Reality check for Spotify and Podcast Boom

The company’s return on investment in audio formats can be hampered by large investments.Spotify has a podcast problem. It seemed that Spotify had discovered a huge shiny object to impress Wall Street during the boom in podcasts.

Daniel Ek, founder of the company, declared audio was his future. Podcasts were central to this strategy in 2019. Podcasting was something everyone wanted to do.

Spotify purchased Gimlet, which is a creator of podcasts such as Reply all about internet culture, for $230mn. Anchor, a podcast-making platform and app, was also bought by Spotify. Following those acquisitions, Spotify also bought Parcast, a producer, for EUR50mn, and Ringer, a podcast and sports media group, for EUR180mn. It also signed content agreements with Prince Harry, Kim Kardashian and the Obamas.

Spotify has been affected by the excessive spending. Paul Vogel, chief financial officer of Spotify, stated it clearly on a telephone call this week. He said that “Podcasting” was a major drag on the company’s business in 2022, but he believed this would diminish over time.

Podcasts were initially seen as an answer to Spotify’s poor margins in its core business of music streaming. It was seen as a market where it could exert greater influence, unlike music which is dominated by a few record labels.

However, the tide has turned. Spotify’s music streaming business has performed remarkably well. Netflix’s slowdown, which caused a correction across all US media stocks was not reflected at Spotify.

Spotify added 83mn users worldwide each month, and 33mn only in the fourth quarter, making it its largest quarterly customer additions. However, Spotify’s losses grew by more than 10x in the same year. Spotify posted a net loss of EUR430mn in 2022 on revenues of EUR11.7bn.

Spotify doesn’t publish podcasting financials, but said at an investor day that had “close to” EUR200mn of podcast revenue in 2021. It means that despite all the big deals and millions of dollars spent on podcasting it only brings in 2 percent of Spotify’s total revenue. Vogel said that Spotify’s podcast revenue was “significantly greater” in 2022 but declined to provide specifics.

Spotify’s actions offer further insight into how podcasts are performing: Spotify has recently laid off dozens and cancelled shows.

This problem is a sign of a wider reckoning with podcasting. In 2020, there were 1mn podcasts. However, the number of these podcasts dropped to 222,0000 by 2022. The rise of Spotify into podcasts boosted the industry as a whole, triggering a frenzy for deals and higher valuations as Amazon. Although podcasting was not a big business, its executives said it was still in its “early days” despite the fact that it made very little advertising money.

Although this may be true, some people in the industry have been questioning whether podcasting will ever achieve their goals.

It’s been called “the next big thing” in every year it’s existed. “In every year of the medium’s existence, it has been called ‘the next big thing’.

While podcast revenue continues to grow, the industry is currently experiencing the same cancellations, lay-offs and disappointments as other media.

It makes me wonder if there’s a bigger problem. Even with all the money that has been spent on podcasts, it still struggles to reproduce a hit like the serial series. Courtney Holt was a former Disney executive who Spotify hired to help build its podcast strategy. He told me that his goal was to find a breakout hit. He commissioned podcast scripts through a partnership between DC Comics. This allowed him to double down on crime podcasts, which he called “the Rihanna podcasting genre — the thing that everyone loves”. Holt eventually left the company in April.

Podcasting will need to produce more blockbuster podcasts in order to be a larger part of the media industry. Content is the king. That is where the money flows. Vogel warns that there will be more cancellations. He said that “we’re still committed the podcasting industry”. We will however pull the plug faster if things don’t work.

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