Why Spotify’s expensive bet on big names like Meghan unravelled

Adding to the trouble has been a recent advertising downturn, which has put further strain on the ad-funded portion of the group’s “freemium” model. Now, just four years into its podcast push, Spotify is reversing course.

In January it parted ways with Dawn Ostroff, the executive who masterminded the podcasting strategy, as part of broader layoffs affecting 600 workers. Earlier this month it made 200 employees redundant in a second wave of cuts and said it would merge Gimlet and Parcast, scaling back original programming and relying more heavily on deals with third-party producers. The podcasting dream now appears to be in disarray. Even Daniel Ek, Spotify’s co-founder and chief executive, admitted he got a “little carried away”.

For Spotify, podcasts offered a new way of attracting listeners to its platform, as well as splashy marketing opportunities to boost the brand. The company hoped podcasts would help to diversify its business model by reducing its reliance on expensive music licensing deals with record labels.

In reality, these benefits have failed to come to fruition. There has been no discernible reduction in music licensing costs. In fact, recent calls by record labels for an overhaul of the streaming model raises the prospect that costs could rise further. Nor has there been a significant uptick in growth for Spotify’s user base, which hit 515 million in the first quarter, but is increasingly skewed towards ad-funded listeners rather than paying subscribers.

Spotify insists podcasts have helped to sustain revenues on its ad-supported tier. Yet advertising made up just 11 per cent of the company’s overall revenue in the first quarter. Losses at the start of the year narrowed from the previous three months, but still stood at a hefty €156 million ($249 million). As Enders puts it, the podcast push has “spectacularly failed to deliver the anticipated financial rewards to shareholders”.

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The lacklustre returns raise the question of whether Spotify simply bet on the wrong horse. While the streaming platform has grown its podcast listenership to 100 million, generating money from this audience has proven more elusive.

Spotify has a proprietary ad tech platform for its music, which is meant to make attaching ads to shows simple and lucrative. Yet podcast makers who distribute their shows on Spotify already use third-party providers such as Acast to monetise their shows, cutting out the platform.

It is also unable to replicate Apple’s format, which splits podcasts from music. Apple allows publishers to set their own price for individual subscriptions or downloads, before taking a cut. This ensures Apple generates consistent revenues without having to spend significant sums on top talent. Spotify struggles to match this model given it sells its platform for a single up-front monthly fee.

Annie Langston, an analyst at Midia Research, adds that Spotify’s platform is “oversaturated”, making it harder for any show to become a hit. Spotify’s troubled foray into podcasting has also highlighted some of the limitations of the audio format itself.

Eye-wateringly expensive deals with celebrities have been centred on the premise of exclusivity, robbing rivals of content and forcing listeners to come to Spotify. Yet the most newsworthy revelations made on podcasts are quickly picked up elsewhere in the media, eroding the benefit. And unlike music, people tend not to re-listen to podcasts. Shows, unlike artists, also often fail to replicate success beyond their home market.

“Podcasts don’t really travel that well,” says Enders. “It’s a cultural product. Joe Rogan is not a big star here, but he’s a big star in the US. He had Elon Musk on and they were smoking dope … it’s the kind of thing that wouldn’t really land a lot of punches here.”

For some industry observers, Spotify’s troubles are a symptom of the wider challenges facing podcasting – an industry that has always been up-and-coming but never quite arrived.

As Nick Hill, co-founder of podcast production company Podot, put it in a blog post last year:

“In every year of the medium’s existence, it’s been described as ‘the next big thing’.” At what point do you have to just call it, and say that rather than being a ‘big thing’ in waiting, it’s just a run-of-the-mill ‘medium thing’?” Ultimately, this could be a rather sobering realisation for Spotify following its heavy investment in the audio format.

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There are signs it is not fazed, however. Earlier this month the company inked an exclusive deal with Louis Theroux, luring the documentary star away from the BBC and proving its strategy of pursuing celebrity hosts is not dead in the water.

Yet the heady days of $US100 million podcast deals seem to be long gone, with any future deals likely to be on a much smaller scale. Instead, Spotify will focus on generating more money from its podcasts in a bid to win over investors. Central to this is Megaphone, the podcast advertising company it bought for €235 million in 2020. Bosses are also taking a more relaxed approach to exclusivity, opting instead to distribute shows to rivals including Apple. Langston says the platform will need to make its shows easier to find in order to generate stand-out hits and hook in regular listeners.

At this stage, Spotify looks unlikely to abandon its dreams entirely. But as shareholders start to question whether Daniel Ek’s big bet will deliver any returns, the company will have to prove that podcasting can generate profits, not just publicity.

Telegraph, London

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