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Spotify’s Q2 Earnings: The Second Option, Advertising Opportunity, and Actual Payoffs

Not quite a direct payoff, but we’re seeing stuff.

So, I’m not sure if I’m going to make a habit out of writing up the quarterly earnings reports from major corporations that directly pertain to podcasts. Even if I wanted to, I don’t think there are enough publicly traded companies with meaningful and interesting enough podcast positions for me to spin much yarn around. Not yet, anyway. Maybe in the future; for now, there’s EW Scripps (home of Stitcher and Triton Digital), there’s Graham Holdings (home of Pinna and Panoply), there’s Acast, there’s SiriusXM (home of Pandora, which I’ll discuss briefly tomorrow), and then there’s Spotify (owner of Gimlet Media and Parcast, plus everything they want to do with the space). I suppose there’s also Apple, but there’s an entire digital cottage industry dedicated to Apple analysis, so I’ll just lean on them. (Well… now that I’ve listed them out, maybe I will make it a habit.)

Anyway: today, we’ll be spending time talking about Spotify’s Q2 2019 earnings and shareholder letter, because they’re pretty interesting and meaningful indeed.

Here are the major podcast-related takeaways:

(1) Spotify’s podcast audience grew by more than 50% quarter over quarter, and has “nearly doubled” since the start of the year. Of course, we don’t know the actual base number at the start of the year, but the very fact and scale of the growth itself is significant. For what it’s worth, I’ve heard consistent reports from individual publishers who’ve seen considerable rises in Spotify listening for their shows. (That said, the observation is often couched with “depending on the show.”) These unverified anecdotes, together with the claim made in this shareholder letter, seem to contribute to the increasingly established convention that Spotify is fast becoming a strong second driver of all podcast listening.

(2) In the breakout “Podcasts” section, the letter emphasizes Spotify’s increasing activities in securing exclusive and/or original titles, both within the States (as in the cases of individual shows like “Jemele Hill is Unbothered” and its acquired studios, Gimlet Media and Parcast) and beyond (as in the case of “Adam och Kompani” in Sweden and “3 Shots of Tequila” in the UK). Further emphasis was also given to its multi-year partnership with Higher Ground, the content production studio founded by the Obamas. And rightfully so: speaking anecdotally, it’s the only podcast-related thing that most non-podcast people in my life want to talk about when we do talk about podcasts. (Nobody really asked, but: I don’t really talk much about podcasts with people in my personal circle. Maybe it’s just my preference, but is there anything more boring that people who only talk about work?)

(3) The most meaningful takeaway, in my mind, can be found in the Revenue section. Breaking it out here:

We are seeing increased demand for podcast advertising following our recent acquisitions and continued development of owned and exclusive non-music audio content. While still relatively small, we continue to expect fast revenue growth from podcasts through the remainder of 2019 and into 2020. Over time, our ambition is to reinvent the podcasting ad experience by building a new tech stack to enable targeting, measurement, and reporting capabilities like we have for our core Ad-Supported offering.

This is, of course, consistent with a thread that’s been playing out re: Spotify for quite some time. Recall: back in January, TechCrunch reported that Spotify had been selling advertising on its own podcasts since mid-2018, and that the company holds considerable interest in going down that rabbit hole. “Think about what we’ve done around music — the more understanding you have around the music you stream, the more we can personalize the ad experience. Now we can take that to podcasts,” Brian Benedik, Spotify’s VP and Global Head of Advertising, told Techcrunch at the time. (This thinking was further followed up by a June announcement that Spotify was allowing advertisers to target ads based on the podcasts that people listen to.)

Which, I mean, yeah, totally. The majority of Spotify’s revenue may be in subscriptions, and the company’s general impetus should be to make moves that increase the value of a paid subscription and deepening user retention, but there is untapped opportunity for Spotify to control some considerable portion of podcast advertising market share. It’s a little more than just money on the table.

The way I see it, the shape of the opportunity is this: there are essentially two broad types of podcast advertising categories these days, the head-oriented premium host-read stuff that we all know and love on the one hand and the tail-oriented volume-inclined programmatic stuff on the other. As Stitcher CEO Erik Diehn pointed out in an interview earlier this month: “You have to remember: anybody that’s just selling host-read spots at the front of the catalogue is leaving an awful lot of inventory untouched in the back catalogue.” Spotify’s major lane here, it seems, may well be to claim back catalogue monetization, and to possibly do so in a way that provides a higher-quality experience than programmatically injected radio-style yelly ads. We’ll see.

One other thing: interestingly enough, The Verge reported on Spotify’s earnings yesterday with the framing that “Spotify’s big bet on podcasts is starting to pay off.” I don’t know. Frankly, it’s too early to tell, and if you’re inclined to base that assessment off the growth in on-platform listening, the crucial missing context is the original base number: after all, 50% growth on, like, 50k users is… well, 75k.

To spin it around: what metrics/findings would make me agree with the notion that Spotify’s podcast investments are paying off? For one thing, given Brian Benedik’s statement and the general opportunity, actual realized podcast advertising revenue is one metric, particularly if it becomes a meaningful share of overall advertising revenue such that investors could feel great about that. Also: some modicum of proof that Spotify’s original and exclusive podcasts are attracting new paid subscribers — in the US or beyond — or are demonstrably increasing revenue-per-user. (Average revenue per user has declined.) And if there are no such hard numbers to share, I’d at least want to see actual Spotify originals pushing pop culture coverage somewhat once they’re out in the open — and not simply off the mere announcement of projects, as in the case of the Higher Ground partnership.

Anyway, that’s just me. You can find more overall assessments of Spotify’s earnings elsewhere — generally speaking, MAUs and paid subscribers came slightly under expectations, leading to a slight stock dip — and that’s all I got for today.