamant that, in consumer media, the dominant business models — subscriptions and advertising — are not up for reinvention. In that sense, the company argues, Spotify already has the right economic chassis; its task is to harness AI to increase engagement, retention and monetisation within that familiar framework.

Second, Spotify believes it is quietly building a dataset that rivals cannot easily replicate: the mapping between natural language and individual taste in music, podcasts and books. The company has long used machine learning for song‑to‑song recommendations; now, with tools such as the AI DJ and Prompted Playlists, it is capturing how hundreds of millions of users describe moods, activities and contexts — “workout”, “study”, “late‑night”, “for my kids” — and what those words actually mean in listening behaviour.

Taste, Söderström pointed out, “is not a fact, it is an opinion.” While large language models can commoditise factual corpora such as Wikipedia, there is no canonical answer to what constitutes “workout music” or “sad songs” across cultures and individuals. Training on those subjective mappings at global scale, over years, may represent a durable source of differentiation.

For users, the AI DJ — built on voice technology from the 2022 Sonantic acquisition — is the most visible expression of this strategy. About 90m subscribers have used it, clocking more than 4bn hours of listening. Prompted Playlists, introduced more recently, allow power users to “literally write your own algorithm,” combining their full listening history with current cultural signals scraped from the wider internet.

Under the hood, AI is also rewiring Spotify’s development process. The internal system dubbed “Honk” allows engineers to instruct Anthropic’s Claude via Slack to fix a bug or add a feature to the iOS app, receive a QR code to test a new build on their phone, and merge the change to production — all “before they even arrived at the office”. Söderström said top engineers now largely supervise AI‑generated code rather than writing it themselves, and he expects software output to grow until the constraint becomes users’ tolerance for change.

Norström, for his part, was keen to tie these technological flourishes back to the core economics of the platform. AI‑driven personalization, he argued, is the single most powerful lever for increasing engagement and therefore retention, which in turn drives lifetime value and ultimately enterprise value. The chain, in his telling, runs cleanly: better models, deeper personalization, more time spent, higher willingness to pay, and an expanding margin stack.

Navigating the AI music debate

The biggest question from investors and the industry is whether generative‑AI music platforms — from Udio to Suno — will disintermediate Spotify by both creating and distributing content. Management’s answer is twofold.

First, they distinguish between two categories of AI‑related music: net new creations and derivatives of existing works. On the former, Söderström said bluntly that “that music, if it breaks, breaks on Spotify.” In other words, regardless of where tracks are generated, the “cultural moment” still happens on the dominant listening platform, where the largest audience and royalty pool sit. A growing catalogue, in this view, is structurally positive because it increases the need for personalization and raises the odds of fandom formation.

On derivatives — covers, remixes and more exotic AI‑spun re‑imaginings — Spotify sees a largely untapped monetisation opportunity for artists and rights holders. Other media sectors have long treated back catalogues as IP mines; music, by contrast, has lacked the rights frameworks and tooling to allow fans to interact with existing songs in sanctioned, revenue‑sharing ways. Söderström said Spotify has “the technology and capabilities ready” to enable such models and is already working with industry partners who are “hungry to seize this opportunity”, but will only move “with artist support, not around them.”

The company is careful, however, to avoid becoming arbiter of creative legitimacy. On the contentious question of “how much AI” constitutes AI‑generated music, Söderström argued that Spotify should not police which tools artists use — whether electric guitars, synthesisers, digital audio workstations or AI models. Instead, the focus is on transparency. New metadata fields will allow creators and labels to specify how songs were made, surfaced in features such as “About This Song” so that listeners can decide how much they care.

Spam remains the unglamorous underside of this debate. AI makes it cheaper and faster to flood services with low‑quality, repetitive content, but Söderström insisted this is a scaled‑up version of a problem Spotify has battled for years. The company has been “investing more than anyone else in the industry” in anti‑abuse systems, he said, and feels “we are leading” in that arms race.

Outlook: pricing power, margin progression and “raising ambition”

Looking into 2026, Spotify’s guidance suggests a business that expects both top‑line growth and continued margin expansion despite currency headwinds and planned reinvestment.

For the first quarter, management forecasts 759m MAUs — up 8m from Q4 — and 293m subscribers, implying 3m net adds in what is seasonally the smallest period. Total Q1 revenue is expected to be flat sequentially at $4.5bn but up approximately 15% year on year, with ARPU growth in the 5–6% range as price increases in markets such as the US flow through. FX will be a drag, with an incremental €35m headwind versus prior‑quarter rates.

Gross margin is guided to 32.8% in Q1, slightly below Q4’s realised level but still firmly in the low‑30s corridor, and operating income is projected at $660m. Spotify does not offer full‑year margin targets, but Luiga reiterated that both gross and operating margins should improve again in 2026. Price rises are expected to outpace net content‑cost growth, the rebuilt ads business should “pick up” as the stack matures, and the Marketplace tools that help artists market on‑platform are now meaningfully accretive to margins. Expansion of newer verticals — notably audiobooks — within existing countries and into new markets offers further support.

On pricing, Norström described the latest $1 increase in the US as proceeding with “really no surprises at all”; churn is low and in line with previous rounds. The company continues to adjust prices on a market‑by‑market basis, emphasising a long‑term optimisation of platform value rather than a global, one‑size‑fits‑all approach. The mantra is to “always create more value than price” and only move “from a position of strength”.

Internally, 2025 was cast as the “year of accelerated execution”. The coming year, Norström said, will be framed as the “year of raising ambition” — a signal that, with the basics of scale, profitability and cash generation now demonstrably in hand, the new leadership duo intends to push harder into products and experiences “that never existed before” rather than simply copying incumbents. Investors will hear more about that agenda at the company’s Investor Day in May.

For a market that has marked the stock down by roughly a third in recent months on AI‑related fears, Spotify’s message was consistent, almost to the point of defiance: the macro wind is shifting, but those who learnt to surf the last three waves — broadband, smartphones, personalization — intend to ride this one too.