Earlier this month, Spotify signed a deal with Kim Kardashian to co-produce and co-host a criminal justice podcast that will air exclusively on the platform. The deal with the reality TV megastar is only the most recent installment of Spotify’s investments in podcasts. In 2019, it acquired podcast companies Gimlet Media and Anchor for just under $340 million combined. In February 2020, it purchased The Ringer, Bill Simmons’ sports and pop culture publication and podcast network, for nearly $200 million. Last month, Spotify signed an exclusive agreement with podcast star Joe Rogan worth reportedly more than $100 million. Rogan’s show, The Joe Rogan Experience, consistently tops the podcast audience charts globally, with nearly 200 million downloads a month.
So, why is Spotify investing so heavily in podcasts? The largest reason is probably that its core business — music streaming — is an inherently low-margin business. This is due mainly to three factors.
1. Spotify doesn’t own the songs we listen to
Whenever we hit “play” on a song on Spotify, the company has to pay the rights of each song back to music labels, like Universal or Warner Music Group. That means, on average, Spotify spends spends 70% of its music revenues on royalties. Unless Spotify branches out from streaming music, this is a dangerously tight margin to manage long term.
2. There is intense competition from tech giants
As music streaming services have become the most popular way to listen to music, it would make sense for Spotify to slowly and marginally increase its price, similar to what Netflix did with its video streaming service.
The main issue with raising prices is that Spotify’s main competitors — namely Apple Music and Amazon Music — are funded by behemoth companies that can afford to lose money on streaming music. It’s not a core service for Apple or Amazon, but rather a sweetener they offer their users to increase customer loyalty. Apple and Amazon have the money to go cheaper for longer than Spotify if Spotify doesn’t diversify from music.
3. It’s easier than ever to find your favorite music anywhere
This threat of competition is especially relevant to a company like Spotify, because the majority of its songs are available for streaming or purchase on other platforms. Aside from a few exceptions — like Tidal’s HiFi subscription streaming plan — music will sound the same on Spotify as it will on other music platforms. That decreases the switching costs (or, rather, the pain) for customers hopping from one platform to another and makes it harder to build a devoted longtime user base.
The power of exclusivity
What makes podcasts a particularly inviting medium for Spotify to invest in is that it can sign exclusivity deals with top creators. Unlike music, where you largely can listen to everything anywhere, Spotify is ensuring with its Joe Rogan and Kim Kardashian deals and its Gimlet and Anchor acquisitions that the content will be available only on Spotify. Meaning that if you are among the many who regularly listen to The Joe Rogan Experience or The Ringer, you are virtually forced to download the app and potentially make Spotify your go-to audio service. Rather than juggling multiple audio apps, Spotify is hoping new adopters who come for the podcasts will stay for its music streaming features as well.
This is something that, at least to date, cannot be replicated on the music side of the business and mimics Netflix’s shift in recent years toward producing original content. To decrease the company’s dependence on third-party content, Netflix began building a library of original shows and films that you can’t find anywhere else, making it more enticing to buy subscriptions or renew subscriptions than if the platform offered only curated content from existing movie and TV studios.
A podcast advertising machine
Spotify’s pitch to woo established and rising podcast stars is simple: It already has a very successful advertising studio and tech-supported ad operations, and the company can leverage its infrastructure and advertising staff along with its large user base to monetize content better than if creators were to go out on their own.
The first evidence of Spotify’s added value as a podcast advertiser is already visible. Many podcasts offer promo codes on air, but it isn’t convenient for listeners to pause a podcast just to write these offers down with the intent to use them later. Spotify is trying to fix that by creating a link to the sponsor’s website within the app, making the promo redeemable at any time in a much more user-friendly way.
As was the case with internet advertising, the emergence of an aggregator (Google) enabled the growth of ad revenues like never before. Spotify aims to replicate the same effect in podcasts.
Is Spotify’s investment in podcasts paying off so far?
Although it’s too early to make a judgment on Spotify’s return on investment, one important group of people agree that this is the right move for the company: its shareholders. The company’s share price popped more than 10% when the deals with Kim Kardashian and Joe Rogan were announced, and the stock price is up more than 250% since April.
Operationally, Spotify also seems to be moving in a positive direction — podcast consumption of Spotify grew 200% in Q4 2019 and more than 19% of its users listened to non-music content on the platform in the first quarter of the year. The latter happened despite an unprecedented lockdown that changed commuting habits globally.
Skeptics could argue that Spotify is overpaying for its bet in podcasts, as podcasting remains a relatively small industry compared to music; podcast ad sales in the United States will likely hit the $1 billion mark for the first time in 2021. The first signs are certainly encouraging, but Spotify still has a mountain to climb to displace Apple as the world’s #1 podcast platform and establish itself as a supplier of podcasts that helps grow the size of the overall market.
Original article: Manuel Medeiros