Spotify Pushes Into Podcasts
With more than 200 million users, including 100 million of whom pay for premium access, Swedish music streaming platform Spotify Technology SA (NYSE: SPOT) recently released plans to focus more on podcasts. The company plans to join other platforms by expanding its product line beyond music in order to gain a larger share of the podcast market, one which Spotify was a latecomer to.
According to Fast Company, Spotify was reported to have entered the podcast scene in 2015, whereas Apple Inc. took podcasts mainstream a decade earlier when it offered a podcast selection on its iPod in 2005. Before podcasts became such a popular leisure, Apple’s former CEO Steve Jobs announced at its podcast launch, “Podcasting is the next generation of radio, and users can now subscribe to over 3,000 free podcasts and have each new episode automatically delivered over the internet to their computer and iPod.” It is over a decade later, and this trend has certainly experienced incredible growth since.
In a featured interview published last Tuesday in the Wall Street Journal, Spotify’s CFO Barry McCarthy said, “The long-term trend here is that everything on-demand wins,” referring to the consumer preference of on-demand products and services, which has generated a substantial profit margin for Spotify and other tech giants in recent years. McCarthy was also behind Spotify’s unconventional decision to go public with a direct listing on the New York Stock Exchange last April.
This year, Spotify planned to invest as much as $500 million to prompt further expansion into the podcasting space, an effort nearly met with the company’s acquisition of three podcasting companies for roughly $400 million. Spotify’s recent acquisition of Gimlet and Anchor in February and Parcast in April provided the company access to even more content as well as the tools to publish podcast content more efficiently.
According to a study conducted by Edison Research in 2018, 26% of Americans over the age of 12 listen to a podcast at least once a month. As demand for podcasts increases so does their supply. Apple reported that there are currently more than 700,000 active podcasts and over 29 million episodes with content in more than 100 languages. Strikingly, these figures have grown from about 550,000 active podcasts and about 18.5 million episodes in 2018. Further data about podcast demographics shows that 30% of listeners are between the ages of 12 and 24, while almost half of podcast listeners earn more than $75,000 in annual income, according to Nielson. More important for advertisers, 80% of listeners listen to “an entire podcast episode or most of it.”
Advertising revenue makes podcasts a clear growth opportunity for Spotify, prompting company plans to make them at least 20% of content streamed on the platform, as McCarthy told the Wall Street Journal. While most consumers are reported to be using Apple’s platform to listen to podcasts, Apple doesn’t have an advertising-driven model, which is precisely where Spotify plans to monetize.
The company’s conscious expansion into podcasts is its way of maximizing the growth of profitable users and its overall profit margin as a result. It does this through monthly subscription payments as well as advertising revenue. Spotify admitted that it initially loses money when a subscriber joins the platform, but that typically changes when subscribers become profitable users at a ratio of 3 to 1 in terms of customer lifetime value and subscriber acquisition cost. It’s about long-term growth for Spotify rather than short-term profit generation.
The primary difference between podcasts and music is that while any platform can own podcast content exclusively, music is less protected. Spotify is looking to monetize on the opportunity to own podcast content, as well. The company is using a music editing software company it owns called Soundtrap to launch a new product called “Soundtrap for Storytellers.” Specifically designed for recording and editing podcasts, the product is positioned as a tool for podcast production. Soundtrap’s CEO Per Emanuelsson compares it to using Google Docs, where it is easy to use and collaborative by nature, enabling many people to edit a project at once. Owning exclusive content is something that can’t be done in the music industry, and is part of Spotify’s plan to produce and invest in podcast content.
Spotify’s McCarthy, who was previously CFO at Netflix Inc., mentioned that the company is pursuing a similar strategy to the on-demand video streaming service. Before its recent price changes and advancements in original content, Netflix’s primary strategy was to grow market share and accelerate growth by favoring lower prices at the expense of margin. Spotify has done the same, and is now following in Netflix’s footsteps as it experiments with prices and pushes to include original and exclusive podcast content with hopes to gain a larger share of the podcast pie.
In addition to subscription and advertising revenue, Spotify also plans to charge artists for insights about user engagement in music on its platform. This includes information about content users listen to, like what competing artists they listen to and where users are located when listening. Translating this data from millions of users into actionable insights is valuable to record labels and their artists when deciding new songs to release and concert tour locations to visit, for example. With recent investments in podcasts and having exclusive content on its platform, Spotify may plan to charge podcast content creators for insights on users’ listening habits, as well. Extracting data off of its platform has a relatively low cost, which may provide a substantial margin on top of Spotify’s primary revenue sources.
While the company commits to investing in the podcasting space and driving alternative revenue sources, music streaming remains the central focus of its platform, known for revolutionizing the music industry. Interestingly, McCarthy noted in the interview featured in the Wall Street Journal that users who listen to more podcasts generally spend more time on the platform and also consume more music as a result. Through investing in podcasts, Spotify is focused on increasing platform engagement overall as its team works diligently to grow user engagement with its podcast content. The company hopes that this will then lead to growth in its market share as well as substantial monetization. Spotify’s new podcast project may even prompt a slogan update well beyond “music for everyone.”
Photo Caption: Listening on Spotify now refers to much more than simply music.
Photo Credit: Wikimedia Commons