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How Spotify's Exclusive Podcast Deals Could Pay Off

The deals stand to give Spotify's podcast advertising business additional scale, as well as boost user engagement and loyalty for Spotify's apps.
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Spotify  (SPOT) - Get Spotify Technology SA Report is pursuing an ambitious podcast strategy that borrows from both Netflix  (NFLX) - Get Netflix, Inc. Report and Alphabet's  (GOOGL) - Get Alphabet Inc. Class A Report YouTube’s playbooks. And it could very well pay off.

The music streaming leader’s stock rose nearly 13% in Thursday trading and made new highs after it announced a pair of additional, high-profile deals for exclusive podcasts. One involves a podcast featuring Kim Kardashian West that will focus on criminal justice reform; the other involves teaming with AT&T’s Warner Bros. to launch an exclusive set of “narrative scripted podcasts” involving DC Comics superheroes such as Batman, Superman and Wonder Woman, as well as other Warner Bros. IP such as Looney Tunes.

The deals come a month after one with Joe Rogan that reportedly cost over $100 million and will result in Rogan’s hit podcast becoming a Spotify exclusive as of Sept. 1. And they arrive four months after Spotify inked a deal to buy Bill Simmons’ The Ringer, which hosts a number of sports and pop-culture podcasts, for a payout that will be in the range of €130 to €180 million ($146 million to $202 million).

In 2019, Spotify paid $340 million to buy Gimlet Media, a producer of 35 original podcast series and 15 branded series that are (by and large) distributed via both Spotify and third-party podcast services. It also purchased Anchor, which runs a popular platform for creating and distributing podcasts.

Spotify’s podcast investments appear to be driven by two primary goals:

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  1. Becoming the dominant player in a fast-growing podcast advertising market that’s currently quite fragmented.
  2. More broadly growing user adoption, engagement and loyalty for Spotify’s audio services.

Working in Spotify’s favor as it pursues goal No. 1: The company has a top-2 podcast service in terms of listening, trailing only Apple’s  (AAPL) - Get Apple Inc. Report Podcasts service, and its free/ad-supported music service has given it a lot of experience selling and delivering targeted audio ads at scale.

Also, despite maintaining a giant podcast listener base and reportedly looking to invest in originals, Apple -- perhaps due to its branding around user privacy and data-protection, and perhaps also because the profits from such an effort likely wouldn’t move the needle much for a company of its size -- hasn’t to date shown any interest in selling podcast ads.

With Apple Podcasts and slew of smaller podcast services (Sitcher, Google Podcasts, etc.) collectively accounting for well over half of all podcast listening, most popular podcasts will probably continue to be distributed via multiple services for the foreseeable future. But by having a stable of popular, ad-supported podcasts that are only available through its apps, as well as some popular podcasts that are distributed via multiple services but are also monetized by Spotify, Spotify can both significantly increase the scale of its podcast ad business (thus making it more appealing to advertisers and podcasters) and drive podcast listening share gains.

In addition, to the extent that Spotify’s podcast investments reel in new app users and lead existing users to spend more time using its apps, there are likely to be some benefits for its core music business, which (though now possessing 130 million paid subs) is still struggling to make money due to a combination of tough competition, large licensing/royalty payments to music labels and high marketing expenses. Strong podcast listening growth could help lower Spotify's music subscriber churn and drive more conversions of free app users into paid subscribers. The latter would also have the benefit of lowering Spotify’s customer acquisition cost for paid subs.

For these reasons, it’s hard to blame equity markets for giving a thumbs-up to Spotify’s recent podcast deals, even if (as is the case for so many other tech stocks right now) the current euphoria might be a little excessive.