About a week ago, tech news outlet The Information reported that Apple (AAPL 1.48%) is planning to launch an ad-free podcast subscription service. The pioneer of the on-demand audio format has been losing market share to Spotify (SPOT 2.24%) over the last few years as the Swedish music streamer has invested hundreds of millions of dollars in podcast studios and publishing platforms. This subscription service is likely Apple's big strategy to turn the tide.
Should Spotify shareholders be worried about the tech giant ramping up the competition? Let's take a look.
Why Apple could make a podcast subscription work
Apple is notoriously secretive about product launches, so we likely won't know any exact details until the service actually goes live. However, according to the sources who spoke to The Information, the service will have exclusive content, be ad-free, and will charge users a monthly fee. This business model has been tried a few times with podcasts in the past, the biggest example being start-up Luminary. The service launched in 2019 with the goal of becoming the "Netflix of podcasts," but only had an estimated 80,000 subscribers as of last May.
While ad-free podcast services have a weak track record, Apple has a few advantages that could finally make it work. First, it has tens of billions in cash on its balance sheet, so it will never have a problem paying creators, which is important to get the value proposition high enough so people actually want to subscribe. Second, its ad-supported Apple Podcasts service, which has hundreds of thousands of shows, has been the leader in podcast listenership for many years (although Spotify is quickly gaining ground). Apple could easily market a premium service to its existing users, whereas Luminary has had to rely on paid advertising.
Lastly, Apple will likely bundle this podcast service with Apple TV+, Apple Music, and some of its other subscriptions, making it cheaper for customers to sign up for the service if they are in the Apple ecosystem.
Should Spotify be worried?
Long story short, no. Spotify already has a head start investing in podcast content through its acquisitions of Gimlet, The Ringer, and Parcast. It also has invested in dozens of shows for its internal studio. Plus, while it has exclusivity for some podcasts -- the biggest being The Joe Rogan Experience -- most of its content is not behind a paywall. Counterintuitively, Apple launching a premium podcast service could actually help Spotify by normalizing the idea of paying for podcasts. Spotify would potentially gain pricing power for its premium offering if it ever decided to put its own podcast content behind the paywall.
Outside of the content wars, Spotify has been investing up the podcast supply chain. It has acquired two podcast production platforms (Megaphone and Anchor) and built out an advertising technology it calls Streaming Ad Insertion (SAI). SAI is a targeted advertising platform that automatically fills ads where creators put preset slots, similar to Alphabet's YouTube. The technology is currently integrated into the shows Spotify owns outright, but over time it will likely expand to all the shows hosted on Megaphone and Anchor.
In a broader sense, premium podcast content may never work out. The barriers to entry are extremely low: It costs almost nothing to start up a show, making podcasts more like YouTube than a streaming video service like Netflix. Maybe some high-budget shows will work behind a paywall, but I don't see many people choosing to pay for podcasts when there are already hundreds of thousands of free options available.
Overall, while Apple has a clear advantage with its installed base and seemingly infinite amounts of capital, it is coming late to the ball game with original podcast content. Plus, even if it starts outbidding Spotify for higher-profile shows, it actually has a chance to increase the value proposition of a Spotify subscription. Spotify shareholders should be tracking Apple's plans with podcasts, but there is no need to sell because of this rumor.