Is Spotify a good bellwether for podcasting?

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For the past couple of weeks, I’ve been mulling over the question: is Spotify a good bellwether for podcasting?

The reason for this line of thought is simple. An apparent crisis of confidence at the heart of the Swedish streaming giant has precipitated a series of anxious reappraisals of the resilience of the podcast market. And this week has seen the latest high profile exit from its podcast executive team: Max Cutler, co-founder of Parcast, and the man who brought Joe Rogan to the platform in his role leading the “speech” programming. He’s notionally off to start “new things”, but after Dawn Ostroff – their Chief Content Officer – was shown the door a few weeks ago, it’s hard not to think that it’s part of the same process. A strategic realignment, to use the corporate speak.

And this is all suspicions that are basically corroborated in their Q4 reporting, after which CEO Daniel Ek was quoted as saying he “got carried away”. And what screams “carried away” more than multi-hundred million dollar podcast deals for content creators like Joe Rogan, Alex Cooper and the Markle-Sussexes? And so yes, I think it’s fair to say that there’s a view, internally at Spotify, that they have overspent on podcasting and that possibly it’s not a market that’s going to be pivotal, long-term, to the company.

But is this a useful litmus test for the industry at large?

I think the nub of this question goes back to a different one: why did Spotify make a play for podcasting in the first place?

Founded in 2006 by Ek and Martin Lorentzon, it launched internationally in 2010 as a very rudimentary platform. Free users got ten hours of streaming each month, and five plays per song. Ads were inserted, on the free tier, every 4-7 songs. But by spring of 2012, the platform was so popular with music fans that restrictions were lifted (though ads remained), and the modern Spotify was born.

Spotify is a classic example of the “freemium” business model (something that, curiously, is becoming an ever bigger part of grassroots podcasting). You get people hooked on a free version of the services, and then upsell to a premium version that has certain advantages. It’s the model that so many successful start-ups of that period employed, from LinkedIn to Discord, and one that is now being retrofitted onto Twitter. It is also the model that has seen massive revenue increases for the gaming industry – free to play games with option add-ons. In short, it’s hard to critique the model.

But Spotify always had one big problem that, say, LinkedIn didn’t. It had to disburse a huge amount of revenue to artists and labels. It is estimate that 70% of Spotify’s revenue is distributed back to rights holders – an arrangement that has been attacked by the likes of Taylor Swift as totally unfair remuneration for artists (the compensatory figure is estimated at around $0.003 per stream for most artists). While I might watch one or two different pieces of IP on Netflix per day, I might easily incur charges with over a hundred different artists (and other rights holders) in a day’s use of Spotify. The more Spotify has been attacked, the more it has tried to find new arrangements with artists, but nothing is solving the issue that a company with about 500,000,000 users is extremely expensive to run, especially when you’re only taking in 30% of your revenue.

So Spotify has been running on fumes for a while now. Just look at the investment history: $100m in 2011, $100m in 2012, $526m in 2015, $500m in 2016, $1bn in 2016, IPO in 2018. It’s currently valued at $23.26bn which still makes all that funding look like a good investment, even though the company still isn’t profitable. And that’s for a simple, and very compelling reason. Spotify is still the market leader, globally, for music. And music is one of the core entertainments.

Music is far more central to the human experience than podcasts. Music, books and movies: they’re the big three. Everything else is basically a spin-off of one of them. They’re unkillable: there is no version of human existence, until the sun swallows us whole, where we don’t have music, books and movies. The forms might shift, the delivery mechanism might change, but we’ll always have music, books and movies.

And yet… Spotify, with a huge market lead on a revolutionary technology that opens up the world of music – probably the easiest sell of the three unkillable entertainments – can’t make money. That is, to borrow a phrase from silent cinema, a fine mess.

And so, in 2019, Spotify made a play for podcasts, acquiring, first off, Gimlet, the fabled production house, and Anchor, the hosting mechanism. In the same year they acquired Max Cutler’s Parcast, and next year brought Joe Rogan and AdTech company Megaphone to the company. Alex Cooper and Call Her Daddy and audiobook company Findaway followed in 2021. Plus, of course, Podz, Chartable, Podsights, Whooshka etc. It was a spending spree that made it clear: Spotify was going in big for podcasting.

Because podcasting offered Spotify a couple of things. Firstly, it unlocked new revenue streams in advertising and subscriptions. Secondly, it wasn’t hamstrung by the prohibitive redistribution of revenue that they have in their music business (most shows that are uploaded to Spotify will never see a cent in revenue back from Spotify). And thirdly, it consolidated their position as the definitive audio business. Until then, Apple – Spotify’s biggest competitor – had the lion’s share of the global podcast audience, which meant that people who listen to both music and podcasts (i.e. a fairly sizeable chunk of the population) were going to be split between two rival services. Now Spotify could offer an holistic audio vision.

The question that remains is: to what extent was podcasting perceived, internally, as a huge opportunity, and to what extent was it seen as a way of mitigating the risks of the music business and off-setting some of its major outlays there?

Because Spotify’s difficulties – be that its struggle to become a profitable business or its 6% reduction in staffing already in 2023 – have, in the eyes of the investment community, reflected heavily on podcasting, but not on the music industry. And Spotify is – first, foremost, and always – a music streaming service. So where have been the soul-searching editorials about the long-term viability of record labels and headphone companies and singer-songwriters? Music, it is assumed, is unkillable. Otherwise there would be a lot of questions asked about the long term revenue-generating sustainability of that industry.

So is Spotify a good bellwether for podcasting? I’d say no. I’d say that any issues at Spotify more closely reflect the turbulence in streaming music than podcasting. That doesn’t recuse podcasting from any soul-searching, and many criticisms of the long-term outlook for our industry remain valid. But I don’t think Spotify ever saw podcasting as a Golden Goose. What it did, instead, was show them the future.

The future for Spotify, it is increasingly apparent, is as an audio YouTube. The genius of YouTube, which arrived on the scene early enough to be foundational in what the internet has become, is the fact that it is responsible to scarcely anyone other than Google’s shareholders. It disburses some advertiser revenue, but it doesn’t owe 70% of its revenue, from the off, to its content creators. Instead, it gives content creators a degree of autonomy – allowing them to turn the service into the video town square.

Now, Spotify did experiment, in 2018, with offering a similar service, called Upload Beta, which allowed artists to upload directly and take home 100% of their revenue. That was quickly wound back as a programme. But it still basically carries on in the podcasting ethos. The acquisitions of Anchor and Megaphone have been particularly instrumental in turning Spotify into a snout-to-tail podcast service – just as YouTube is for video. In podcasting it is now offering something that it cannot (or will not) offer to musicians. That illusory autonomy. But that is the long term path to profitability across the company – disentangling the service from their obligations to rights holders, trying to become something more akin to a town square.

So while I don’t think that the manoeuvrings at Spotify currently are a particularly pertinent indicator for the overall health of the podcast industry (and before people call me a hypocrite, my predictions for podcasting have consistently focused on the micro-trends that I see as a podcaster rather than the macro-trends of the investment community). But I do think that Spotify for Podcasters is probably a very decent bellwether for where Spotify, the music streaming giant, is heading in the future. If I worked at a record label or strummed sad ballads in my bedroom, I’d be watching what’s going on in the “strategic realignment” in podcasting with a view to how things might well progress in the coming years.

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