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  • Brett Schafer

What is Spotify’s Endgame?

Big news out of Sweden this week. Spotify, everyone’s favorite audio streamer, has gotten exclusive rights to the number one podcast in the world, the Joe Rogan Experience (JRE).

This is a huge deal. Not just for Rogan, who will likely net over 100 million on the deal (exact numbers are not public), but for Spotify’s long-term ambitions. CEO Daniel Ek started talking in 2019 about the company’s strategy outside of music – “owning the ear,” as he has called it – but nobody thought they’d be this aggressive. They now own one of the top sports/culture networks (the Ringer), two high-level storytelling/internet/tech networks (Gimlet and Parcast), and have exclusive global rights to the most listened to show in the world.

Right now Apple Podcasts is where the majority of U.S. downloads happen (60% is a rough estimate that is thrown around). Each JRE show gets millions of YouTube views. So why would Rogan risk losing a large chunk of his audience by going to Spotify? Here was his explanation:

“It will be the exact same show,” Rogan said in a video. “I’m not going to be an employee of Spotify. We’re going to be working with the same crew, doing the same show. The only difference will be it will now be available on the largest audio platform in the world.”

Exactly. While Apple dominates in the United States, Spotify is now the number one platform in many international markets. At current growth rates, they will be number one in every market within five years. The JRE has the potential to become a global phenomenon, introducing the show to the almost 300 million Spotify MAUs that should grow to 500 million in a few years.

But why would Spotify want to buy the JRE? How does that help them as a business? Let’s talk about that next.

Why Spotify Wants an Exclusive Deal

Here are some questions I am asking myself as a Spotify shareholder concerning the JRE signing (and other, smaller exclusive deals, like with the Obamas):

  1. Will the advertising money bring in any material revenue?

  2. Does the show being exclusive drive meaningful MAU growth?

  3. Will new podcast-driven MAUs convert to premium subscribers at the same rate? (historically around 45%)

The rumor is that the JRE has around 200 million monthly downloads. At a $100 CPM* per show (just an estimate), that is $20 million in monthly revenue, or about $60 million a quarter. Spotify did about $2 billion in revenue last quarter, so adding $60 million is slightly meaningful, but not really. Add in all the other shows they own and you might get somewhere though.

What Spotify really cares about is converting JRE listeners (and Bill Simmons listeners, and Reply All listeners) to Spotify users, and then hopefully to premium subscribers to the music service. If 25 million new sign-ups occur because of this deal, with 10 million eventually getting premium at an average of $7 a month, that is $840 million of new revenue coming in every year. That money, after partially being doled out to the labels, of course, can be put back into R&D, marketing, UI improvements, and more content. And then, as with all great businesses, the flywheel starts turning.

The Long-Term Game

The three large music labels still take around 70% of Spotify’s revenue. Contrary to popular belief, this is not on a pay-per-stream basis. Labels are sent money based on regional revenue pools and what percentage their content makes of the local streaming market. The deals are complicated and not made public, but suffice to say, the labels have it pretty good. I mean, Spotify and the Artists do all the work and the labels get half the money. What a world.

With music continuing to be a low-margin commodity (at least for the next five years), Spotify has bet big on podcasts. This will help them in two ways. First, since they own or have exclusive rights on a lot of content, overall profit margins will increase. Second, and this is the more important one, it will slowly give them leverage to strike better deals with the labels. Why? Because if a third of app usage/revenue comes from podcasting, and the labels have nothing to do with podcasting, they are suddenly a lot less existential to Spotify’s success.

This introduces Spotify’s long-term ambitions. In my view, they are trying to build two vertically integrated pillars. The first pillar was going to be music, but with all the issues in that market, the spoken-word has to come first. Starting with acquiring podcasts, this will expand to:

  1. Video integrated studio shows (launching with JRE)

  2. The merging of audiobooks and podcasts (already doing this with Harry Potter)

  3. Building a podcast advertising stack to bring internet quality ads to creators of all sizes

  4. Allowing premium users to go ad-free

  5. Letting shows record live on Spotify to replace the “in-the-moment” feel of radio (less confident in this one actually happening)

If they do it right, a podcasting advertising platform could be printing billions in high-margin revenue within a decade, if not sooner. What’s beautiful about this is Spotify’s freemium version (the last step of their customer acquisition funnel) will actually be making them money. And once they make shows ad-free for premium subscribers, they’ll finally attain that elusive pricing power and break away from Amazon, YouTube, and Apple Music.

Music is Second

After a few years of podcasting/MAU growth to obtain more leverage over the labels, Spotify will move on its music ambitions. These will include:

  1. Paid artists promotions (already doing it)

  2. Decentralizing the payout structure (stopping revenue pools, going to artists directly, paying based on a subscriber’s percentage of listens, etc.)

  3. Leaving the labels entirely

Because of all the moving parts, it’s harder to see how the music side will play out. It may happen slowly over a decade, or all at once when nobody expects it. But understand that it will happen. Spotify won’t let the labels price-gouge them forever. Nobody would.

In 2019, the audio industry was worth roughly $100 billion. Over time, most of that spend will move from analog services to on-demand streaming. Spotify, if they are able to capture a majority of listenership, will be able to take and grow the money spent on audio by giving it internet-enabled scale and personalization.

*How much money you bring in per 1,000 listens.

Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.

#podcasts #JoeRogan #Stocks #Investing #Audio #Spotify #Finance

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Listen On: Spotify Apple Podcasts Disclosure: The author and podcast guests are not your financial advisors. Ryan Henderson and Brett Schafer are general partners and portfolio managers at Arch Capita

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