Amazon (NASDAQ:AMZN) announced plans to acquire Wondery, one of the largest independent podcast networks, at the end of December. The team will join Amazon Music, which launched support for podcasts in September. 

Amazon's following Spotify (NYSE:SPOT) into podcasting. Spotify has seen very good results over the last couple years, and it's made massive investments in podcast technology and content to bolster its position. But Amazon's deep pockets and broad reach could pose a significant threat to the streaming leader.

An Amazon Echo Dot smart speaker on a side table.

Image source: Amazon.

Modeling Spotify's success

Spotify started pushing its listeners toward podcasts in 2018 as it made several big investments in the area. The results have been great. Management says users that listen to podcasts are more likely to convert to premium subscribers and stay subscribed for longer.

Spotify now counts 1.9 million podcasts on its platform. That's up from just 185,000 at the end of 2018. In that time, the company has added over 100 million total listeners and nearly 50 million premium subscribers.

Amazon started out in September by adding about 70,000 podcasts to Amazon Music. Following in Spotify's footsteps, acquiring a podcast network like Wondery will allow it to build a library of podcasts more quickly. Adding Wondery's popular podcasts to the library will bring attention to the platform from both listeners and creators, creating a virtuous cycle where more listening brings more creators and vice versa.

Indeed, the acquisition of Wondery is a sign Amazon's seeing traction with podcasts in Amazon Music. Investing more in podcast content and technology could help the tech titan grow its music service or Audible, which launched a premium podcast tier of its service in August. And Amazon has a lot of advantages over Spotify to do so.

Amazon's already in your life

It's hard to avoid Amazon these days. If you want to buy something online, Amazon is probably your first stop. If you own a smart speaker or a smart TV, there's a good chance Amazon's powering it. Over 126 million individuals in the U.S. have access to a Prime account, and more and more of them are using the digital media benefits like the free tier of Amazon Music or Prime Video.

These are all touch points for Amazon to connect with users and point them toward podcasts on Amazon Music. Spotify's ability to get in front of potential new listeners is relatively limited in comparison. What's more, the ability to attract consumer attention has proven to be a weak point for Spotify versus its competitors in some cases. For example, Apple (NASDAQ:AAPL) has had a lot of success converting iOS users to Apple Music subscribers. Management said in 2019 that its streaming service is more popular than Spotify on Apple devices.

With millions of Echo smart speakers and Fire TV devices in consumers' homes, Amazon could see similar benefits for its homegrown music-streaming service. A growing library of podcast content will bring the retailer's offering more in line with Spotify, further mitigating the smaller company's advantages.

Another reason to acquire podcast content

Aside from bolstering the appeal of its music-streaming service, Amazon has another reason to acquire additional podcast content: advertising.

Podcast advertising has been a major focus of Spotify's, becoming a key monetization strategy. It launched its streaming ad insertion (SAI) technology in early 2020, offering the ability to dynamically insert ads into each individual listener's podcast stream. This allowed marketers to target ads based not only on who's listening, but what device they're listening on, what time they're listening, and where they're listening. It originally limited SAI to its own podcast productions, but the acquisition of Megaphone in November allowed it to open the technology to other podcasters.

Amazon has the ability to build similar tools for marketers. What's more, it has much more data on its listeners than Spotify, and can more easily track whether advertisements convert into sales on its e-commerce website. Owning Wondery and other podcasts gives Amazon the content it needs to test new advertising technology before it offers it to a wider group of podcast creators. That's a very high-margin opportunity for Amazon.

Most of Spotify's 300 million-plus listeners probably aren't going to switch to Amazon overnight, if ever. But Amazon has the advantage of attracting listeners that are new to streaming music and podcasts thanks to being built into its devices. Moreover, if Amazon can build a lead in podcast advertising technology on the back of its Wondery acquisition, it could be a major threat to one of Spotify's key strategies going forward.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.