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Investors Love Spotify's Continued Podcast Push

By Evan Niu, CFA – Jun 19, 2020 at 8:00AM

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Podcasts represent a compelling path to profitability.

Following the podcast exclusivity deal inked last month with Joe Rogan, Spotify (SPOT 0.94%) is continuing its podcast push with more content deals and investors are extremely excited about it, sending shares soaring to all-time highs. News broke this week that the Swedish music-streaming leader has scored yet another major celebrity to produce podcast content: Kim Kardashian West.

Spotify also announced that it had partnered with AT&T's (T 3.81%) Warner Bros. to create exclusive podcasts around popular superheroes like Batman and Wonder Woman. Here's why investors are cheering the moves.

Microphone icon over a sound wave

Image source: Getty Images.

The next Serial?

The series featuring Kardashian West is said to focus on criminal justice and true crime, starting with a murder case from 1994, according to The Wall Street Journal. Kardashian West will co-produce the series with TV producer Lori Rothschild Ansaldi.

It's unclear how much Spotify may be paying for the content, but the deal with Joe Rogan was reportedly worth an estimated $100 million. That's on top of the $600 million the company has already spent acquiring other podcast start-ups and content producers -- Gimlet, Parcast, Anchor, and The Ringer -- over the past year and a half.

Spotify is probably hoping for a hit like Serial, the true crime podcast series released in 2014 that went on to become a cultural blockbuster.

The hero that Spotify needs

The DC partnership is a multiyear pact that will feature a series of narrative scripted podcasts that take place within the DC Universe. Think of Batman, the Justice League, or Birds of Prey, among other familiar superheroes.

Warner will manage the overall business and strategy, including creative aspects around development, programming, and production. Spotify will be in charge of marketing and distributing the exclusive podcasts on its streaming platform. The companies also teased the possibility of creating new content around original intellectual property.

DC's longtime rival, Disney's Marvel, has a handful of official podcasts, including a scripted miniseries starring Wolverine that was released back in 2018.

The podcast path to profitability

Spotify CEO Daniel Ek has already outlined his vision for the future of the streaming tech platform. Ek wants to expand Spotify beyond just music to encompass all forms of audio content and entertainment. For now, that primarily entails an aggressive expansion into podcasts to challenge Apple, but presumably could eventually include other forms of content like audiobooks, where Amazon.com dominates (some audiobooks are already available on Spotify).

One particular reason why investors are excited about the strategy is that original podcasts don't carry the same types of royalty burden as licensed music does, so the move will potentially pave the way for higher margins as the cost structure incrementally shifts from variable costs to fixed costs.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Evan Niu, CFA owns shares of Amazon, Apple, Spotify Technology, and Walt Disney. The Motley Fool owns shares of and recommends Amazon, Apple, Spotify Technology, and Walt Disney and recommends the following options: long January 2021 $60 calls on Walt Disney, short January 2022 $1940 calls on Amazon, long January 2022 $1920 calls on Amazon, and short July 2020 $115 calls on Walt Disney. The Motley Fool has a disclosure policy.

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