Why Spotify's podcast bet is paying off
Spotify revolutionized the modern day music industry; that's earned it some benefit of the doubt.
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Why Spotify's podcast bet is paying off
Just as you can’t talk about the state of the TV industry without discussing Netflix, you can’t assess the podcast industry without name checking Spotify. Even stories that are ostensibly not about Spotify – like SiriusXM buying Sitcher or Amazon Music acquiring the podcast network Wondery – still mention the Swedish streaming platform in the headline.
After spending over $1 billion on podcasting talent and tech, Spotify has quickly become the industry’s lodestar, in that it drives many of the trends and innovations within the space. That mantle was previously held by Apple, which maintained a mostly hands-off dominance of the medium for its first 15 years, but in 2021 Spotify surpassed the Cupertino giant as the top podcast-listening destination in the world.
But despite that dominance, it’s still considered an open question as to whether Spotify has wasted a lot of precious time and money investing so much in podcasting. Bloomberg recently published a long piece titled “Spotify’s Billion-Dollar Bet on Podcasting Has Yet to Pay Off.” It boils down to three core arguments:
Many of the big celebrity podcast deals it announced to great fanfare have yet to result in much content.
Its $100 million deal with Joe Rogan produced multiple PR headaches.
Direct podcast revenue still makes up a tiny percentage of its overall revenue.
I do think the first item points to a genuine weakness in Spotify’s approach to talent management. Early on, the company signed some huge, multi-million dollar deals with celebrities like the Obamas, Meghan Markle and Prince Harry, and Kim Kardashian without any regard as to whether these people excelled at podcasting. In several cases, those deals didn’t bear much fruit, and I would argue that the money would have been better spent bringing more already-existing podcasts exclusively into Spotify’s fold.
As for the Joe Rogan deal, while I do agree that his spread of Covid misinformation and tendency to host controversial guests has produced bad PR for Spotify, I still think his presence has been a net benefit for the company. Rogan hosts the most popular podcast in the English-speaking world, and he legitimized Spotify’s entry into the podcast industry in the same way that Howard Stern established SiriusXM as a serious player in the radio industry. There are just so many downstream effects that came out of that Rogan deal beyond the direct revenue that his show drives. We’ll get more into those effects in a moment.
As for the third point? It is true that podcasting “accounted for only 7% of [Spotify’s] total listening hours in the first quarter of 2022 and 2% of revenue last year,” but I don’t think that stat alone tells you much about the ROI of Spotify’s podcast bets, either in the short or long term. Not only does it ignore the indirect benefits of the podcast strategy, but it also sets unrealistic expectations for how quickly a platform can grow revenue in a still-nascent industry.
Let’s take a deeper look at why I think Bloomberg is underestimating Spotify’s podcast success:
A music streaming differentiator
Podcasting shouldn’t only be valued for its direct revenue contribution, but also how it strengthens Spotify’s music business.
The thing about music streaming is it’s a tough industry to compete in. Every major music streaming platform — whether it’s Amazon Music, Apple Music, Pandora, or YouTube — has access to basically the same exact library. This not only makes it extremely difficult for Spotify to differentiate its offerings, but it also gives the music labels a lot of leverage. After all, if a single major music label pulled its entire library off of Spotify, that would give Spotify’s competitors all a key advantage. Because of that leverage, Spotify pays out 70 cents of every dollar it earns from subscription revenue to the labels.
Podcasting offers up that differentiation that Spotify needs. If a user already fires up the app to listen to Call Your Daddy or the Joe Rogan Experience, then they’re more likely to use Spotify for their music streaming as well. This not only creates more user lock-in for the app, but it makes Spotify less vulnerable if any one label removes its music library during future negotiations.
Revenue is a lagging indicator
As recently as 2021, the entire digital audio advertising market clocked in at about $3 billion, making up only 2% of digital advertising. And the podcast advertising market was much smaller — less than $1 billion.
It’s just very clear that digital audio advertising isn’t as mature as other mediums, and judging Spotify based on its current podcast advertising revenue would be like judging YouTube — which today generates over $30 billion from advertising — based on its 2010 revenue numbers. There’s so much more room for growth in the audio advertising market, and Spotify is well positioned to capitalize on that growth (for reasons I’ll get into in the next section).
According to the IAB, digital audio advertising grew by 57.9% in just the last year alone, and the Bloomberg article acknowledges that advertising is a fast-growing business for Spotify. “The company’s consistent user growth has attracted marketers, with total ad sales topping €1.2 billion (about $1.3 billion) last year, more than double what they were in 2018.”
It’s all about the podcast tech
Most of the Bloomberg article focuses on Spotify’s star-studded exclusive shows, but they’re really just the tip of a very large iceberg.
In the long run, Spotify’s acquisitions of Megaphone and Anchor will be considered far more consequential than any of its deals with celebrities. Both platforms host podcasts and insert dynamic advertising for participating shows, and Anchor alone is the fastest growing podcast host in the world.
What does that mean? Most new podcasts today are being launched on Anchor, and Anchor defaults to Spotify-only distribution. Spotify is amassing a gigantic podcast library that’s exclusive to its platform.
Up until recently, Spotify has mostly focused its advertising efforts on its exclusive shows, but it’s slowly rolling out its advertising tech to the entire Anchor-hosting ecosystem. Just as YouTube became a video advertising behemoth by monetizing thousands of creator channels — creating a feedback loop that lured more and more talent onto its platform — Spotify is poised to do the same in the podcast space.
Spotify has already revolutionized the modern day music industry; the streaming model it pioneered reversed the post-Napster decline in sales and led to the fastest revenue gains since the 1990s.
That doesn’t mean it’ll succeed in podcasting, but it earns it the benefit of the doubt, especially since it so quickly usurped Apple as the undisputed podcast king. With $27.9 billion in global radio advertising up for grabs, it has the head start it needs to capture a significant amount of that money as it migrates online. I certainly wouldn’t bet against it.
What do you think?
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In 2012, two French graduate students grew frustrated with the lack of online news in the biotech industry, so they launched a blog to cover it. Little did they know that the blog would evolve into the leading biotech publisher in all of Europe.
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Web3’s house of cards is collapsing as more and more journalists acknowledge that all these tools have very little actual utility. [Bloomberg] Of all the criticisms of Web3, I think this one paragraph most effectively eviscerates its core argument:
If you’re a VC, financialization might seem natural and even fun. But most normal people don’t find financialization fun in the least. They view maintaining their 401(k) as a burden, they mostly ignore the stock market, and they don’t open their bills for a few days when they come in the mail. The idea that they’d want to get into a complicated financial transaction, with a nuanced risk/reward calculus, to play a game or listen to a podcast, probably sounds fun to a few galaxy-brained VCs—and pretty much no one else.
Patreon has at least seven podcasts generating over $100,000 per month on the platform. [Graphtreon]
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"It’s baffling how befuddled these men look when asked to articulate concrete, compelling use cases for [Web3]." [The Atlantic]
The media startup developed a membership model that involves asking the audience what news should be covered.
Did you know I have a podcast?
I’m actually quite shocked by how often readers of this newsletter tell me they had no idea that I have a podcast. After all, I convert all of my episodes into longform case studies and make sure to plug the podcast within those.
But at the same time, I very rarely promote the podcast directly within the newsletter itself, and I need to rectify that. It’s called The Business of Content, and it features longform interviews I’ve conducted with successful media operators. Here are the titles of a few recent episodes to give you a taste of the subject matter:
He transformed a B2B sports magazine into a thriving media company
Why two star WSJ reporters left to launch their own media company
How Payload became the leading space industry newsletter
How Pop Up Magazine survived the pandemic
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