Spotify’s Business Problems and How Podcasts Can Solve Them

The music industry suffered all through the 2000’s. Piracy was rampant and all the legal options for buying music were either too pricey or too inconvenient. This is where streaming services were able to offer a meaningful innovation. Users could now stream music conveniently (any time, anywhere) for a low subscription price, or have to listen to ads. Other services have emerged (Apple Music and Google Play) that have their own advantages, but they don’t command the same level of loyalty from their readers.

Behind every streaming service is the idea “if they’re going to clone the music, then let’s clone it even more easily, and then charge for it.” However, with music streaming businesses, there is a limiting factor in the business plan. Increases in revenue equal proportionate increases in expenses. This is because users listening to more songs mean that the record labels are owed more. So even as Spotify scales, its profit margin stays the same and growth is limited.

This is where podcasts come in as a meaningful evolution to the strategy. Users have signed up for music, but are technically there for audio in general, so why wouldn’t they stay in order to listen to podcasts. In terms of user experience, it makes intuitive that this would be an improvement for users, because their lives have become even simpler.

Business Model Flaw

Most technology companies benefit from having fixed costs, however large they are. These investments are made early on, but result in higher marginal profit later on. Since Spotify doesn’t have this, moving into podcasts would be a great way to solve this problem. There is no marginal payout to podcasters.

To users, this just means an improved experience, but to podcasters (the supply) they have a chance to earn more ad revenue. Spotify currently earns $616 million of ad revenue, which is more than double the estimated $300 million of revenue the entire podcast industry is estimated to bring in. This creates a clear opportunity for synergies. Spotify already has the customers and the advertisers, it just needs more supply in the space.

Solving the Problem with a Pivot

Solving the supply problem started with the purchase of Gimlet Media, and has been furthered by the purchase of Anchor. Gimlet represents approximately 30 solid podcasts that can now be offered exclusively on Spotify, and Anchor will help create new supply (it is focused on the development of podcasts).

So in the end, Spotify will begin to move towards the aggregation end goal of using customers to get more supply and supply to get more customers. The benefits for both sides are clear: users get more podcasts in a more convenient way, and podcasters get greater reach and more advertising revenue.

From Spotify’s perspective, they also can begin to differentiate themselves more from Apple Music, who they trail behind significantly in the podcast space. By offering some podcasts with exclusivity, their platform gains an edge. The centralized result represents a change in the podcast space that could be bad or good – time will tell what it does for the medium.

The Long-Term Perspective

However, for Spotify it seems like podcasts are going to be able to become a small percentage of revenue and larger percentage of profit in the future. Their efforts to differentiate have started with these acquisitions and we will see how they play out over the next few years as this strategy is implemented.

I spend a lot of time looking for the long-term buying opportunities, because those are where you can make a decision once and then benefit from it until something changes. Looking at Spotify’s current business configuration and how they aim to revamp it using podcasts, it is clear there is huge growth potential. And with total revenue in the industry set to overtake revenue from the peak of the CD age, investors should continue to pay attention to management over the next couple of years to see where things go.

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