Spotify and the quality of podcast advertising

Spotify went on something of a shopping spree related to podcasting, across both content and technology, between 2019 and 2022:

  • In February 2019, the company acquired Gimlet Media and Anchor, two podcast networks, for a combined $340MM;
  • In March 2019, the company acquired Parcast, a true crime podcasting studio, for $56MM;
  • In February 2020, the company acquired The Ringer, a sports-related podcast and media network created by Bill Simmons, for nearly $200MM;
  • In May 2020, the company acquired the exclusive multi-year publishing rights for The Joe Rogan Experience, a podcast, for a reported $200MM (the podcast did not become exclusive to Spotify until September 2020);
  • In November 2020, the company spent $235MM to acquire Megaphone, a podcast publishing and advertising platform;
  • In June 2021, the company acquired the exclusive multi-year publishing rights for Call Her Daddy, a podcast, for a reported $60MM;
  • In December 2021, the company acquired Whooshkaa, a podcast hosting and monetization platform, for an undisclosed sum;
  • In February 2022, the company acquired both Podsights, a podcast measurement service, and Chartable, a podcast analytics tool, for a combined $87MM.

These content acquisitions — in addition to exclusive content deals struck with the likes of the Obamas, Prince Harry, and Kim Kardashian — were mostly spearheaded by Dawn Ostroff, a veteran television operator whom Spotify hired in 2018 into the Chief Content and Business Officer role. Spotify’s strategy of simultaneously developing its podcast production and monetization capabilities while also aggregating a content portfolio through the acquisition of exclusive publishing rights for large, well-known shows was for a time, ostensibly, working. In Q2 2022, the company reported 19% year-over-year growth in subscribers against 31% year-over-year growth in advertising revenue (versus 23% growth in overall revenue, as I detailed here).

But Spotify performed something of an about-face on its podcasting strategy: the company laid off 6% of global staff in January of this year and parted ways with Ms. Ostroff, imparting many of her role’s responsibilities with Alex Norström, formerly the company’s Chief Freemium Business Officer, now elevated to Co-President.

Spotify’s strategy with podcasts followed something of a television playbook: acquire headline content and pair it with broad-based brand advertising. From this piece in Semafor:

Ostroff’s biggest editorial bet, however, was on Hollywood talent, and on a podcast industry that has increasingly centered on packages created by talent agencies.The former executive had focused on signing big name celebrity talent, courting A-Listers and making overtures to non-podcasting celebs like Kerry Washington, Gigi Hadid, Bill Maher, and Jennifer Aniston…She appeared to deliver on the promise: Spotify signed deals with the Obamas, Kim Kardashian, and Prince Harry and Megan Markle. But others at the company saw her as inexperienced in audio, and focused on big names over quality content. People familiar with Spotify’s numbers said Michelle Obama, TikTok star Addison Rae, and Kardashian’s podcasts were initially successful, but churned users quickly after the first few episodes, rather than developing loyal audiences.

The podcast strategy began to exhibit fractures in Q3 2022, when advertising revenue growth slowed to 19%, which the company attributed to a “challenging macro environment” (my thoughts on that rationale here). With the layoffs and executive reshuffle earlier this year, the company effectively capitulated on the strategy; in the earnings call for Q4 2022, held on January 31st, a little more than a week after Spotify’s layoffs were announced, Ek relented that Spotify’s “podcasting business had been a drag to our gross margin profile.” Spotify’s advertising revenue in Q4 2022 grew by 14% on a year-over-year basis, representing 14% of the company’s total revenue. In response to a question on the commercial viability of the podcasts strategy in the call, Ek said (emphasis mine):

Now what you’re probably asking underneath all of that is that it’s been a drag on the gross margin side. So, what does that mean future? Well, we’ve been making many investments. Some of them have been working greatly, and you should expect us to double down on those. And some of them, not surprisingly, haven’t worked out. And there are certain shows that work really, really well for us, and there shows that didn’t perform as we expected. And I think that’s a sign of maturity that you go for the growth first and then you seek the efficiency….But generally, what you should expect us is across the board now to be focused more on that efficiency and creating more leverage and that’s certainly true in podcasting too. And the management changes really had nothing to do with the change of strategy in podcasting. It’s more around increasing the speed of decision-making and increasing the focus on efficiency across the board because the next era of Spotify is one where we’re adding speed plus efficiency, not just focused on speed or growth at all costs.

In considering Spotify’s podcasting strategy — aggregating large audiences attached to headline content and pairing it with ads — it’s important to recognize the appeal of the ad placements that can be joined to podcast content. Brand advertisers are enticed by the large, heterogenous audiences that follow tentpole podcasts, just as they are with tentpole television series. But podcast ads inherently present challenges for conversion measurement; if direct response advertisers are to be courted by platforms like Spotify, which does offer some measurement assistance through tools like Podsights, then targeting must be accommodated by contextual relevance, which isn’t present in content that is as broadly appealing as what Spotify was investing heavily into acquiring. As I write in Twitter and the quality of brand advertising revenue:

Brand advertising revenue is akin to a participation trophy for a social media property; it’s a low-leverage means of converting attention into revenue. And while brand advertising revenue is fairly easy to harvest, it’s susceptible to disruption through advertiser boycotts and “shiny new object” syndrome. Direct response advertising tools aim to use behavioral and contextual data to unlock value through relevance targeting; brand advertising tools give advertisers untargeted access to attention. As a result, direct response advertisers buy conversions and revenue, while brand advertisers simply buy reach.

And in The perilous mythology of Brand Marketing for digital products:

The promise of brand marketing is that, by creating presence of mind within a consumer for a particular product, the purchasing of that product becomes habitual on some cadence; for instance, whenever a consumer is in the market for new shoes, they default to a particular brand because of some affinity for it that has been cultivated through brand advertising (and, obviously, product satisfaction). The promise of direct response marketing is that, given adept targeting, it can produce a purchase immediately, exploiting existing demand and creating the opportunity for the consumer to engage with the product.

What is the quality of brand advertising for a podcast network? It’s table stakes — background noise. Amassing an expansive, diversified audience and then shoe-horning brand advertising into that content is a commercial strategy borrowed directly from television. But television predates the existence of direct-response advertising, which, by now represents the towering opportunity in digital advertising. There is no contextual relevance for mass-market podcasts outside of the most broadly appealing brands, which would look at podcast advertising as a supplement (or substitute) for television advertising.

But the bulk of direct response advertisers aren’t interested in this format, and a lack of measurement solutions (which Spotify acquired) aren’t the primary obstacle: the core content experience simply provides no contextual relevance to direct response advertising, nor does it broadcast intent. And as Semafor reports, podcasters feel constrained by exclusivity contracts: universal reach across platforms, but especially YouTube and Apple Podcasts, is preferable. So while exclusive distribution for tentpole content has almost certainly driven subscriptions for Spotify, albeit at exorbitant expense, the breadth of those podcasts has likely undercut advertising revenue. The network television strategy simply doesn’t translate to the digital realm.