Spotify Technology (SPOT 4.00%) has been investing in podcasting for over a year. It started by producing its own podcasts with well-known talent in music and comedy, and it's recently started acquiring podcast media companies, including Gimlet and Parcast, as well as podcast hosting platform Anchor. So far, it's spent over $400 million on podcast content and technology.
Getting its 217 million monthly active listeners to stream more podcast content is essential for Spotify. The company pays out a royalty based on its revenue to music labels, which puts a cap on its gross margin. Podcasts could have much more favorable economics for Spotify, especially if it's producing the podcasts itself.
While Spotify can produce and distribute great podcasts, that doesn't do the company any good if its users don't listen to podcasts via its app. Over 60% of podcast listening still happens on Apple's (AAPL 4.08%) default podcast app. Spotify accounts for just 10% to 20% of listening for top podcasts.
The company is taking some steps to get its listeners hooked on podcasts in Spotify.
Overhauling the app to put equal focus on podcasts
Spotify is reportedly testing a version of the app that puts additional focus on its podcast content: Tabs at the top of users' libraries show menus for music and podcasts, according to sources cited by Bloomberg. That's vastly different from the wide array of music options the app currently presents users before showing them podcasts.
Management has been working to improve podcast discovery in the app since it started investing in podcast content. "Personalization is one of our core pillars of our strategy. And there, we are obviously really, really far along in music; podcast is a much newer space for us," CEO Daniel Ek admitted during the company's first-quarter earnings call.
But discovery is only part of the challenge. Spotify needs to make its app the default for consumers when they want to listen to podcasts. Right now, listeners don't associate Spotify with podcasts, as they do with Apple's app. (That's not a huge surprise considering Apple practically invented the format, and it's named after one of its most iconic products.)
Spotify can use some of its most valuable screen real estate to push more podcasts into users' ears and help associate its app with all streaming audio, not just music.
Algorithmic playlists -- now with podcasts
In Spotify's registration filing with the Securities and Exchange Commission, it said 17% of all listening on its app comes from its algorithmically generated playlists. Listeners love Discover Weekly and Daily Mix playlists.
Spotify is reportedly testing a new personalized playlist called Daily Drive, according to The Verge. Daily Drive incorporates shorter podcast episodes alongside music designed for users to listen to on their commutes.
Podcasts are a bit harder to serve algorithmically compared to music, which is eminently re-listenable -- and organized in millions of playlists on Spotify for the company to mine for data. But the company can take what it's learned from its personalized music playlists, and apply a similar method to provide personalized podcast content to its users.
With its audience already accepting of its algorithmically generated playlists, Spotify could use Daily Drive to get people to think of Spotify as a podcast-listening app.
A long way to go
Spotify's efforts in podcasting still have a long way to go. You can expect the company to continue investing in content, technology, and new ways to get its users to associate its app with podcasts; the company has already said it could spend another $100 million on podcast acquisitions this year.
On top of buying or creating podcast content, attracting other creators to the platform, and getting users to listen to more podcasts, Spotify also faces the challenge of monetizing podcasts. Podcasts typically have ads baked into the stream, either read by hosts or otherwise produced by a podcast media company. Spotify sees an opportunity to serve ads dynamically, creating a more personalized ad experience for listeners. That could result in a share of ad revenue for Spotify from the content it doesn't create itself.
We're still in the early innings of podcasts on Spotify, and management believes monetization will figure itself out over time. For now, the focus is on improving content selection and discoverability: two big challenges in their own right.