Please ensure Javascript is enabled for purposes of website accessibility

Did Spotify Waste $1 Billion on Podcasts?

By Adam Levy - Updated Jan 21, 2021 at 2:05PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In explaining his recent downgrade of the stock, an analyst says podcasts aren't paying off for Spotify.

Spotify (SPOT 1.42%) has made some big investments in podcasting over the last few years. It acquired podcast networks like Gimlet Media, Parcast, and The Ringer, podcast technology companies like Anchor and Megaphone, and exclusive production rights for big celebrity names, including Joe Rogan, Michelle Obama, and Kim Kardashian.

Overall, Spotify spent close to $1 billion on podcasting-related acquisitions and production over the last two years, and some investors are starting to worry whether the company is getting its money's worth. Citi analyst Jason Bazinet downgraded the stock last week due to concerns that those investments aren't bringing in new premium subscribers or converting free listeners into paying customers.

A man giving a presentation.

Spotify CEO Daniel Ek. Image source: Spotify.

A recent change in reporting

Citi points out that there hasn't been a meaningful upward inflection in app downloads or premium subscriptions since Spotify started spending heavily on podcasting. The number of premium subscribers increased 27% year over year in the third quarter, but that was a slowdown from the 31% increase in the same period of 2019 and its 40% growth in 2018. That said, the company is measuring its gains against a much larger subscriber base now.

Still, in citing the biggest factors driving its premium subscriber growth, Spotify pointed to its family plan and its Duo membership, a two-person subscription plan it started offering last year.

Perhaps one of the biggest indications the podcast investments aren't driving more people to sign up for premium subscriptions is the reporting change that it made at the start of last year. The company started attributing all of its podcast-related expenses to its ad-supported segment.

"We continue to believe that our investments in podcasts will benefit the platform as a whole, and see an overall benefit to both usage, engagement, and retention across both Ad-Supported and Premium," management wrote in its first-quarter letter to shareholders last year. That's slightly different from suggestions in the fourth quarter of 2019 that the investments in podcasts would increase conversions from free to paid listeners.

That is to say, Bazinet and his researchers may be correct in their assessment that podcasts haven't meaningfully moved the needle for Spotify's premium subscriber gross additions. Does that make its billion-dollar investment a waste?

Deriving value from podcasting

Even if podcasts aren't meaningfully impacting premium subscriber numbers, that doesn't mean they're not having a meaningful impact on Spotify's business and financials. Podcasts offer the company an opportunity to use its fixed costs to generate more revenue from advertising. That's much different from the music business, which pays a percentage of revenue to music labels and publishers. In other words, when Spotify makes money directly from podcast listening, it keeps all of it.

Therefore, the company has an interest in diversifying listening on its platform between music and podcasts while pushing toward monetizing podcast listening directly. Original and exclusive podcasts are beneficial to both of those goals. They push more users to podcasts, and Spotify is responsible for monetizing them.

The streamer's acquisitions of Anchor and Megaphone give it more opportunities to generate revenue directly from podcast listening. Creators who use Anchor to produce their content can also use Spotify's tools to monetize them. Megaphone supercharges Spotify's streaming ad-insertion technology, which should make its ad tools more appealing and push average ad prices higher.

Right now, podcast advertising is a $1 billion industry in the U.S. alone. That number is set to grow rapidly as more people adopt podcasts, and they replace a larger share of radio listening. Spotify is positioned to take share and expand the market for podcast advertising. Considering its total revenue of about $8.5 billion over the last 12 months, directly monetizing podcasts could provide a sizable boost to its financials.

That said, the company is making big investments today in hopes it will pay off long term, and that's having an adverse effect on cash flow and gross margin. But over time, investors in the media stock should see improvements in both as it leverages the fixed costs of podcast content.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Spotify Stock Quote
Spotify
SPOT
$107.27 (1.42%) $1.50
Citigroup Inc. Stock Quote
Citigroup Inc.
C
$49.75 (-0.06%) $0.03

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
330%
 
S&P 500 Returns
115%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/22/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.