Spotify is more than an audio streaming service. We are in the discovery business. Every day, fans from around the world trust our brand to guide them to music and entertainment that they would never have discovered on their own. If discovery drives delight, and delight drives engagement, and engagement drives discovery, we believe Spotify wins and so do our users.
Spotify is the Most Popular Global Audio Streaming Subscription Service (pg. 37), Spotify Technology S.A. Form 20-F for FY2020
Spotify has always been known as one of the most successful music streaming services in the world: in a way, it helped pioneer the music streaming industry through its massive catalog of 70 million songs, its powerful recommendation algorithms, and its free ad-supported streaming service. Whenever the name “Spotify” is mentioned, the first association most people would have is “music streaming.” However, the company has recently been shifting its approach away from music and toward podcasting. Is this the right move? Here are my thoughts.
To better postulate their rationale behind the push toward podcasting, it’s important to recognize whether the podcasting market has the potential to grow. While I originally thought that podcasting was not that popular and that the potential would have been dry, I was proven otherwise by the numbers. According to Statistica, the estimated number of active (monthly) podcast listeners in the United States this year will be 120 million. That figure accounts for over 36% of the entire U.S. population, and projections up to 2023 expect a growth of 17% compounded annually. Clearly, the podcast market is quite large, and the growth potential is massive.
Source: Statistica
As for Spotify, there are two metrics that are important to note: monthly active users (MAUs) and Premium subscribers. While both metrics appear to be growing quite rapidly, it’s more important to analyze how Spotify interprets the numbers. Spotify’s latest press release, containing figures for Q1 2021, mentions a 24% growth of MAUs Y/Y (year-over-year) to a total of 356 million users. However, the company concedes that the figure is “modestly below our internal expectations.” A Y/Y increase of 21% for Premium subscribers hits “the top end of our guidance range,” at 158 million users.
Podcast listeners are considered as a part of the MAU. According to Spotify’s FY2020 annual report, 25% of Spotify’s MAUs have listened to podcasts. The slightly underperforming MAU figure is not a good sign; however, Spotify is holding its ground. Spotify only began its podcasting venture in 2018, and it is already on track to beat Apple in podcast listeners this year. Apple, on the other hand, began its podcasting venture in 2005 and has remained relatively stagnant in recent years.
Back to the April 28th press release, Spotify notes that their ad-supported gross margin in Q1 was 4.4%, an 11% increase over Q1 last year, and that “[t]he strength in Ad-Supported revenue was led by our Podcast and Programmatic channels.” The numbers look really promising for Spotify’s podcast business. In fact, on the same day, Spotify announced monetization for podcast creators. Using a subscription-based model, podcast creators can optionally charge listeners $2.99, $4.99, or $7.99/mo to listen to their podcasts and/or allow creators to release early-access episodes, exclusive episodes, etc. for subscribers. 100% of the revenue will go toward creators until 2023, when Spotify will then start taking a 5% cut of the revenue. In a clear sign of creator-centered aggressiveness, Spotify is hoping for as many podcasters as possible to host on their platform and for those creators to drive their listeners to Spotify.
Spotify’s new podcast strategy is a stark shift from their traditional Premium and Ad-supported business model. In fact, Premium users have zero added benefits over free users in terms of podcasting. I find this approach to be quite puzzling: why not allow automatic ad skipping for Premium users on podcasts? It would act as an incentive for podcast listeners who may not be as inclined to purchase Premium for music to purchase Premium for podcasts. Furthermore, because Spotify’s podcast monetization is optional and the company will only take a 5% cut from creators should they monetize their content, incentivizing Premium will act as a larger and more stable source of revenue without knocking away the benefits of their new podcast subscription model.
During the writing of this piece, I was pleasantly surprised by how strong the podcast market truly is. Spotify’s long-term strategy targeting the podcasting scene has merit, and it is paying off by growing an audience quicker than any other platform. Through its creator-oriented tools, Spotify can quickly centralize a somewhat underdeveloped scene through its services and become an undisputed leader for podcasters. At the same time, Spotify should consider adding a fresh coat of paint to its music streaming foundation: although Spotify’s music streaming is already thoroughly developed, it could also benefit from a monetized community-based approach, similar to Tencent Music’s business model which I wrote about previously. Spotify’s new philosophy is an example of contemporary innovation, and it could possibly revolutionize the music industry. As long as Premium subscribers (91% of its total revenue) are not taken for granted, the company will find no problem remaining competitive in its respective industries.
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