Spotify is paying millions of dollars to bring the biggest podcast stars exclusively to Spotify. From the Joe Rogan Experience to Call Her Daddy, Spotify has spent millions of dollars on licensing deals. Yet, O&E (Original and Exclusive Podcasts) represent 20% of all podcast consumption on $SPOT, despite being a tiny percentage of the content. Is the gain worth the cost?
The theory of exclusivity is multiple:
- Increased user growth
- Reduced churn
- Increased ad revenue
The first two are rather obvious, but the third can be a little more complicated. Spotify is building the Spotify Audience Network to drive better monetization of audio. The more users that Spotify gains means better monetization. The centralization of ads is key to raise ad revenue per impression. An example of how this has played out in the past is Google AdSense.
“Again, what happened to the web is likely instructive: in 2003 Google launch AdSense, an advertising network for websites. Now advertisers could buy ads in one centralized place, and those ads could be better targeted by one company that spread its cookies across the entire Internet (and, of course, combined them with data from search, email, etc.).”Ben Thompson in Spotify’s Podcast Aggregation Play
Spotify is trying to mimic Google’s AdSense success, but with audio. It is an ambitious goal, with a huge potential reward.
The Current Podcasting Landscape
Apple dominated the podcast market for years (they essentially created it), but Spotify has recently been taking significant market share from Apple. Spotify has a ton of momentum and likely will be the leader in podcasts, just like they are for music streaming.
All of this comes at a cost. Hundreds of millions of dollars in licensing deals.
Spotify isn’t mortgaging its future. This is easy to tell from the lack of debt Spotify carries. They can afford the strategy. But this doesn’t answer the question of whether the strategy is working.
You need to consider opportunity costs here, but financially I don’t view this as a huge concern. Spotify has enough cash flow to experiment. The balance sheet is strong. Spotify can afford this strategy, but being able to afford it doesn’t explain whether you should do it.
A Look at the Charts
Exclusives dominate Spotify’s top charts. A view of the top charts shows that the exclusive podcasts are getting streams. Estimates show 20% of all Spotify podcast consumption is O&E. Four of the top 6 podcasts are O&E.
Yet no one would ever doubt that the Joe Rogan Experience or Call Her Daddy would get streams. JRE was the top podcast pre Spotify and now it’s still the top podcast. How can you measure success based on this information? Let’s dive in and review user growth, churn and changes in ad revenue.
The main strategy behind exclusive podcasts is bringing new users to Spotify. Reviewing Q/Q and Y/Y growth trends show continued decelerating growth for premium MAUs without much change during timeframes of entering podcasts or bringing on exclusive content. Ad-supported MAUs tell a slightly different story with an acceleration in mid 2019.
But are the ad-supported MAUs driven by exclusive podcasts? What would these look like without exclusives? It’s too hard to tell.
Low churn is a key to subscription businesses. The more services you offer to a customer raises switching costs. Podcasts will play a key role in that.
Spotify doesn’t always directly report churn, only irregularly giving the actual rate (they always state Q/Q and Y/Y). In CY19 Q2, Spotify reported churn at 4.6%. By CY20 Q3, churn had fallen below 4% for the first time.
“Our average monthly Premium churn rate for the quarter fell below 4% for the first time, markingSpotify CY20 Q3 Earnings Report
an 89 bps improvement Y/Y and 49 bps sequentially, driven by churn improvement across all
In CY20 Q4, following the record low churn, Spotify reported a slight increase Q/Q, but a Y/Y decrease. CY21 Q1 showed flat churn Q/Q and a reduction Y/Y. We don’t have enough data to determine whether this is merely a correlated decline, but overall churn has reduced since Spotify has entered the podcasts market. The podcasting strategy is working, but it is still unclear how much of that is driven by exclusive podcasts.
Changes in Ad Revenue
One could try and run unit economics to see how much direct financial benefit Spotify has gained, but the unit economics are wild right now. Consumption is up 95% YoY. Podcast revenue was up 627% YoY. Guessing at what the long term equilibrium state of podcasting would be isn’t really helpful.
We can tell everything is trending in the right direction, but growth is coming off of a tiny base. Continued growth in both volume and per impression is needed. I think it’s too early to tell how successful podcast advertising will be (and even harder to tell how exclusives impact that).
You can hear the shift in emphasis for Spotify to a total audio company. From Vogel to Ek, you can hear it in their calls and read it in their letters.
“Going forward, I think our investments in originals and exclusives are creating more and more reasons for listeners to choose Spotify, and our exclusive programming is already proving to be an essential part of our differentiation. That said, with a small number of these shows on our platform today, but many more in the pipeline, it is very difficult to know exactly when we will see the compounding effect of these investments, but all early indications are very positive.”Daniel Ek Q4 CY20 Earnings Call
“I do think, again, from a strategy perspective, we are very much aiming to be a very open platform all along, and the most important job for us is to be a great partner to all the creators that we have in the ecosystem. So, I don’t think it rolls out and say that we would only do exclusives hard on. I think you’re going to see us do many different types of deals, but where possible, we would obviously opt to take it fully exclusive, but we’re going to be very opportunistic about that going forward.”Daniel Ek Q2 CY21 Earnings Call
“What we can see is that, the O&E part of this tends to drive a bigger bump in engagement and, in particular, it translates into more new users. So, whenever we’ve done an exclusive, we’ve tended to be able to convert more of the existing Spotify Audience to also start listening to podcast on Spotify and likewise, we’ve been able to get more people from outside of Spotify to try Spotify for the first time. So, it’s definitely been positive. But as the mix goes, we’re primarily focused on making Spotify the audio platform on the Internet. And we think that is the most important thing and that’s opening up more content, and as I mentioned, going from 8 million creators to 50 million creators is the primary focus. But, obviously, the O&E part is a very helpful addition and it’s helpful, not just with our ability to get more people to listen to podcast, but also is a very attractive proposition for advertisers as I think was evident in the quarter.”Daniel Ek Q2 Earnings Call
“Then, of course, there is the growing strength and importance of our ads business. Admittedly, this is an area where I previously didn’t spend much time, but it’s become impossible to ignore. It’s now safe to say it’s becoming a second big revenue driver for Spotify. And I’m especially inspired by the early success of the Spotify Audience Network. While we are growing the overall ads business from a small base, the potential is significant and the trend line is clear. We saw strong growth of 110% year-over-year. Adjusting for FX, the growth is even more impressive, coming in at 126%. And looking at Podcasts, Podcast revenue was up over 627% year-over-year, or nearly 200% on an organic basis. And the continued outperformance is currently limited only by the availability of our inventory, which is something we are actively solving for. ” –Ek Q2 Earnings Call
You can see the earnings calls shifting from O&E to their ads business. I don’t think O&E is the end goal for Spotify, I think it is the bridge to aggregation.
So… Is It Working?
All of this qualitative and quantitative data leads to the dramatic conclusion of I don’t know. Or maybe, it is too early to tell. The pivot to audio strategy is clearly working, but I still don’t think it is clear how well the exclusives strategy is working. Even if O&E is the bridge to aggregation of podcasts, did Spotify even need that bridge? And is that bridge working? I just don’t think we have enough data. I think only Spotify has enough data to determine that.
To me, these exclusives are equivalent to Spotify going for the jugular. They probably would have dominated without it. Long term, the higher ROI is probably on the Ringer, Gimlet and Megaphone acquisitions. Licensing deals have a shorter term benefit, but the short term benefit *could* lead to a longer term benefit. Aggregating demand can lead to better monetization (podcasts are currently poorly monetized). Going for the kill isn’t a bad thing, but it is an expensive thing. Especially when Spotify has so much in the works for podcasts (improved discovery, subscriptions, Spotify Audience Network, dynamic ad insertion, oAuth, etc…). Ideally, licensing deals are a bridge until the full podcast stack is built. These kinds of questions can’t really answered by retail investors. We just don’t have the needed data. This type of question is a reminder of the importance of trusting management.