Why is Spotify spending so much on podcasts?
For many years, podcasts have been on the fringes of life. There have been great podcasts out there on any subject imaginable, but the medium has never been at the centre of the culture in the same way as music or films.
This began to change in 2018. From humble beginnings where the average podcast could expect a few thousand listeners and a modest sponsor, these shows have become seriously lucrative. A good podcast can now include merchandising, crowdfunding, live events and much more that has a broader appeal beyond just a hardcore of listeners.
2018 was such a breakout year that it included Amazon producing a television adaptation of a popular podcast called Homecoming, something which would have been unimaginable even 18 months ago. It is believed that Julia Roberts was paid US$600,000 per half hour episode to star in the programme.
You can generally tell when a technology market is teetering on the brink of becoming a major force when tech giants line up to buy all the small start-ups which created the sector in the first place. For example, Google has gone to great expense to buy up the key players in both the robotics and AI markets in the past half-decade.
And now it is the turn of podcasts, with Spotify purchasing Gimlet and Anchor, two leading podcast start-ups. Gimlet, the producer of the aforementioned Homecoming podcast, was valued at US$230m by Spotify, making it the company’s largest acquisition to date.
Whilst Spotify has been working in the podcast sector for a long time, this marks its first real push into dominating the market. The company is so convinced podcasts are the future that it is planning to spend between US$400-500m on multiple deals this year and has warned that the investment is so significant that gross revenues are likely to drop by up to 4% as a consequence of the spend.
Why are they doing this? The answer may have to do with Netflix. The television and film streaming service has grown from humble beginnings to become one of the world’s leading content producers; rather than being a middle-man for other people’s work, why not make your own? The success of Netflix has been well-noted by other technology companies and it is no wonder that Spotify is planning to follow suit with podcasts.
Barry McCarthy, the CFO of Spotify who formerly held the same position at Netflix, explains: “Initially, just like our first investments at Netflix in streaming content, it’s incremental cost. We are investing in a better user experience with no pricing increase to drive a cycle of growth.”
He goes on to add that Spotify is “clearly leaning into growth at the expense of margin” in the short term.
Spotify has come to dominate the world of online global music streaming, but it owes so much money to the music labels which own the songs that many wondered if it could ever really be profitable. By expanding its presence and, theoretically, becoming the main player in the booming podcast market, Spotify has potentially created a mammoth revenue stream which could see the company scale new heights in the future.
