Spotify Bets on New Audio
Trivia time. What do 14% of Americans do daily, pumping revenue into an industry growing at 25% per year?
They listen to podcasts.
I’ve written before about my love of podcasts… but seeing those stats made my jaw drop. And I don’t know for a fact, but I’d like to imagine that Spotify’s CEO Daniel Ek probably had a similar jaw drop moment when he saw their early podcast numbers. But more on that later.
Since they started offering them, Spotify has gotten some things right… but it hasn’t been easy, and critics have had multiple bites at the apple. Today, I’ll talk through the two biggest criticisms folks have made, and I’ll weigh-in on each one.
Criticism #1 – Exclusive celebrity podcasts backfired
In December 2020, Spotify announced a $20M partnership with Prince Harry and Meghan Markle (and their production company Archewell Audio) to launch multiple podcast projects. But when Archewell only released a single 12-episode project (Archetypes) 2.5 years into the contract, Spotify is exiting the agreement. Separately, prior deals with the Obama’s and Brene Brown were also not renewed. The Obama’s didn’t want to limit their audience by being Spotify-exclusive, and Brene cited concerns about COVID misinformation on the Joe Rogan podcast.
That put Spotify between a rock and a hard place, because they signed Rogan to a $200M deal in 2020 and his popularity is one of just a few bright spots when it comes to those celebrity deals.
Reflection
On the surface, these aren’t positive updates. But Spotify seems to be learning and adapting, which I think is a good thing. From the royals, they learned that it’s important to “try before you buy”. They have a large fanbase, but for reasons other than content creation… Signing proven creators (whether they already have a large audience or not) makes more sense. From the Obama’s – who delivered on their commitments but didn’t have the traction they wanted, Spotify learned that for now, exclusivity limits reach. Maybe when podcasting is a more mature industry, and competition feels like the current streaming wars, then exclusivity will be a viable strategy. But for now, not so much.
And what makes me say “they learned” from those two? Last week, Spotify signed a non-exclusive deal with Trevor Noah. The former Daily Show host is a proven creator, bringing many of his producers, writers, etc. from the show. Making the deal non-exclusive will help maximize reach.
Lastly, Spotify signed with Joe Rogan in May 2020, and the contract runs out in 2024. If they can continue to add hit new podcasts, they are essentially diversifying, and they’ll be less dependent on the Joe show. At that point, I wouldn’t be surprised if they opt not to renew the exclusivity deal with him.
Criticism #2 – Going vertical isn’t working
It was in 2015 that Spotify first listed podcasts in the app. It worked just like any other podcast player, though it wasn’t a completely seamless, tailored experience. Despite that, it showed promise, and Ek himself commented on how different the podcasts users’ behavior was:
“Our podcast users spend almost twice the time on the platform, and spend even more time listening to music”
So not only was this a new revenue stream, but it seemed to have a positive effect on existing revenue streams. Seeing that, they pulled a Phil Ivey and went all in. In 2019, they bought Gimlet – an independent podcast studio with several successful shows – for ~$230M. Later that year they also bought Anchor – a platform for creating and distributing podcasts – for $150M. They pledged another $500M in acquisitions for 2019. By acquiring studios, they gained the ability to create, produce, and monetize their own content. By acquiring tools, they simplified podcast production for creators. Both are versions of “going vertical”, which is usually cheered.
Ok wait… so what’s the criticism?
In 2022, Spotify canceled 11 podcasts. Some of those had been very popular before their studio was bought, but Spotify’s exclusivity reportedly hurt engagement. In June, they announced a strategic realignment of the podcasting studios – putting most of them (Gimlet, and other others like Parcaster) inside the Spotify Studios brand name. Similarly, they put Anchor underneath the umbrella of Spotify for Podcasters. Simultaneously, 200 jobs in the podcast unit (studios and tools) were cut. Critics say it feels like a shitty, slippery slope.
Reflection
I’m sorry if I sound like a broken record at this point, but layoffs are happening everywhere in tech. The number of articles I read dunking on Spotify for theirs (without that bigger context) is pretty annoying.
Also, streamlining/combining some of the acquired businesses makes sense. Think about if you were a studio Spotify bought, but your team continued to do your own accounting work. If you have 5 acquired studios, that’s five accounting teams running their own processes. Since the end goal of each process is the same (financials based on solid accounting), and the inputs are the same (a studio is a studio – with similar types of costs, revenue streams, etc.) – you can absolutely put those accounting teams together. And the same thing goes for the podcast creator tools. Plus, for those creator-facing tools, imagine how confusing it might be if Spotify’s acquired tools weren’t strategizing and going to market together. You could have engineers developing duplicate features, sales teams competing against each other, etc.
In general though, I still think verticalization is a great idea for Spotify. Their margins on the music side are very small because the music labels are basically in an oligopoly and have enormous negotiation power. Spotify’s instinct to push for more power – by going vertical – seems like a proactive way to avoid a similar situation on the podcast side.
Wrapping Up
To summarize, I basically think Spotify is taking reasonable actions to fix the things that aren’t working. But I do have one final rant about what they should be doing instead…
Spotify seems to be trying to play the role of king-maker and platform… and they need to pick one. They act as the king-maker by launching original podcasts, signing celebrity deals, and buying up studios. When they do that, they’re saying “we know best what you want”. But then they also act as the platform, giving creators the chance to sprout up from anywhere, and empowering them with monetization and growth tools. When they do that, they’re saying “you know best what you want”.
Spotify should go with the “you know best” strategy.
Let me give some examples before I land this plane:
Short form video startup Quibi had vaunted Disney execs and claimed to know what you wanted… and they failed. TikTok lets creators do their thing… and it’s working.
Cable companies claimed to know what you wanted… and they are hurting. A-la-carte streaming and YouTube are thriving.
Traditional newspapers claimed to know what you wanted… and their readership (even including online) is declining. Newsletters and Substacks (like this one!) are on the rise.
If the next big announcements from Spotify are about studios and originals, I’ll take that as a sign that they think they know best, in which case I don’t think they’ll lead the category long term. If instead the next announcements are about making podcasting easier and more lucrative for creators, I think that’s a great sign. Looking forward to keeping tabs.
Bonus Bullets
Quote of the Week:
“We might be wrong, but we’re not fucking confused.”
— Tomer Cohen, Chief Product Officer at LinkedIn, talking about conviction and clarity in product development
Quick News Reactions:
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