Breaking Down Spotify’s New Podcast Business Model
Spotify’s plans to own the audio market
Spotify the music streaming service has made headlines recently with its acquisition of Gimlet Media and Anchor to boost its podcast credentials, in a bid to increase its share of the podcast market.
Gimlet Media is a podcast studio who’s podcasts include drama’s such as ‘Homecoming’ (now a series on prime featuring Julia Roberts) as well infotainment and startup focused shows like ‘Every little thing’ and personal favourite ‘The Pitch’.
Spotify believes their future is not just in music, but in all audio and plans to spend around $500 million to grow its podcast business in 2019.
In this lean canvas I will be diving into the problems Spotify trying to solve to help secure its business strategy.
Lean Canvas Takedown
Problem
- High music licensing costs
- Differentiation from Apple music and other similar music streaming services
- Dependency on music labels for licensed content
- Becoming a music label themselves may antagonise record label partners
Spotify recently reported its first operating profit of last quarter — a huge milestone. What holds Spotify back in terms of revenue by far are the marginal payouts to record labels for each song played. The more people pay, the more Spotify needs to pay out making the profit margin harder to scale.
Apple Music (Spotify’s closest competitor) has gained a lot of traction since its launch in 2015, having once surpassed Spotify in terms of paying users in 2018.
It’s hard for Spotify to differentiate itself from the competition when all services are offering a similar product, especially when one of those competitors are leveraging their existing customer base. Spotify have tried to develop unfair advantages through new services like “Discover Weekly”, but these in time will become easier to replicate by the competition. Once the music streaming catalogue on all services becomes mostly equal, users are likely to pick one based on price and convenience putting Spotify’s business model at risk.
One of the obvious things that may come to mind at this point is, “Why doesn’t Spotify just create its own music label and hold a catalogue of exclusive artists and songs”. This is very much in the vein of the Netflix model and could be a real solution while simultaneously reducing dependency on the big music labels. I think the answer comes down to how people consume music compared with tv or film. An average music listener most likely has around 100–200 songs in their collection at any one time and having access to all of it is very important.
I believe Spotify can’t risk starting a music studio without risking their relationship with the large music labels, who would certainly withdraw their licenses before Spotify could gain any traction. Users could simply migrate to the next competitor with the biggest library.
Customer Segments
- Podcast listeners
- Spotify user non-podcast listeners
Spotify is looking to bring in a new audience of people who listen to podcasts. According to a Gimlet Media pitch deck from 2017 there is “a race to occupy the last part of people’s day that’s untouched by screens: commuting, cooking, working out” — about 2.5 hour of non-screen time. Research by Edison in 2017 shows more people are listening to podcasts than ever, with 32 percent of American between the ages of 25 and 54 turning in at least once a month. Tapping into this growing market looks to be a source of new user growth for the company and well as bringing in existing audiences through acquisitions.
I imagine that Spotify will also be targeting their existing music listening audience with podcasts in a big to increase listening minutes per user per month.
Solution
- Open up Spotify ecosystem to a range of existing podcasts
- Commission and partners with producers to create exclusive podcasts available only on Spotify
- Leverage user insight to produce targeted advertising within podcasts
Spotify needs to open up its ecosystem to the world of Podcasts. They should try to replace their amazing work from their music catalogue to allow users to easily search, subscribe and discover new and exciting podcast content based on their interests.
They need to develop their unique value proposition by acquiring and building partnerships with media companies to produce exclusive content for the Spotify platform.
And finally, develop relevant and targeted advertising which can be placed within podcasts which will be of genuine interest to the user and help drive revenue from their ‘Free’ membership level.
Unfair Advantage
- Existing large ecosystem of users
- Ability to produce targeting advertising within a podcast based on user insight
One of the things going for Spotify is their existing user base. They are a household name with a engaged userbase and have a presence on most of their user’s devices. Leveraging this audience by introducing them to the world of podcasts, or targetting existing podcast listeners with a convenient podcast management and discovery solution will be the first step in building their audience.
It will be interesting to see with the Anchor acquisition if more targeting advertising on podcasts will be effective. Certainly by understanding your audiences podcast listening habits it’s possible all of Spotify’s targeted advertising may improve.
Revenue Streams
- Advertising
- Spotify premium membership — exclusive podcasts
- Branded podcasts
Not much to add here that we haven’t mentioned already. There is a possibility of revenue streams through branded podcasts. Gimlet Media had a Tinder inspired one which I really want to listen to now.
Cost Structure
- Acquisition and partnerships with big-name podcasts
- Development of new search and discovery tools for podcasts
- Development of targeted advertising systems designed to seamlessly be placed within podcasts
- Salaries for internal podcast creators
- Marketing
Recode reports Spotify paid around $230 million for Gimlet alone, with $500 million more for further acquisitions in 2019. Thats alot of bank, but could also bring a lot of new user acquisition and like I said help develop an unfair advantage in this market.
Key Metrics
- Revenue from direct advertising
- Revenue from affiliate sales
- Time spent listening to podcasts per user, per month
- Number of podcasts listened to per user, per month
- Time spent listening to all audio content, per user, per month
Spotify CEO Daniel Ek believes that Spotify’s bet on podcasts will lead to 20 percent of all Spotify listening being non-music content in the future. “This means the potential to grow much faster with more original programming — all with the goal of becoming the world’s number one audio platform.”
Apart from revenue this new podcast audience can help drive I image Spotify’s metrics of success will be similar to Youtube’s in that the more time a user spends on the platform the better.
Final Thoughts
From Jenny
I am one of those rare human urbanites who does not have a Spotify account, most of the audio content I listen to is podcasts, occasionally books, and in extremely rare cases its music, in the case of the later I use Amazon’s Prime music.
I think this morve from Spotify is smart, this said I also think that this move shows that Spotify is trying to play catch up. It’s main competitor Apple already has a podcast library, and Amazon has expanded from audiobooks to music.
Yes, Spotify owning Gimlet and acquiring other producers means that they have exclusive content but will it actually be that good to make me shell out £9.99 a month? No, not unless they produce a Netflix load of Netflix quality content, and even then they will have to deal with consumers like me who will sign up for a month — binge and then stop the subscription.
This said I am curious to see where this acquisition takes the podcast industry which at the moment relies heavily on advertising and Patreon donations. And I do think that this is a sound strategy, and far riskier than trying to create their own music studio, or competing with Amazon for audio books.
From Adrian
I think this a smart move from Spotify who are looking for a way to grow and thrive in a competitive market with a fragile dependency on some big players in the music industry.
Ultimately I think Spotify want to become their own music label and aggregate new and existing artists under their brand, but taking this step risks destroying their business before they can even get started. Building an audience and revenue streams based on other types of audio content could help give them the foundations to do so.
