While many investors see Apple (AAPL 0.47%) as Spotify's (SPOT -0.67%) biggest competitor, Amazon (AMZN 1.87%) is starting to pose more of a threat. As Spotify has made headlines with its big podcasting deals over the last couple of years, Amazon has quietly built a stable of exclusive audio content under its Audible business. Now, it's launching a premium service offering unlimited access to its 11,000 exclusive titles.

In Spotify's efforts to become the world's No. 1 audio platform, Amazon's presenting a big challenge.

A young woman wearing headphones looking at her smartphone.

Image source: Getty Images.

Introducing Audible Plus

Audible's new plan, dubbed Audible Plus, costs just $7.95 per month and offers subscribers unlimited access to its library of exclusive audio content and podcasts. Subscribers currently on Audible's $14.95 and $22.95 per month plans will also gain access to that content while maintaining their monthly book credits.

Audible won't include access to other freely available podcasts like those found across Spotify, Apple Podcasts, and dozens of other podcast players. It'll also be an ad-free experience, whereas Spotify serves ads within podcasts, even to its paid subscribers.

Audible Plus on its own doesn't represent a big threat to Spotify's listener base. The streaming-audio leader counts around 300 million monthly active users. About 21% of them listen to podcasts, but that number's growing. Audible doesn't release listener stats publicly, but it's very likely to be much smaller than Spotify.

Audible Plus represents a major competitor for Spotify in terms of content acquisition. And with Amazon's existing presence in music streaming and advertising, it could be just a few steps away from launching an audio platform more like Spotify's.

Spotify's already spending big on podcasts

Over the last couple of years, Spotify's spent around $1 billion on podcast technology, original content, and exclusive rights. If Spotify has to go up against other bidders for podcast content, that number could climb much higher.

Investors should consider how Netflix saw the rates for licensed content climb rapidly in the early 2010s as more competitors entered the streaming video market, including Amazon. While the market for podcasts isn't as concentrated in the hands of a few big companies as the film and television market, the added competition will likely push prices higher.

Apple has also expressed interest in podcast content, mostly around its own Apple TV+ original series. But if the Cupertino company pursues that strategy further with more podcast or narrative content, it also has plenty of cash to bid against Spotify for top creators.

Spotify has historically operated around breakeven operating income, and its free cash flow is under pressure as it spends big on podcast companies and deals with the impact of COVID-19. It's generated just 6 million euros in free cash flow through the first six months of 2020 compared to 223 million euros during the same period in 2019.

The competition is just getting started

Amazon isn't the only company competing for exclusive premium podcasts and audio content. Stitcher, which SiriusXM recently agreed to acquire, is also in the premium podcast business. As mentioned above, Apple is interested as well. As podcasts become more popular, Spotify will naturally face more competition for premium podcasts, and likely from deep-pocketed tech or media companies.

That could put pressure on its free cash flow and operating income for some time to come. But if the Netflix analogy continues to play out, greater investment in exclusive and original podcasts will eventually translate into greater recurring revenue and strong free cash flow growth.