Spotify (NYSE:SPOT), the global leader in music streaming, announced on Nov. 10 that it is acquiring podcast advertising and publishing platform Megaphone. The deal values Megaphone at $235 million and marks yet another investment by the Swedish tech giant into the podcast industry. Here's what Spotify shareholders need to know about the deal.
What Spotify is getting
Megaphone is a middleman between podcasters and podcast advertisers. It helps creators publish shows and helps advertisers partner with those same shows, making it easy for creators to monetize their work.
We don't know the exact number of publishers who use Megaphone, but the company works with some of the largest studios in the industry. ESPN, the Wall Street Journal, Bloomberg, and many others use it as a premium publishing tool and a way to efficiently line up advertisements for their shows. This differs from Anchor, a company similar to Megaphone that Spotify bought last year; it focuses on emerging and new podcasts, while Megaphone helps the large, established players. This gives Spotify exposure to every level of the industry.
Spotify did not disclose any of Megaphone's financials in the initial press release, although it will have to eventually. For now, all investors know about the company is whatever Megaphone has up on its website, and that Spotify is paying $235 million for the business. Anchor was purchased for $154 million back in 2019; without knowing the financials of each business, Spotify's willingness to pay more here suggests that it likely thinks Megaphone is a more valuable asset.
Why it makes sense for Spotify
In January of this year, Spotify launched streaming ad insertions (SAI) for original and exclusive podcasts. SAI works like YouTube advertising: Rather than recording their own ads, publishers leave blank slots within their shows that get automatically filled with advertisements. This technology brings internet-level insights and targeting tools to podcasts, a huge step up from what shows currently use. Spotify is on its way to becoming as effective a matchmaker for podcast creators and advertisers as Facebook (NASDAQ:FB) and Google (NASDAQ:GOOGL) are for other parts of the internet.
Megaphone fits in perfectly with these ambitions. In the acquisition press release, Spotify said it "will soon make Streaming Ad Insertion available to all podcast publishers on Megaphone, the first time this technology will be made available to third parties." So Megaphone can now offer these targeted, automated ads to its publishers, and Spotify can test this technology on a significantly larger audience. That's a win-win scenario.
Investors may worry that these acquisitions, while interesting, will not move the needle for a company as large as Spotify. The stock has a market cap approaching $50 billion and is estimated to bring in $9.2 billion in sales in 2020, so any new product must generate a few hundred million dollars in sales to even nudge the company's financials. Even the top podcasts only bring in $10 million to $30 million in annual revenue apiece -- a far cry from Spotify's overall numbers.
However, investors should be focusing on what the podcast industry could be in the future, not how it looks right now. Dedicated listeners tune in to shows for six-plus hours each week, and the industry as a whole is projected to reach $1.33 billion in ad revenue by 2022.
With Spotify's SAI technology, combined with Megaphone's (and possibly Anchor's) platform, the company is setting itself up to manage the majority of this spend. Podcast-related sales won't match its revenue from music subscriptions overnight, but they will likely help the company grow for years to come. Investors should be checking whether Spotify's revenue growth from advertising accelerates in the next few years as a way to see whether the Megaphone purchase is paying off. If that doesn't happen, it could signal bad news for shareholders.