Spotify (NYSE:SPOT) is expanding its push into original podcasts again with an exclusive deal with Warner Bros. and DC Comics. The multi-year deal with the AT&T subsidiary gives Spotify the ability to produce, market, distribute, and sell ads against podcasts built around DC Comics-based intellectual property. That means Batman, Superman, and Wonder Woman could star in their very own audio story.

The deal follows closely on the heels of a contract with Kim Kardashian West and last month's deal with Joe Rogan.

Spotify's growing podcast investments are a clear sign that its strategy in this medium is working. And it's going after a wide audience with various topics, personalities, and characters, ensuring anyone will be able to find exclusive podcasts they like on the streaming service.

DC comic characters around the DC logo. Spotify's logo in the corner.

Image source: Spotify.

The core podcast strategy

There are a couple of aspects to Spotify's podcast strategy.

First, it can lower subscriber acquisition costs by bringing listeners onto the service through podcasts as well as music. Exclusive and original podcasts like its forthcoming DC Comics narratives or the Joe Rogan Experience (starting at the end of 2020) ought to be even more effective at attracting new listeners. Both of those examples have built-in fan bases, and Spotify will be the only place to listen to those shows.

Spotify also contends that increased engagement with podcasts leads to greater engagement in music listening as well, leading to lower churn rates and higher customer lifetime value. "We have seen benefits to retention on the order of several hundred basis points, which is a material change on a retention curve, for users that engage with spoken word content relative to those that haven't, and early data indicates that these users are more likely to convert to Premium over time," management wrote in its fourth-quarter letter to shareholders.

Spotify warned investors that its data still doesn't show a clear causality between podcast listening and increased customer lifetime value. That said, its continually increasing investments in podcast content indicate management's confidence. Not only is it striking big deals with big names, it's producing more originals. Last quarter, it released 78 original and exclusive podcasts. That compares to just 15 in the first quarter of 2019.

The talent-grab opportunity

Spotify has an opportunity to win over valuable talent and lock down important intellectual property right now. While many television and film productions are halted and concert tours are suspended, there are many content createors available to work on new projects.

"Our portfolio of [original and exclusive podcasts] was more resilient to the impact of COVID-19, as nearly all our show teams shifted to producing podcasts while working from home," management noted in its first-quarter letter to shareholders. "We don't think yet that the best talent has come to the podcast format, and we're seeing stronger and stronger growth on that side as well," CEO Daniel Ek added during an earnings call last year.

Spotify will do well to win over more big names and titles for its podcast productions. New releases could come before the end of the year, perhaps around the time fall television series usually start. But with video production delays occurring this spring and summer, content-hungry consumers may have to look elsewhere for entertainment. Podcasts may be able to fill some of that demand, and that's great timing for Spotify to ensure strong momentum for its investments in this space.

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