Spotify is about to beat Apple in podcasts and it’s all Apple’s fault
Inside the Media, Issue no.1
Welcome to my newsletter by me, King Williams. A documentary filmmaker, journalist, podcast host, and author based in Atlanta, Georgia. This is a newsletter covering the hidden connections of Atlanta to everything else.
Spotify acquires The Ringer
Spotify, just announced the purchase of digital media pioneer Bill Simmons's website and podcast network ‘The Ringer’ for $250 million dollars, yes a quarter billion dollars, becoming the largest acquisition in podcast history.
Spotify’s purchase of The Ringer comes off of a year-long pivot of the company, as it transitions from its roots as standalone music streaming company into a full-fledged multi-channel (more on that later) audio company.
Spotify’s goal is to become, (the founder’s own words) the world’s ‘audio-first’ company, as stated in a February 2019 company blog post by Swedish founder Daniel Ek. And if Spotify, the global king of streaming music is to become the destination of all audio formats, it needs to conquer the fastest-growing segment of the audio industry, podcasts. And in doing so it must face off against a reluctant Goliath of the podcast industry, the trillion-dollar tech giant, Apple.
In doing so, Spotify has already spent a hefty sum on acquisitions over the last 12 months, spending nearly $400 million to buy key podcast studios and related companies. Including $56 million for the true-crime podcast studio Parcast (Unsolved Murders), around $340 million to acquire both podcast production house Gimlet Media (StartUp, Homecoming) and multi-platform podcast distributor, Anchor (more on this one later).
So why did Spotify buy The Ringer when its podcasts are already on the platform?
Audience. And as Spotify grows, it knows the key to keeping subscribers and avoid attrition (aka churn) is to produce content for niche communities with rabid fanbases, especially those who base who are:
1) …willing to pay a premium for “free” content/events…
2) …likely to be evangelists willing to proselytize for that community whether online or in-real-life (IRL)…
3) …who are united by rituals, communal events with near-weekly attendance and culminating with an annual event of sorts…
Sports fans. Reality show junkies. Wrasslin’ devotees. Popcorn movie lovers. All are the respective fan bases that The Ringer taps into daily via its website and podcast network of thirty shows. The Ringer Podcast Network boasts over 100 million monthly downloads and registering $15 million in yearly podcast revenue. Making the entire company profitable, before accounting for the advertising on its website, brand deals, a production deal with HBO, and growing online video network. This is exactly the type of company Spotify needed to acquire.
Spotify has to become all-encompassing
Spotify, in its quest to become the all-encompassing audio choice for customers, needs devotees for its platform, people willing to pay $ 10 a month and evangelize on behalf of the brand, who better than your hardcore podcast enthusiast?
But there is only one problem, Apple.
Apple, since June 2005, has had support for podcasts on its devices, leading to the rapid popularization of the medium, while Spotify didn’t add podcasts until 2015. Apple’s decade head start has given it dominance over the medium that no one has challenged for nearly 15 years until Spotify entered the frame.
Spotify in the last 5 years, especially in the last 2 years, has made a mind-boggling leap in podcast growth. Starting from zero podcasts in May 2015, to over 500,000 by the end of 2019, according to the company.
Spotify’s growth in podcasts can be attributed to a multi-pronged strategy which has included:
Allowing companies like DistroKid and Anchor (whom they acquired last year), to be the third-party bridges for existing podcasts, many of whom simply added their existing iTunes podcast shows over to Spotify.
Internally developing a slew of Spotify-branded original programs, including a branded podcast with New Amsterdam Vodka, as well as striking deals with celebrities like comedian Amy Schumer, former ESPN host Jemele Hill and even striking a deal with The Obamas.
Cutting the check for popular podcasts like The Joe Budden Podcast and music breakdown podcast Dissect.
This strategy has already yielded dividends in just 12 months, as Spotify had a 200% increase in podcast listenership in 2019, and podcasts now represent 16% of all listenership on the platform. This is on top of Spotify surging to 271 million global subscribers, 124 million of them now paying customers, with podcasts being a driver in converting free users into paying ones. This is on top of Spotify having a year-over-year growth rate of 64 million subscribers globally.
There are levels to this
To put it in a better perspective, Spotify gained more subscribers in one year than the total number of people who pay for Apple Music, the world’s #3 music streaming service. But this pales in comparison to Apple, which alone has over 800,000 shows on iTunes/Apple Podcasts currently, not to mention surpassing 50 billion downloads and streams back in 2018. This is on top of the nearly 1.4 billion iPhones currently in use globally, all of which come with the podcast app pre-installed. To understand the gulf between Apple’s ecosystem and everyone else, just look at how many iPhones have been sold since its launch in June of 2007👇🏽
Spotify may never catch up in pure listenership and downloads but is still potentially able to win the podcasting space, here’s how:
1) Despite those mind-boggling sales of the iPhone, Apple’s podcast use and awareness of the medium is still remarkably low.
Apple until last year, really hasn’t made any push into podcast support, which is strange for any company, especially one worth one trillion dollars until you realize 👇🏽
2) Podcasts are a loss leader for a company the size of Apple (or Google or Amazon or Samsung) for that matter.
Producing an individual podcast isn’t expensive, you can record and upload directly episodes from an iPhone or Android phone right now. But on the business side, the costs are associated with hosting, distributing, marketing, and hiring developers to maintain hundreds of thousands of podcasts.
Especially considering that the global podcast market is in its infancy regarding monetization. No company that large wants to spend money on the podcast space considering that money doesn’t yield immediate cash flow.
3) Podcast’s main source of revenue comes from ads, which is against Apple’s ethos of privacy. This is why Spotify can and should corner the market on podcasts.
Apple’s reluctance to allow advertisers and third-party data collectors on its phone is something the company isn’t willing to budge on right now, ask the FBI or DOJ.
And despite Apple literally owning 80-90% of the podcast market, they don’t see a viable monetization strategy, yet. Apple, outside of potentially creating a paid podcasts tier, Apple has taken a hands-off approach to data and monetization of podcasts. And due to increasing competition from Spotify and smaller companies have opened up specific metrics on podcast performance for creators.
But Spotify already has the internal infrastructure, wildly popular app, and distribution to make ads work on a global scale. Combined with the purchases of existing profitable podcast companies, The Ringer, Gimlet, and Parcast, these companies will now be bringing those ad clients now to Spotify.
Spotify’s challenge will be to use these companies to bring in the bigger AAA brands like Coke, P&G, and McDonalds. As well as amplifying the smaller companies that wish to advertise in more niche markets, like your city/zip code, which is the business strategy of Facebook.
4. Spotify buying Anchor was the most crucial acquisition.
Anchor is a podcast distributor to not only Spotify but also Apple Podcasts and several other podcast sites. What makes Anchor important to Spotify is how it pairs that distribution with its podcast data collection, identifying high-performing shows with ads. In purchasing Anchor, Spotify has the ability to see real-time trends in topics, types of shows, subscriber declines/increases, monetization patterns, and demographic data across a wide variety of its competitors.
If Spotify can control the means of production and distribution of podcasts via Anchor, more importantly, the distribution of advertiser-supported podcasts, it will have control of the podcast advertising market.
Spotify despite its growth, is losing money and they need podcasts to work
Spotify despite gaining 60+ million subscribers year-over-year, missed its fourth-quarter earnings projections and actually lost money. And this loss of revenue is going to continue for Spotify for a few reasons:
1) With every new subscriber Spotify gains, they lose money due to its payout structure with the music labels who grant access to their libraries of music.
Spotify loses 70 cents on every dollar generated by the company in this deal, this includes ads on the free tier and the paid subscription tier.
The big three music labels, Sony, Universal, and Warner Bros, are also taking an obscene amount of money from Spotify on both ends. All three not only receive payouts from music being streamed on Spotify they also all own equity in the company as well.
2) Spotify is growing in debt and is hemorrhaging money at the wrong time
In addition to losing money despite gaining new customers, there are several new entrants into both the podcasting and music streaming space. This is causing a rise in spending across the board for the entire music industry.
Spotify has already raised over $1 billion dollars pre-IPO listing and is currently again raising another $1 billion in debt-equity. This is being done primarily in order to keep the company viable against known competitor Apple, but also new-ish competitors Amazon Music, YouTube Music as well as fast-rising Indian music streaming service Gaana. This is on top of the new paid podcast platform Luminary which has launched as well as a deal of smaller music players either adding podcasts to their services.
3) Spotify needs to establish itself as the platform for audio in the era of wireless speakers and voice assistants.
The one part of the marketplace no one saw exploding would be wireless speakers and voice assistants, as Amazon’s Alexa has for now taken the lead in consumer preferences. But this also leaves Spotify in a unique quandary as Apple, Amazon, and Google all have their own music streaming services to pair with their devices.
In the case of Amazon, the stand-alone Amazon music service for Alexa-only devices is a mere $4/month compared to the $10/month for a standard Spotify subscription. By having a robust internal offering of podcasts, Spotify presents better leverage for being relevant for customers in this new post-phone music economy.
So where does Spotify go from here?
At this point, podcasts are where they are going to stake a bigger amount of attention for Spotify.
I would expect more moves in the space to purchase or strike deals with any remaining major players of the podcast world. So who else is left to buy? My guess is companies like Wondery (Dr. Death/Dirty John), Loud Speakers Network (The Read), Crooked Media (Pod Save the World), PodcastOne (Adam Corolla), and even striking a content deal with podcast og’s NPR or WNYC radio would all be on the table.
Not to mention individual podcast hosts with large followings on Apple Podcasts/YouTube starting with the controversial podcast host Joe Rogan, who could charge upwards of $150-500 million for his podcast, as well as comedian Marc Maron, author Tim Ferris, in addition to conservative podcast hosts Ben Shapiro and Charlie Kirk. Even if they do no additional acquisitions, for Spotify the future is still bright despite the cloud cover. In the US, Spotify surpassed Pandora for monthly active music listeners and is still growing fast outside of the US. It also bodes well that podcasts are increasingly attracting more young listeners as well as becoming more ubiquitous among adults in the US.
Spotify initially started out as a safer, more streamlined alternative to digital piracy of the post-Napster/Limewire/Kazaa era of the mid-late 2000s. Since then the company has evolved into the most important player, in the most important source of revenue (streaming music), for the entire music industry.
The future according to Spotify
But its future will require a new pivot. But it won’t just be limited to podcasts. Buying all of these podcasting studios and distribution doesn’t make sense for a music company but makes perfect sense for becoming the global hub of audio content.
And if I were Spotify, the best long-term play would be to give a slice of the ad revenue to hosts in a more equitable way than what YouTube has currently. I mean aren’t podcasts just YouTube channels for adults anyway? Spotify could funnel more podcast creators to use Anchor and use the data to build a moat around audio similar to how YouTube has done to video. If Spotify could do that with 271 million global subscribers, imagine what it could be as a company with 1 billion subscribers. This bodes well for the company if they can pull this off.
For a bonus, check out this Spring 2019 webinar from Edison Research on podcasts:
Spotify has a chance to be the leader in audio, and it’s all Apple’s fault.
-KJW