Today, Spotify is mainly used for music consumption. Only 20% of MAUs (Monthly Active Users) use the app for podcasts. With the acquisition of networks like “The Ringer”, podcasts like “The Joe Rogan Experience” and the general shift in how music is viralized, Spotify is leveraging it’s position to become the largest player in the audio content market.
The irrelevance of record labels
The most common criticism toward Spotify’s business model is that they are at the mercy of the record labels through royalties that have to be paid each time a song is played. Since record labels own the right to their music they can name their price and if Spotify doesn’t comply they are left without a music catalogue and a dead application.
While this is an understandable worry, I think reality is quite different. In fact, I would argue that the record labels are at the mercy of Spotify.
In the classic record label business model, the artists receive a relatively small piece of the pie for their content. The reason why artists have accepted this is because historically it has been the only way reach a larger audience, either through Radio or TV.
But today many of the top hits become viral through social media, not through radio or TV, and is something that is achievable by the artist or a small team themselves. What is then the reason for labels existing if artists and small independent teams can spread their music efficiently and capture a larger piece of the pie?
Compare this to how other forms of media have used platforms to allow anyone to reach an audience e.g. video through YouTube or writing through Medium. It’s not impossible to imagine a future where record labels have a diminished relevance.
The more users that Spotify has, the larger leverage they have over labels. Leaving Spotify as an artist or label then becomes a risk because users are seldom willing to switch streaming service to gain access to to a specific artist.
This is clear when examining artists who have left Spotify, only to return a few years later. The reason why they come back to Spotify is because there are very few “superfans”, people who mainly listen to 1 or a few artists and will choose a service based on those artists. Most people prioritise using a service with a majority of the music they want to listen to rather than a service with a few popular artists.
Spotify’s pivot to podcasts
Spotify’s pivot to podcasts is one of the most interesting strategic decisions made by a company in the last few years. General audio consumption, and podcast consumption in particular, has exploded in recent years due to the increased adoption of smartphones and the possibility to listen to what you want, when you want, where you want.
But podcasts have several fundamental problems which have been hard to tackle: monetisation, transparency of user data, and discovery. All problems I think Spotify aims to solve.
Monetisation
Podcasts are great for advertisers and have a higher return-on-investment than many other advertising channels. This is because a 67% of podcast ads are delivered by hosts, 32.5% are delivered by separate announcers (often journalists aren’t allowed to read ads by their news organisation) and only 0.5% of ads are supplied by the advertiser, the type of ad you would typically see or hear on TV or radio. This makes the ads more entertaining, more memorable and less “skippable”, and increases the likeliness of converting the audience to buyers.
The problem is that podcasts are under-digitalized. Monetising podcasts require a lot of work: reaching out to sponsors, creating premium content, donations, affiliates etc. Platforms like YouTube allow all users (reaching a minimum requirement) to monetise their content with ad sense and for many YouTubers this revenue stream make up a majority of their content income.
Additionally, anyone can create a YouTube channel for free while it still costs money to host a podcast (certain basic hosting packages are free, but often require you to upgrade once you have accumulated enough downloads). Spotify wants to enable anyone to create and monetise a podcast for free through their acquisition of Anchor.
Data transparency
Because of podcasts decentralised nature it’s hard for hosts to gather granular data on their podcast and audience. This results in a guessing game for podcasters to understand their own audience since data analytics is a BIG advantage for building an audience and increasing engagement.
Compare this to YouTube or other platforms that supply granular data: Demographics, traffic sources, drop off rate etc, making it easier to understand the audience, adjust content to increase views, and create targeted ad campaigns.
Discovery
Since podcasts have no centralised platform to reach new listeners hosts have to rely on other platforms, like Twitter, to reach an audience. This effectively means that podcast hosts need to build a following on multiple platforms in order for their podcast to grow.
On YouTube when a video is published on the platform it can be discovered by anybody. This is a problem with decentralisation: It is extremely hard for others to discover you and your content.
Most in-app search functions are mediocre at best and many rely on recommendations from friends, social media, lists or newsletters to find new podcasts. YouTube’s algorithm automatically shows you related content that can be of interest to you.
All these problems are something Spotify could alleviate: granular data for podcasts, monetisation through Anchor (similar to YouTube’s monetisation system) and Spotify is great at curating audio with their algorithm.
Acquisition time
I was very positive to the news of Spotify’s acquisitions of producers/networks like The Ringer and podcasts like The Joe Rogan Experience. Analysts tend to focus on the high price tag for e.g. Joe Rogan (“Spotify overpaid”), but I think it’s important to see the big picture.
In the short-term Rogan will be able to attract new customers. If only a small percentage of his audience of millions convert to being Spotify users, the payback period for the Rogan acquisition won’t be long. On top of this Spotify has an extremely high lock in effect which means that new customers are highly probable of staying customers. And even if they churn, 70% of churned customers are back within 45 days.
In the long-term, the acquisitions of podcasters, networks and companies gives Spotify huge credibility as a podcast platform, for users (20% of MAU listen to podcasts through Spotify), but also for creators. Why choose another platform if Spotify can provide you with everything you want?
Podcasts not only compete against music for user attention, but all other sources of entertainment: music, text, and video. The downside with audio is that it’s a media form that is hard to browse, has low potential for virality, and is hard to share and discover. These are all problems that centralisation, that Spotify, can help solve.
If Spotify can alleviate the problems that podcasters face, why would a podcaster choose another service? Why would users choose another service if Spotify can provide everything from music to podcasts and much more? Owning the audio content market is extremely powerful and Spotify is moving toward full audio dominance.
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Original tweet from 17 July 2020: