Revisiting Spotify and the audio walled garden
How podcasts fit into this platform’s growth strategy
When Neil Young yanked his music from Spotify to protest the platform's star podcaster Joe Rogan, he sparked a larger conversation covering everything from censorship, through culture wars, to what role platforms play in today’s media ecosystem. The most important angle to understand is why Spotify is paying hundreds of millions of dollars for exclusive content from various high-profile podcast content creators. While some may see this as another public tussle between a platform and famous creator, it’s also a business issue: An ad buy on Rogan’s show reportedly runs at a ~$60 CPM / $1 million minimum rate, and advertisers of variously sized budgets are paying attention.
We believe that the key to truly appreciating this dispute is to reexamine Spotify's podcasting aspirations. Spotify’s podcast strategy, which it began implementing back in 2015, is the most fitting lens through which we should view this most recent fracas and understand what drove Spotify to invest in owning content, rather than just being a distribution platform.
Podcasts, as we’ve previously written, offer a ton of unexploited advertising potential, and the more exclusive podcasts Spotify has, the more exclusive ad inventory it can sell. Spotify is now the top podcast app in the US, and its platform has 3.6 million podcast episodes in Q4 2021, up from 3.2 million in the previous quarter. As expected, that translates into growing revenue: Advertising sales increased 40% in Spotify’s most recent quarterly earnings report, and its contribution to total revenue reached 15% in Q4. This proportion is only poised to grow — so long as Spotify can move past this current dustup and continue executing the typical go-to-market playbook used by most successful platforms. Let’s revisit this approach and Spotify’s podcasting ambitions.
Spotify has become near-synonymous with music in the smartphone era. Founded in 2006, launched in 2008, and IPO’d in 2018, it has been lauded as one of the big global success stories of the European startup ecosystem. In its latest quarterly earnings from February 2022, Spotify reported growing its paid subscribers to 180 million vs. 406 million monthly active users (MAUs). That’s up from 130 million paid subscribers when this One originally published in June 2020, against a total of 286 MAUs at the time. Premium revenue in Q4 2021 was up 22 percent year over year to nearly $2.63 billion, while ad-supported revenue soared 40 percent YoY to $452 million. (Spotify revenue is reported in Euro so some exchange rate differences may apply.)
On the other side of the audio ecosystem, podcasts were prepping their own ~18-year overnight success. If it seems that today everyone you know has a podcast, it could be tangentially true: There are millions of podcast series globally, and in the US, we’ve crossed the coveted 100-millionMM-strong audience point. Edison Research estimates that podcasts audiences in the US have hit 41% of the population, which translates to 116 million people.
It’s been an interesting ride. This podcast timeline from our friends at LUMA Partners charts the major milestones along the way:
The first 10 years were mostly quiet: Podcasting grew with the patterns of a niche hobby. That all began to change in 2014 with breakout hit “Serial,” an investigative journalism podcast that spun out of “This American Life” and introduced us all to MailChimp’s adorably mispronounced “MailKimp” ad. (The adorability wore off after a few listens, but as far as campaign ROAS goes, that’s certainly one for the history books.) You can spot the inflection point in 2015 in Edison’s listening chart, when usage started visibly trending up and to the right. That same year also marked Spotify’s entry into the podcasting space.
Turns out that podcast listeners listen to other types of audio content, too. Spotify had observed that 19% of its MAUs were podcast listeners. Demographic-wise, this cohort skews younger and more affluent: Nearly half of the 18-34-year-old US population listens to podcasts, and 41% earns more than $75,000 annually (vs. 29% across the whole population), according to Edison Research. They also on average listen to six different podcasts every week for an average of 6 hours and 39 minutes of weekly listening. Could this be an audience of audio superusers?
On the one hand, we have a healthy global subscription audience. On the other hand, we have a growing, engaged global audience happy to consume ad-supported content. Who can effectively monetize long-tail advertising and maintain quality consumer experience through content recommendations, tailoring, and discovery algorithms? This sounds like a job for a platform!
Why should you care:
Walled gardens in audio certainly aren’t a new concept: The entirety of terrestrial radio, premium subscription-based satellite radio like SiriusXM, and others were all variants of walled gardens. What’s new in this iteration is the global nature of it. Audio walled gardens in the past used to be heavily localized; Spotify is an audio platform with unique scale and range. Like its platform cousins, this usually means that there’s money to be had in advertising.
To really understand, take the current value of the video industry. Consumers spend roughly the same amount of time on video as they do on audio. Video is about a trillion dollar market. And the music and radio industry is worth around $100 billion dollars. I always come back to the same question: Are our eyes really worth 10 times more than our ears?
- Spotify CEO Daniel Ek, announcing its Audio First vision in February 2019
Right now they seem to be. Pre-Covid podcast ad spend was set on a good growth path with CAGRs exceeding 40% (!!) and reminiscent of the earlier days of digital advertising’s hypergrowth.
As interesting as podcasts are to consumers, on the monetization front there’s still significant room to grow and eat into the share of other audio formats:
There are several key drivers of this apparent monetization lag:
Podcasting is a long-tail market with a sharp drop off in consumption metrics outside of the top 10% of content. Even within this group, there’s a big difference between the performance of the top 1% of content and everyone else. Successful monetization of long-tail markets typically requires self-serve interfaces and automated ways of connecting advertisers and content creators or distributors. This is in its infancy in the podcast universe — and an area where Spotify can rapidly make a significant difference if it were to build a self-serve audio advertising marketplace. In November 2020, Spotify acquired Megaphone, a podcast monetization and hosting company used by publishers like the Wall Street Journal. Spotify combined Megaphone with Anchor, a podcast creator platform it acquired in 2019, to launch the Spotify Audience Network, which it calls "one of the world’s most scaled and sophisticated audio advertising marketplaces." In October 2021, Spotify announced Spotify Ad Studio, a self-service ad platform that gives US advertisers access to the Spotify Audience Network for as little as $500.
The most effective podcast ads are those read by hosts, and until recently, the marketplace lagged in the ability to place ads programmatically or to re-constitute ad pods depending on who’s listening. This makes testing and optimization more challenging, as well as monetization of older content (e.g., someone who starts listening to “Serial” now could be exposed to a different mix of advertisers than the original run). Improving creator tools and building monetization options into the content creation process can address this challenge — and Spotify’s 2019 acquisition of Anchor, a podcast authoring suite of tools, points in that direction.
Podcast advertising has been very direct response-driven, yet podcast analytics and measurement are still in their infancy. Tracking is rather primitive and limited to pixel calls duct-taped together. Analytics support varies widely depending on which app you use to listen and both content creators and advertisers have to rely on very basic metrics to inform their decisions. Efforts like NPR’s Remote Audio Data (RAD) project are encouraging, but there’s a long way to go to get to analytics parity with other formats of digital media. This is where Spotify for Podcasters can really work the power of the walled garden: Between an increasing market share of podcast listeners using Spotify to discover and listen to podcasts, tailored content creator tools, and now analytics tools that can inform advertising monetization, that’s a pretty compelling burgeoning audio ecosystem (or an audio “oasis” rather than a simple walled garden, to borrow our metaphor from an earlier Sparrow One).
Since articulating its podcast strategy in early 2019, Spotify has made significant investments and acquisitions across creator tools and content. This content strategy may seem like one-of-these-things-is-not-like-the-others at first glance, but this is where the underlying podcast market dynamics come into play: If Spotify can attract some mix of Top 1% and Top 10% of today’s creators, the monetization and analytics engines will create lock-in and enable advertising economies of scale on the long-tail. This is the same platform advertising approach that Google and Facebook homed in on for search, display, video, and mobile advertising; tier 1 brands with large budgets are a nice-to-have, but the real growth driver comes from making it easy for thousands or millions of smaller businesses to buy ads and promote themselves. This not only creates more explosive revenue curve growth but, as we’re seeing in near real-time with the current large brand Facebook ad boycott, it creates significant levels of business resilience.
In an earlier Sparrow One, we looked at the typical go-to-market playbook for platforms. Spotify looks to be around the “grow” stage with podcasts — and we can predict what’s likely to happen next.
How will this play out across different constituencies?
For consumers, this all looks good. Spotify continues to be a great value proposition whether you’re a subscriber or on the ad-supported plan. The ARPU for subscribers who are also avid podcast listeners increases as the advertising revenue stream from podcasts bumps up the base level subscription. (There’s currently no plan for ad-free options on podcasts.) The biggest value-add from a consumer perspective may be in podcast discovery: We’ve been well-trained by Spotify’s music recommendation algorithms to trust it’ll do a good job surfacing worthy podcasts, too. This may in turn develop entirely new listening patterns and begin to elevate content that would otherwise be lost in the long-tail.
For content creators, Spotify’s platform creates a more direct link between content production and monetization. Creators won’t have to hack through what is the optimal monetization model for them to get off the ground; they can hit the easy button, focus on content quality and audience nurturing, and evaluate monetization improvements as they go along.
The biggest winners in all this may be advertisers. Spotify appears to be building a brand-safe environment with highly receptive audiences and the relevant metrics that advertisers care about. The medium has been tried and tested with direct-response advertising and is now ready to move up the funnel. Spotify has thought of the perfect on-ramp, too: It struck an exclusive $20 million first-look deal with Omnicom for podcast inventory through the end of 2020. Not a small feat in a global pandemic but one with perfect timing; as brands pause and reevaluate spend on other platforms, there’s less risk in trying a new channel like podcasts.
The Trojan Horse and main value-add across all three key constituencies really lies in measurement and analytics. Traditionally audio wasn’t a very measurable and certainly not an addressable space at scale. Spotify’s platform approach has the potential to rapidly change that. The caveat is that, as with many other walled gardens, measurement is not that important, accurate, or auditable. For platforms, the illusion of measurement may be more attractive and temporarily more important than measurement accuracy, so Spotify’s efforts don’t have to be terribly elaborate to unlock a new addressable advertising channel.
If Spotify is following a platform approach, can other platforms challenge it by committing similar levels of investment? The most obvious challengers here could be Amazon (high 15% global market share + advertising chops) and YouTube (which could go for creating a new hybrid video podcast format). How big can a platform’s moat truly be vs. other platforms?
Luma Partner’s excellent session with Spotify’s Sheila Spence on the future of podcasting
Edison Research’s Infinite Dial series
IAB’s Podcast Measurement Guidelines outline a nascent analytics & measurement landscape
Spotify’s creator analytics hub, Spotify for Podcasters
Thanks for reading,
Ana, Maja, and the Sparrow team
Enjoyed this piece? Share it, like it, and send us comments (you can reply to this email).
We’re a results oriented management consultancy bringing deep operational expertise to solve strategic and tactical objectives of companies in and around the ad tech and mar tech space.
Our unique perspective rooted deeply in AdTech, MarTech, SaaS, media, entertainment, commerce, software, technology, and services allows us to accelerate your business from strategy to day-to-day execution.
Founded in 2015 by Ana and Maja Milicevic, principals & industry veterans who combined their product, strategy, sales, marketing, and company scaling chops and built the type of consultancy they wish existed when they were in operational roles at industry-leading adtech, martech, and software companies. Now a global team, Sparrow Advisers help solve the most pressing commercial challenges and connect all the necessary dots across people, process, and technology to simplify paths to revenue from strategic vision down to execution. We believe that expertise with fast-changing, emerging technologies at the crossroads of media, technology, creativity, innovation, and commerce are a differentiator and that every company should have access to wise Sherpas who’ve solved complex cross-sectional problems before. Contact us here.