Spotify and the reimagined audio walled garden

How their ‘Audio-First’ strategy fits squarely into platform domination plans

Spotify has become near-synonymous with music in the smartphone era. Founded in 2006, launched in 2008, and IPOed in 2018 it has been lauded as one of the big global success stories of the European startup ecosystem. At their latest quarterly earnings from the end of March (and amidst an increasingly serious global pandemic) Spotify reported growing its paid subscribers to 130 million against a total of 286 monthly active users. Compared to Q1 of 2019 both their subscription and advertising lines of revenue grew in the double digits: 22% YoY for subscriptions, now totaling $1.9 billion for the quarter; and 17% YoY for ad-supported which ramped nicely to ~$167 million (Spotify revenue is in Euro so some exchange rate differences may apply). 

On the other side of the audio ecosystem podcasts were prepping their own ~16 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 100MM-strong audience point. Edison Research estimates that podcasts audiences in the US have hit 37% of the population which translates to 104 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 marks 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 their MAUs were podcast listeners. Demographic-wise, this cohort skews younger and more affluent: according to Edison Research, nearly half of the 18-34 US population listens to podcasts and 41% earns more than 75K (vs. 29% across the whole population). They also average listening to 6 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 we have a (also global) growing, engaged 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 a hundred 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 their 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/eat into the share of other audio formats:

There are several key drivers of this apparent monetization lag:

  1. Podcasting is a longtail 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 longtail 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 they were to build a self-serve audio advertising marketplace.

  2. 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 in monetization options into the content creation process can address this challenge  -- and Spotify’s acquisition of Anchor, a podcast authoring suite of tools, points in that direction.

  3.  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. Effort’s 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 -- and 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 to borrow our metaphor from an earlier Sparrow One: an audio oasis rather than a simple walled garden).

Since articulating their podcast strategy in early 2019 Spotify have made significant investments and acquisitions across creator tools (Anchor) 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 longtail. This is the same platform advertising approach that Google and Facebook honed 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/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? 

  1. 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 they’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 longtail. 

  2. 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.

  3. 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: they’ve struck an exclusive $20MM first-look deal with Omnicom for podcast inventory through the end of the year. Not a small feat in a global pandemic but one with perfect timing: as brands pause and re-evaluate 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/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.

One question: 

If Spotify is following a platform approach, can other platforms challenge them by committing similar levels of investment? The most obvious challengers here could be Amazon (high 15% global market share + advertising chops) and YouTube (who could go for creating a new hybrid video podcast format). How big can a platform’s moat truly be vs other platforms?

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