Over the past year, Spotify (NYSE:SPOT) has been mounting an aggressive podcast offensive against podcasting leader Apple (NASDAQ:AAPL), spending $400 million on a handful of acquisitions while developing advertising and analytics tools, and seeding exclusive content for its platform. Apple still has more podcasts available within its ecosystem, but quantity alone may not be enough to fend off Spotify.

The Swedish music-streaming leader rolled out podcast recommendations a couple of months ago, leveraging its strong content-discovery technology. Now, it's introducing Streaming Ad Insertion (SAI) for podcasts.

Woman reading into a microphone while creating a podcast

Image source: Getty Images.

Modernizing podcast advertising

"Today, despite being a digital medium, the podcast industry measures audience, reach, and impact much like you would a full-page ad in a magazine," Spotify's Alex Leung wrote in announcing SAI. "Advertisers generally have a sense for who they're reaching, based on survey data and the magazine's target audience."

That's comparable to how linear TV commercials work, too, but the advertising industry's rapid shift toward digital ads presents advertisers with a whole new set of targeting capabilities. Spotify will provide podcast creators with granular analytics and data-driven marketing tools in a way that Apple never has.

SAI will dynamically insert ads within podcasts that are highly targeted to their audiences using Spotify's trove of listener data. Traditionally, advertisers have paid for sponsored ads that content creators read to their audiences. SAI will enable different -- and ideally, more relevant -- ads to be inserted into podcasts based on what Spotify knows about the listener.

CEO Daniel Ek has pointed to his company's data as a key advantage. "Spotify is a logged-in environment where we do have demographic data," the chief executive said in April while discussing the opportunities in podcast advertising.

Since podcasts have historically been distributed via downloads, advertisers never actually knew how many times their sponsored ads were being listened to. But amid the broader shift from downloading audio content to streaming it, Spotify is uniquely positioned to provide detailed analytics regarding ad impressions, allowing buyers to get a better sense of the ROI they're getting from their advertising dollars.

Podcast ad revenue forecast to hit $1 billion

Apple has long been the undisputed leader in podcast distribution, and Spotify has emerged as the No. 2 player. It's fair to say that innovation in the podcast advertising niche has largely stagnated while Apple has been No. 1, which is both embarrassing and expected.

While podcast creators lean heavily on advertising to monetize their content, and would appreciate stronger tools, Apple disdains ad targeting due to the fact that it inherently requires a sacrifice of user privacy. That aversion to advertising businesses is one reason why Apple Music doesn't have an ad-supported subscription tier while Spotify does. SAI is based on technology Spotify already uses in music streaming.

Podcasts are a booming industry, and U.S. podcast advertising revenues -- which were expected to hit $679 million in 2019 -- are forecast to top $1 billion in 2021, according to the Interactive Advertising Bureau and PricewaterhouseCoopers. If Spotify can provide a more robust set of tools to advertisers and content creators, it should be able to grab a chunk of that growth.

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