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Spotify advertising faces challenge as Q2 revenue drops 1% year-over-year

Despite reaching 276 million Premium subscribers, streaming giant's ad business struggled with execution challenges amid market transition.

Luis Rijo

• 6 min read
Spotify ad revenue growth trends Q3'22-Q2'25 showing declining share despite absolute gains
Spotify ad revenue growth trends Q3'22-Q2'25 showing declining share despite absolute gains

Spotify reported mixed results for its second quarter 2025 earnings on July 29, with strong subscriber growth overshadowed by declining advertising revenues and execution challenges in its ad business transformation. The music streaming platform's ad-supported revenue fell 1% year-over-year to €453 million, down from €456 million in Q2 2024, highlighting persistent struggles in monetizing its free-tier user base.

According to CEO Daniel Ek during the earnings call, "It's really an execution challenge, not a problem with the strategy." He acknowledged being "unhappy with where we are today" regarding the advertising business performance but expressed confidence in the company's long-term advertising ambitions. The company reported seeing "promising signs" in its programmatic business, which executives expect to position Spotify favorably for 2026.

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The earnings announcement came amid a significant leadership change in Spotify's advertising division. Global Head of Advertising Lee Brown departed the company on July 28 to join DoorDash as Chief Revenue Officer, with executives indicating the move was part of a strategic shift to accelerate the advertising business transformation.

Ad-supported revenue represented approximately 11% of Spotify's total quarterly revenue of €4.2 billion, down from 12% in the same period last year. The decline occurred despite the platform's ad-supported monthly active users growing 10% year-over-year to 433 million, demonstrating challenges in converting audience growth into proportional revenue increases.

Co-President and Chief Business Officer Alex Norström emphasized during the earnings call that the company sees "a ton of potential" in its advertising business, particularly in programmatic sales channels. He noted that automated sales channels were the largest contributors to overall advertising growth, indicating a shift toward programmatic advertising infrastructure.

The advertising decline contrasted sharply with Spotify's Premium revenue performance, which grew 12% year-over-year to €3.74 billion. The platform added 8 million net Premium subscribers during the quarter, reaching 276 million total subscribers and exceeding company guidance by 3 million.

Spotify's advertising challenges reflect broader industry transformation as the company transitions from traditional direct sales to programmatic and automated buying systems. According to the earnings documents, when excluding near-term impacts from strategic initiatives like licensed podcast optimization and the Spotify Partner Program rollout, the company achieved low double-digit constant currency advertising growth.

The streaming platform has invested heavily in advertising technology infrastructure throughout 2025. In April, Spotify launched its Spotify Ad Exchange (SAX), enabling programmatic buying through real-time auctions. The company expanded SAX partnerships to include major demand-side platforms such as Google's Display & Video 360 and Magnite, providing advertisers with enhanced targeting and measurement capabilities.

Industry data suggests Spotify operates within a challenging advertising environment. PPC Land report indicates that despite digital audio commanding 20% of all time spent with digital media, audio investment represents only 2.9% of total digital advertising revenue as of April 2025. This measurement gap creates ongoing challenges for audio advertising platforms seeking proportional investment levels.

The company's ad-supported gross margin showed improvement, reaching 18.3% in Q2, up 495 basis points year-over-year. This improvement was driven by enhanced contribution from podcasts and music, suggesting increasing efficiency in monetizing free-tier users despite revenue headwinds.

Spotify's programmatic advertising adoption has accelerated significantly since launching SAX. The company reported a 64% increase in programmatic adoption following the April announcement, demonstrating advertiser interest in automated buying capabilities. The programmatic push addresses technical challenges that have historically limited podcast advertising scale, providing real-time bidding capabilities and standardized measurement protocols.

The advertising business transformation occurs amid significant product developments. Spotify expanded its AI-powered DJ feature with voice request capabilities across 60+ markets during Q2, generating a 45% increase in DJ streams globally. The platform also launched Audiobooks+ subscriptions in 13 markets, providing additional monetization opportunities through add-on services.

Video podcast consumption has emerged as a growth driver for advertising opportunities. PPC Land reported data shows video podcast consumption increased 20% with 300% growth in creator payouts through the Spotify Partner Program. The program combines audience-driven payouts from Premium video engagement with advertising revenue from free users.

For the marketing community, Spotify's Q2 results highlight the ongoing evolution of audio advertising technology and measurement capabilities. The platform's programmatic infrastructure provides advertisers with enhanced targeting precision and optimization tools, potentially addressing historical challenges in quantifying audio advertising effectiveness.

Looking ahead to Q3 2025, Spotify forecasted total revenue of €4.2 billion, incorporating a 490 basis point headwind due to foreign exchange rate movements. The company expects to add 14 million net Monthly Active Users and 5 million net Premium subscribers during the third quarter.

The advertising business challenges underscore broader industry trends toward programmatic automation and measurement standardization. According to PPC Land report, 72% of marketers plan to increase programmatic advertising investment in 2025, with audio and podcast advertising growing from 7% to 9% of total programmatic spending.

Timeline

Key Terms Explained

Programmatic Advertising: Automated buying and selling of advertising inventory through technology platforms using real-time bidding mechanisms. Spotify's adoption of programmatic capabilities through SAX represents a fundamental shift from traditional direct sales relationships toward algorithmic purchasing systems that enable greater targeting precision and campaign optimization.

Ad-Supported Revenue: Income generated from advertising shown to users of Spotify's free tier service. This revenue stream depends on user engagement levels, advertiser demand, and the platform's ability to effectively monetize attention without disrupting the listening experience, making it inherently more volatile than subscription revenues.

Spotify Ad Exchange (SAX): The company's programmatic advertising platform launched in April 2025 that enables real-time bidding for advertising inventory. SAX provides advertisers with enhanced targeting capabilities and measurement tools while allowing Spotify to automate much of its advertising sales process and compete more effectively with other digital advertising platforms.

Audio Advertising: Marketing messages delivered through audio content, including music streaming, podcasts, and digital radio. This advertising format faces unique measurement challenges compared to visual media, contributing to the industry-wide investment gap where audio receives only 2.9% of digital advertising spend despite commanding 20% of media consumption time.

Premium Subscribers: Paying customers who access Spotify's ad-free service with enhanced features. These subscribers represent Spotify's most valuable and predictable revenue source, growing 12% year-over-year to 276 million users and demonstrating the platform's ability to convert free users into paying customers over time.

Podcast Advertising: Promotional content integrated into podcast programming, either through host-read endorsements or programmatically inserted advertisements. Spotify's podcast advertising capabilities have evolved to include automated buying systems and AI-powered voice cloning technology, addressing scalability challenges that previously limited advertiser adoption.

Automated Sales Channels: Technology-driven advertising sales systems that reduce manual intervention in campaign setup, optimization, and reporting. These channels were Spotify's largest contributors to advertising growth, indicating successful transition toward self-serve and programmatic buying models that can scale more efficiently than traditional direct sales approaches.

Monthly Active Users (MAUs): The total number of unique users who engage with Spotify's platform within a 30-day period, including both free and premium subscribers. This metric serves as a key indicator of Spotify's reach and potential advertising audience, with ad-supported MAUs growing 10% year-over-year to 433 million users.

Gross Margin: The percentage of revenue remaining after subtracting direct costs of providing the service, including content licensing fees and technology infrastructure expenses. Spotify's ad-supported gross margin improved to 18.3%, demonstrating increasing efficiency in monetizing free-tier users despite revenue challenges.

Video Podcasts: Podcast content that includes visual elements alongside traditional audio, creating new advertising opportunities through display formats and enhanced engagement metrics. Video podcast consumption increased 20% during the quarter, with creator payouts growing 300% through Spotify's Partner Program, indicating strong momentum in this emerging content category.

5 Ws Summary:

Who: Spotify Technology S.A., led by CEO Daniel Ek and Co-President Alex Norström, reported Q2 2025 earnings showing advertising business challenges

What: Ad-supported revenue declined 1% year-over-year to €453 million despite 10% growth in ad-supported users to 433 million, highlighting execution challenges in the company's advertising business transformation

When: Second quarter 2025 results announced July 29, 2025, covering the period from April 1 to June 30, 2025

Where: Global advertising performance across Spotify's 184 markets, with particular focus on programmatic advertising infrastructure launched in key markets including United States, Canada, Europe, Australia, India, and Brazil

Why: The advertising revenue decline reflects ongoing transformation from traditional direct sales to programmatic and automated buying systems, compounded by broader industry challenges in audio advertising measurement and investment allocation