Loading… Spotify’s Podcast Takeover
I began to grow increasingly dissatisfied with Apple’s eponymous Podcasts application around 2017. The Cupertino consumer electronics company had grossly neglected its podcast player: the IOS application routinely crashed every time I opened it and struggled to refresh my podcasts accordingly. I'd sometimes have to wait up to five minutes to start listening. Let's not even get into iTunes, which at that point was more a bloated living anachronism than the revolutionary digital distribution platform it had been in the early-to-mid 2000s. Moreover, Podcasts lacked some essential quality of life features I had come to expect from a 2017 consumer application. For example, the app had neither a modern recommendation system nor a robust search engine to encourage discovery.
Human beings are creatures of habit. I didn't want to change podcast player. I had been using Podcasts for 13 years; it contained my entire library, and I didn't want to start over. I went on various forums to understand whether I was the only person experiencing those issues. I even filled out an Apple consumer survey in which I expressed my complaints about Podcasts. Eventually, I decided to give Spotify's podcast player a try in summer 2019. I already had their app on my phone even though I rarely used it since I was an Apple Music subscriber.
I was blown away by the experience. I finally had a working podcast player that instantly loaded all of my shows and never crashed. A couple of months later, I made a more drastic decision: I centralized all of my audio products in one app. I canceled my Apple Music subscription and bought-in entirely into the Spotify audio-ecosystem.
Spotify's Podcasting End Game
My experience with Podcasts might seem unique, but it perfectly exemplifies one of the reasons why Spotify is doubling down its investment in podcasting. From Spotify's Q4 2019, earnings report, the company cautiously proclaimed:
As we mentioned last quarter, we have a growing body of evidence showing that there are significant benefits to engagement, retention, and conversion of users from Ad-Supported to Premium stemming from consumption of Podcast content. We have seen benefits to retention on the order of several hundred basis points, which is a material change on a retention curve, for users that engage with spoken word content relative to those that haven’t, and early data indicates that these users are more likely to convert to Premium over time.
The superiority of their podcast experience led me to become a Premium member. Since I don't intend ever to cancel my music subscription, my decision to switch from Apple Music to Spotify premium is potentially worth thousands of dollars (discounted $120 yearly recurring revenue). If Spotify continues to invest in a superior platform for both music and podcasts, it will become much more difficult for me to leave their ecosystem for the same reasons mentioned above (library connected to their app).
To remain relevant in the next decade, Spotify will need to continue to grow its pool of premium subscribers and diversify its consumer acquisition channels. It's part of the reason why the Swedish firm has been on a Podcasting shopping spree since December 2018. They snatched up content producers (Gimlet Media, Parcast, and The Ringer), acquired productivity software tools (Anchor and Soundtrap), locked up influential personalities to their platforms (Joe Budden, Jemele Hill, and the Obamas).
Last week, the company announced that it had signed Joe Rogan — the most popular podcaster on the planet — to an exclusive deal that will bring The Rogan Experience audio and video podcast to the platform. The deal is reportedly worth more than $100 million and is the largest of this kind for the podcasting industry.
All of those strategic moves indicate that Spotify has greater ambitions than adding premium subscribers. In truth, they are developing their podcasting ecosystem because, with the correct infrastructure, they can capture more value from the nascent and growing podcasting advertising landscape.
They want to become Facebook/Google for audio advertising.
Ad-Supported vs. Premium
Spotify has two main business segments:
Premium Supported Segment: This group consists of 130 million paying subscribers as of April 2020 who get access to an all-you-can-eat bundle of songs (online and offline).
Advertising Supported Segment: Spotify has more than 250 million active users. Consumers who do not pay for the premium service are subject to ads similar to those encountered on YouTube/Pandora. Record labels and artists can also promote their music on Spotify to users in the same vein individual shop owners, and products can advertise their products on Amazon.
Traditionally, advertising corresponds to only 10% of Spotify's revenue and an even smaller fraction of their profits (see table 1) since nearly all of the ads are placed after songs. Songs require high royalties regardless of the type of subscriber (Premium or Non-premium) who plays them. The high costs of revenue, in turn, translate into depressed margins for this segment.
The royalties remain the elephant in the room. Spotify relies on major record labels to offer its (music) streaming products. Contrary to Netflix, Spotify doesn't own a record label, although they have experimented with some exclusive deals. Even if paid-subscriber growth continues, there isn't a lot of room for profit margin growth given the variable nature of the royalty costs. The numbers bear this hypothesis: despite sustained growth over the last eight quarters, Spotify's profit margin remains flat around 25%.
The State of Podcasting
Podcasting, on the other hand, is a different type of audio product. Unlike music, podcasts don't require high royalty costs. Podcasts have mostly always been free and multi-platform since their inception. It's precisely why a 14-year-old kid from Haiti, could download most ESPN's paid cable programming for free.
Podcasting is in a similar position blogging was at the beginning of the 2000s. Much like blogs, podcasts are cheap to start; they're also more often passion projects rather than a pure money play. Furthermore, podcasts and blogs represent an "amateur" free version of an established format (traditional newspapers and radio). Perhaps more crucially, the economics of the two mediums are the same. There are an infinite amount of podcasts, but only a few achieve financial success.
Podcast advertising is still stuck in the late 90s. The ad reads are static and don't change regardless of context. There is almost no automation nor targeting. I recently listened to a 2010 interview between Steve Jobs and Kara Swisher on iTunes. It strikes me that a podcast like this, even though it is ten years old, probably gets a fair amount of plays/downloads every year. Yet there is no structure to monetize a podcast once the publisher posts it to the Internet. The state of paid podcasting is also dismal, which is to say mainly nonexistent. Luminary and Stitcher are the only two players that attempt this at scale, but both have failed to make a considerable impact in the marketplace.
Even today, the podcasting advertising ecosystem isn't robust. At Nielsen, I spent four years advising major CPG brands on how to allocate their marketing dollars. I've analyzed all sorts of ad products across different platforms and ad agencies. I never encountered an instance of podcasting advertising. According to PwC, in 2019, advertisers spent $71B on television, $18B on radio, and a mere $700MM on podcasting.
All listeners' trends indicate that podcasting advertising is widely undervalued. Podcasts listeners skew younger, are more educated, and have a more significant disposable income than their radio counterparts. Even more so than music or television, podcasts offer a window into their listeners' lives. Contrary to many other media forms, consumers "like" podcasts ads. Yet terrestrial radio receives 25 times more advertising dollars than podcasts; it's hard to accept that the current status quo is either efficient or effective. In the 2010s, digital advertising spending surpassed traditional advertising spending; it's not inconceivable Podcasting advertising will outpace traditional radio advertising by 2030.
Podcasting is particularly valuable to Spotify because of two factors we discussed:
Unlike the structural disadvantages, Spotify faces in the music industry, they can essentially become a vertically integrated podcast provider, and therefore attract new (potentially premium) subscribers by having their platform-exclusive content. It's much easier to build in-house (Spotify Studio), make acquisitions (Gimlet, Parcast, The Ringer), and sign exclusive deals in the podcasting category (Joe Budden, Jemele Hill, and now Joe Rogan).
Most importantly, they can expand and grow their advertising business in the podcasts category in which they don't face high costs from record labels. Effectively, they want to become the platform that standardizes audio advertising. They already started building their advertising platform with the introduction of their programmatic advertising product SAI. In a perfect world, the advertising segment will eventually generate more profit dollars than it is currently at a rate closer to the premium segment.
Becoming the leading podcast player in the world is the only way Spotify can create and capture all of this value. Per their Q1 2020 earnings call, 19% of their active monthly subscribers listen to podcasts on the app (up from 16% the previous quarter). If we apply 19% as a proxy across all Spotify's regions (27% of their monthly active users are based in North America), they currently have about 14.6MM podcast users on their platform in the U.S, which nets them a 14% market share.
It's impressive that Spotify has been able to establish a competitive position on the market in less than two years. However, Apple is still the big name in town, and although they don't have nearly the ubiquity they had five years ago (80+ % market share), they easily control more than 50% of the market.
Apple's next move is what makes this industry so interesting to follow. Spotify has been open about its intentions. Their in-house studios will surely start producing truly-exclusive content beginning in 2021 that will not be available on other platforms. They have already started experimenting with different distribution models for their content, specifically around timed-exclusives. Spotify can realistically get a quarter of its monthly active users to use its podcast service by the end of 2021.
What will be Apple's (and Google's) response? We explore this next week.
