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Insider: November 12, 2020

Spotify ads, everywhere?

Spotify ads, everywhere? First of all, my mistake for not making this more explicit in my Tuesday write-up on Spotify’s official intent to purchase Megaphone: the acquisition effectively fast-tracks Spotify to a place where it will be able to facilitate advertising on third-party podcasts in addition to Spotify shows. Which is to say, we’re looking at a situation where Spotify would be able to sell advertising on podcasts that get distributed outside the platform. The basis of an ad network that sprawls through the open podcast ecosystem, in other words.

This was perhaps always on the cards for Spotify, though they weren’t particularly upfront about the possibility when the company first announced its Streaming Ad Insertion initiative back in January. Here’s what I wrote then:

That the technology will initially be limited to the platform’s original and exclusive is unsurprising, since any application on third-party podcasts would probably require Spotify to strike deals with those creators and publishers. I imagine the longer-term goal is to open SAI up to everybody, though the company opted to be vague on this point for now. When I raised the question, they emphasized that SAI is currently in a test phase.

And now here we are, with the platform moving to acquire a company that’s already been striking deals with publishers, creators, and additional advertisers.

This development should be read as supporting an interpretation of Spotify that should be quite apparent by now: the Swedish audio streaming platform wants to be the fundamental infrastructure facilitating the bulk of all podcast advertising, and while some has largely taken this to adhere to some “YouTube for Audio” metaphor, this move should stretch that out to a broader Google-like comparisons.

This should also add to the consternation of those already skeptical of Spotify, as well as those who hope to continue building a podcast business that won’t in some way end up being infrastructurally dependent on the Swedish audio streaming platform. In four years, will it be possible to monetize one’s podcast through advertising without having to give some cut to Spotify? I think it’s still too early to tell. For one thing, there are other corporate-level competitors to the stack: iHeartMedia, SiriusXM. The question, then, should be more specific: is it possible to sell podcast advertising without having to give some cut to this corporate layer? Sure, probably. It would just be an incredibly boutique or intentional business, not unlike the current state of the rest of digital media.

On a separate note, I got some peppy emails about Megaphone itself: the $235 million price tag proved to be surprising to some people. To be honest, it’s somewhat surprising to me as well. Graham Holdings’ most recent annual financial report, dated 2019, listed Megaphone as still being an “investment-stage business” that’s sorted under “Other Businesses” — suggesting that revenues weren’t particularly big enough to be spun out as their own category — and while its revenues were said have to grown somewhat year-over-year, it seems like the company wasn’t yet profitable.

Of course, the valuation around acquisitions like this tend to be less about fundamentals than about an expression of potential, so I’m inclined to view the Megaphone acquisition as keeping in that logical tradition. It’s vaguely similar to the conditions surrounding Gimlet Media’s $230 million price: in part a statement about the potential of the brought, and in part a statement of intent on the part of the buyer. This, Spotify seems to be saying, is how much it believes in its podcast advertising future.

Whether or not that future will actually come to pass — and whether or not it will truly reshape Spotify’s economics — remains to be seen, as a feature in The Baffler highlighted this week. It’s a worthwhile read if you’re in the mood for a skeptical refresher on the big picture regarding Spotify’s ambitions with podcasting, and how that relates to the company’s historical business lineage. This chunk, in particular, is the one to clock:

At the same time, John [a former Spotify employee] largely dismissed the idea that advertising might be a big potential money-maker for Spotify. He explained that, during his time at the company, advertising on Spotify was treated as merely a contractual obligation of the company’s deals with major labels. “The argument would be, they need an ads product, because of the relationship with the labels. And as long as they have a free tier product, they have to run ads.” About 30 percent of advertising revenue would be kept at Spotify, with the rest going to rights holders, meaning it effectively went to the major labels. John and his coworkers would often do “back of the napkin math” to try to estimate if Spotify was making any money off of advertising at all, comparing the vast amount of investment the company poured into its advertising efforts (paying for the people and the tech to build its advertising mechanisms, for one) with the amount of profit it brought. “I’m convinced Spotify loses money on ads,” he said. “It does not add up.”

There is a larger thesis to the Baffler feature, one that I should foreground a lot more in discussions about Spotify moving forward. That premise is this: reflecting its track record in the music space, Spotify’s podcast machinations seem structurally set up to chiefly privilege those who are already stars. The same can be said about the broader podcast business as the space continues to industrialize, I think.

The bigger question remains: at the end of the day, are more podcast makers — as a collective community, but also broken down into individual segments — better off than they were five years ago? To what extent have their plights improved, and to what extent have things gotten worse?Last few things….

This thought by Peter Kafka is rattling around my head: “Thing you will care about if you are a current Megaphone client (like, for instance, Vox Media), and, potentially, a regulator: How will Spotify handle valuable data that Megaphone tracks about its clients?”

Speaking of Megaphone, here’s a Medium essay from Megaphone/Panoply’s first hire, Laura Mayer: “Personal Lessons I’ve Learned from Podcast Consolidation.” My time at Panoply overlapped with Laura’s as a subset: she was there when I joined, and she was there when I Ieft. (Though not for long.) I had few good experiences at that job, and working with her was definitely one of them.

I brought this up briefly in a past Insider, and to quick revisit: I don’t think there’s much room left for a standalone podcast hosting/advertising platform in this business, at least if it’s still searching for meaningful growth. The next few months will probably see one or two more pickups of such platforms still left on the market — there are still some obvious potential buyers left standing, and the question is if they’re interested enough to buy deep into podcasting — and then I think we’re just not going to see very much from this layer of the ecosystem for a long time. Maybe forever.

Quick memory. I remember back when Panoply divested from the content business — which resulted in full layoffs of its creative production teams — a source that remained the company at the time told me: “We’re pivoting into the kind of company that’s much less sexy. You probably wouldn’t write about us very much from now on.” And you know what? He turned out to be right.On a separate but related note…. iHeartMedia reported earnings earlier this week, where it stated the sum they’re apparently paying for Voxnest: $50 million. It’s unclear if this is in cash, or if it’s some combination of cash + performance-based earnouts. In any case, seems high to me. When the acquisition was first announced, several industry insiders had speculated around the $12-$15 million mark. As a reminder, iHeartMedia paid $55 million for Stuff Media.Meanwhile. Acast has struck a partnership with Patreon that’s meant to better integrate the paywalled podcasting solution available on both platforms. Both companies have already offered some form of support for paid subscribers-only podcasting — a key implement for indie podcast publishers leaning into direct monetization — but Acast’s solutions are a little more advanced than Patreon’s, and so this partnership means podcast creators using Patreon would get streamlined into Acast’s hosting platform. More details can be found in The Verge.