SPOTIFY'S PODCAST POWER PLAY
Bloomberg Businessweek|January 18, 2021
The company is staking its future on converting music listeners to podcast fans and has become the favorite to own the industry—for better or worse
Lucas Shaw

When Spotify went public in April 2018, Daniel Ek had been struggling with this question for more than a decade: How would the company make money? The Swedish entrepreneur had saved the music business from 15 years of declining sales with an app that can stream millions of songs on demand. But in exchange for that bottomless buffet, he agreed to return more than 70% of every dollar Spotify earned to rights holders. So despite building the most popular paid music service in the world —it would take in $6.1 billion in sales in 2018—Spotify Technology SA hadn’t turned a profit since Ek co-founded it in 2006. Wall Street is obviously capable of forgiving years of a company’s losses (see Amazon, Netflix, Tesla, etc.). But investors have never made sense of Spotify’s business model. For every $5 that comes in, about $3.75 goes right back out.

Ek had long argued that the answer would come from changing how the music business operated. Three record label groups control the majority of new music releases, giving them power over Spotify in negotiations. But Ek thought streaming would begin an era when artists didn’t need labels. Musicians could use social media to promote their work and Spotify to distribute it. “The old model favored certain gatekeepers,” he wrote in a letter to prospective investors in February 2018. “Today, artists can produce and release their own music.”

Shortly after going public, Spotify unveiled a feature that let artists upload music directly to its app. Without intermediaries, performers got a larger share of royalties, and Spotify kept more money. The company tested the feature with a handful of artists—Chicago rapper Noname was an early adopter—and expanded the trial to a few hundred participants that September. But most artists weren’t ready to forgo the help they get from labels to promote their work, especially since millions of people use services other than Spotify, and the labels didn’t like being circumvented. By December its stock had slipped to a low of $106.84, a drop of more than 20% from April, and doubts about the company’s long-term viability grew. In July 2019, Spotify ended the program.

Ek wanted to build a business the labels couldn’t touch, and there was another massive audience up for grabs. The number of people in the U.S. listening to podcasts monthly had grown from 32 million in 2010 to 73 million in 2018. Although the vast majority of them used the iPhone’s podcast app, Apple Inc. had never converted it into a revenue stream: Podcasts get money from ads, which Apple doesn’t sell. Outside the U.S., where most of Spotify’s users reside, there was no dominant player. Spotify had already dethroned Apple as the king of online music. Maybe it could do the same in podcasting.

In the past two years, Spotify has spent close to $900 million acquiring podcast production and technology companies. And it’s spent millions more on exclusive rights to shows from celebrities such as Kim Kardashian and TikTok star Addison Rae. Two of its most popular programs are comedian Joe Rogan’s The Joe Rogan Experience and The Michelle Obama Podcast, and Spotify expects new shows from Prince Harry and his wife, Meghan Markle, to put up big numbers, too. Spotify now hosts almost 2 million podcasts, up from 2,500 three years ago, and has more than 600 exclusives. Apple still has the most listeners in the U.S., but Spotify has narrowed the gap. And it’s No. 1 in many overseas markets.

The company has already converted more than 20% of its 320 million total users—about 70 million people globally— into podcast listeners. The larger the audience gets, the easier it is to pry ad dollars from radio and TV; Spotify’s ultimate goal is dual revenue streams from ads and subscriber fees. “If you look at the amount of people listening, how young the demographic is, anyone would look at that and say this is going to be the next big medium,” says Dawn Ostroff, the company’s chief content officer.

Many of Spotify’s biggest partners and competitors, including record labels, advertisers, and talent agents, question if it’s wasting money on a niche business. In 2019 the podcasting industry generated less than $1 billion in U.S. ad sales, a fraction of the $14 billion captured by radio. Apps such as Luminary, which charge customers for original shows, haven’t worked. “The audience for podcasts has grown, and Spotify’s share is growing,” says Michael Morris, an analyst at Guggenheim Partners LLC. “It’s still not clear what that will mean in terms of money.”

Courtney Holt thought short-form video would solve Spotify’s money problems. He joined the company in 2017 after a stint at Maker Studios Inc. (now Disney Digital Network), which sold ads and provided tools, services, and data for thousands of YouTube channels. He’d seen up close the growing audience for video and thought Spotify could create a product like Snapchat’s Discover page, where original series sit alongside videos from TMZ and the Daily Mail. Spotify had already licensed clips from ESPN and Comedy Central and produced original series from Russell Simmons, Tim Robbins, and other celebrities; shows were as much as 15 minutes long and included dance competitions and documentaries. But they were parked in a video tab on the app and got little promotion. Holt realized he couldn’t compete with YouTube and Facebook Inc. People didn’t come to Spotify for video, and it was expensive to produce, anyway.

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