Good morning,
It’s Thanksgiving week, and I expect content to be light; today is a regular update, I plan on a lighter update tomorrow, including follow-up to last week’s Article on Unity and Weta, and then the rest of the week will be off.
On to the update:
Spotify’s Earnings
I’m a few weeks late to this, but these results, given my writing about Spotify, are worth covering; from Bloomberg:
Spotify Technology SA’s move into podcasting is starting to pay off. The company reported a 75% jump in advertising sales for the third quarter on Thursday and projected it would eclipse 1 billion euros ($1.16 billion) in advertising sales for the first time on an annual basis. The company reported overall sales of 2.5 billion euros and operating income of 75 million euros, both surpassing analysts’ forecasts.
Investors have been waiting for Spotify’s multibillion dollar investment in podcasting and advertising technology to turn its money-losing music service into a profitable audio service. After shares of Spotify spiked for most of 2020, they’ve sagged this year as investors soured on the podcasting gambit. The company has urged patience and said that podcasting is still a drag on profit margins. But Chief Executive Officer Daniel Ek said the company’s efforts to build a podcasting business are now ahead of schedule, and projected advertising would one day account for more than 20% of its total sales. Advertising generated 323 million euros of revenue in the third quarter, which is about 13% of total sales.
This is absolutely the headline takeaway, but it is worth diving into some of the details that further confirm that Spotify’s push is paying off exactly as you would hope if their strategy is sound.
Spotify’s Podcast Payoff
The first bit of good news actually comes from last quarter’s earnings call; Ek said:
Then, of course, there is the growing strength and importance of our ads business. Admittedly, this is an area where I previously didn’t spend much time, but it’s become impossible to ignore. It’s now safe to say it’s becoming a second big revenue driver for Spotify. And I’m especially inspired by the early success of the Spotify Audience Network. While we are growing the overall ads business from a small base, the potential is significant and the trend line is clear. We saw strong growth of 110% year-over-year. Adjusting for FX, the growth is even more impressive, coming in at 126%. And looking at Podcasts, Podcast revenue was up over 627% year-over-year, or nearly 200% on an organic basis. And the continued outperformance is currently limited only by the availability of our inventory, which is something we are actively solving for.
First off, a quick disclosure: I was actually mentioned on this earnings call due to the integration built between Passport and Spotify; this is not exclusive to Passport, it’s just an example of Spotify’s Open Access Network, and neither I nor Spotify benefit monetarily from this integration (other than the fact my subscribers can now listen to subscriber-only podcasts on Spotify).
That noted, the key sentence in this excerpt is “the continued outperformance is currently limited only by the availability of our inventory”; the Spotify Audience Network is the ad network wherein Spotify delivers on-demand ads based on their understanding of the customer. In this sense the ads are much more akin to a Facebook-style ad than they are a generic webpage ad; the problem, though, is that the only place these ads worked were with Spotify-owned podcasts streamed through Spotify (you could pick up on this if you listened to Spotify-owned podcasts on other podcast players, where the host would indicate they were taking an ad-break…and then there would be no ad).
This is why the Megaphone acquisition was so important to Spotify’s plans: by owning a podcast host Spotify gained infrastructure to start inserting ads into podcasts played on other platforms, and also podcasts streamed on their own. These ads won’t always be quite as good given that Spotify’s knowledge of the listener isn’t as accurate, but the more inventory the better.
At the same time, Spotify is also increasing the number of people who listen to podcasts on Spotify; from this quarter’s earnings call:
We started our journey three years ago in podcasting with a catalog of about 185,000 podcasts. And we were really nowhere compared to the largest players in the industry. Today, we have 3.2 million podcasts on the platform, a growth rate of over 1,500%. But despite the fact that we’re still a relatively new entrants, previous data indicated we have become the top platform for podcast consumption in 60-plus countries. And now, according to Edison research and our own internal sources, we recently became the number one podcast platform US listeners use the most.
As I noted when Spotify signed Joe Rogan, a big part of Spotify’s marketshare growth has been converting new podcast listeners; the point of that signing, though, and other exclusives, has been to win over podcast listeners from other platforms as well. I don’t have any hard numbers as to how successful Spotify has been, but the fact they are now number one suggests their approach has worked out pretty well. What is important for the business is that the answer as to what is the best platform for targeted audio advertising is now unequivocal: it’s Spotify, not only because they have the best targeting, but also because they have the most listeners.
That’s not the only advantage of the ad network approach, though; note this bit about Anchor from CFO Paul Vogel:
I would say aggregating into Anchor podcasters is a big opportunity for us to add incremental inventory into the ecosystem, which we think will be very bullish, because as I’ve said, a couple of times, we know the demand is there. So for us it’s really about adding incremental supply into it. We’re also launching new markets, I believe it’s four new markets. They will have access to this as well. So the combination of both the Anchor podcasters, but also the new market growth should be pretty significant for us. Again, we’ve been optimistic with how it’s gone. We talked about how strong advertising was in the quarter, and adding both the Anchor podcasters as well as new markets into the environment should be pretty supportive of our further growth.
The thing about Anchor podcasts is that while they make up a huge percentage of new podcasts — the entire point of the service is that it is super easy to get started — the vast majority of those podcasts have few if any listeners. That’s the brilliant bit about the Spotify Audience Network though: because it is based on targeting listeners, as opposed to podcasters, it doesn’t matter how many listeners a particular podcaster has. Indeed, to Spotify, it’s completely immaterial: all they see is an inventory spot to be filled, even if the listener is the only one subscribed to a particular podcast.
This is a point worth dwelling on, because it gets at exactly how disruptive platforms like not just Spotify but also Facebook are: the liquidity introduced by targeted advertising is so powerful that it reduces every single piece of content to the exact same multiplier as far as profitability goes. When it was difficult to sell podcast advertising, that was a boon to large players because their reach overcame the trouble of selling and tracking an ad campaign; that meant they took more share of the market than their reach necessarily dictated, because all of the small players took nothing. When the target that matters is the listener, though, then every podcast can be priced perfectly, from the podcast with 10 fans to the one with 10 million. This is good for the smaller players, but it’s especially good for the market maker, because there is no longer a premium being paid to larger players simply for being worth the trouble.
That noted, podcasters ultimately want to make money. This was the most encouraging note of all, when Vogel was asked about creator and advertiser feedback to the Spotify Audience Network:
So the feedback has been really, really strong. We’re super encouraged. If you look at Megaphone in particular and Spotify Audience Network, we’ve got 50% more podcasts in the ecosystem since the acquisition of Megaphone. One in five advertisers are now using the product as well. The feedback has been really great. We’ve seen a number of partners, who have seen performance go really well and have given us incremental inventory throughout the quarter, because of performance that we’re giving them is higher and they could see other places and in some cases, higher than they’re getting in their own direct sales force.
This is why the previous point, about Spotify taking over the market from individual podcasters, is in fact a win-win: yes, Spotify is forcing individual podcasters to take a price based on nothing more than the audience they can command (as opposed to a convenience premium), but that is worth it because Spotify is driving so much more advertising demand that podcasters are coming out ahead. Podcasters wouldn’t be giving additional inventory to Spotify were it not profitable to do so; that it is suggests that Spotify’s flywheel is only getting started.
Universal, Taylor Swift, and Internet Power
This Wall Street Journal article has lots of interesting tidbits:
Taylor Swift’s rerecorded songs are outperforming their original counterparts on streaming services, going viral on TikTok and landing lucrative licensing deals—all of which is wresting control and earnings from the owners of her early recorded music catalog. On Friday, she released the latest batch of rerecordings, a new version of her 2012 hit album “Red.” Ms. Swift’s success with the recordings over the past year highlights why her label company, Universal Music Group, has been trying to protect its rights with other artists who later might want to rerecord their songs.
In its recent agreements, Universal has been effectively doubling the amount of time that the contracts restrict an artist from rerecording their work, according to music attorneys and executives. At a time when making—or remaking—and distributing music is easier and cheaper than ever, Universal, the world’s largest label company, is moving to protect its investments in artists’ work.
The first thing that is interesting is that Universal is giving out some goodies in exchange for more control:
Some of the other terms Universal has added to its contracts include increases in royalty payments to artists and more transparency into how royalties are calculated, said the person with knowledge of the contracts.
This makes sense: the vast majority of artists will never reach Swift’s stature, and thus wouldn’t care about the ability to re-record, whereas they very much would like more royalty payments; Universal, meanwhile, really only cares about protecting the returns from true stars like Swift.
Prior to the rise of music consumption on streaming services like Spotify and Apple Music, music labels were less threatened by the prospect of rerecording because releasing music on a wide scale without the help of a label was far more difficult. Now, the ease of digitally recording, distributing and promoting music has diminished labels’ gatekeeper status, which was prevalent when costly physical formats and radio were the keys to stardom.
I noted above that Spotify increases podcaster liquidity such that the only thing that matters is the number of listeners; this is that same concept on steroids, but in this case it works to the advantage of the biggest star of all. In a world of zero friction Swift can, with a tweet or a Tumblr post, fundamentally shift the economics of her recorded catalog. It’s the most extreme example yet of how the Internet is a smiling curve: the advantages go to the creator on one side and the Aggregator on the other, and everyone in the middle is seeing their margins eroded with the liquidation effect of the Internet.
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