Apple (AAPL 0.02%) practically invented the podcast, but it's barely capitalized on the growing popularity of the format over the last decade. Meanwhile, Spotify (SPOT 1.58%) has quickly grown its audience of podcast listeners, and it could overtake Apple in total podcast listeners in the United States this year, according to estimates from eMarketer.

The boom in podcast listening has Apple exploring opportunities to monetize its still-sizable audience and consumers' appetite for content, but it could be too late.

A woman with headphones in staring at her smartphone.

Image source: Getty Images.

Losing ground in its biggest market

Apple has a considerable advantage over Spotify and other podcast players in the United States: It has a massive market share of smartphones in use. Apple's share of smartphone sales in international markets isn't nearly as high.

Since the Apple Podcast app comes pre-installed on all iPhones, it's already at an advantage. That advantage is seen in Apple's Apple Music subscriptions. Apple says its subscription service is more popular than Spotify's on its own devices.

There's a network effect at play here as well. Apple has a built-in audience, which draws podcast creators to its platform, and that ensures Apple Podcast users can find what they're looking for in the default podcast app.

But Spotify is quickly overcoming Apple's advantages. It's poached some of the top podcast talent exclusively for its own platform. It's also producing its own podcasts in-house after acquiring several podcast media companies. And it's bought technology companies to make creating podcasts and distributing them on Spotify extremely simple.

As Spotify grows its listener base on the music side, which topped 80 million in North America by the end of 2020, it's done a good job at getting them to try podcasts on its platform as well. Twenty-five percent of music listeners also tried podcasts in the fourth quarter, up from 16% in the fourth quarter of 2019. When you factor in total listener growth, global podcast listeners on Spotify doubled in 2020.

Given Spotify's progress in bridging Apple's moat, the Swedish company's U.S. podcast audience will continue to grow over the next few years while Apple's listener base will remain roughly flat, according to eMarketer's analysts. They expect another 42% increase in Spotify podcast listeners in the U.S. this year while Apple's audience grows less than 2%.

Just how big is the opportunity?

The primary form of monetization for podcasts is advertising. eMarketer expects spending on U.S. podcast ads to double between 2020 and 2024. But the total market for podcast ads will only reach $1.8 billion by the end of the period.

Apple generated $274 billion in revenue in fiscal 2020. Its services segment alone brought in over $50 billion. After factoring in Apple's market share, splitting ad revenue with creators, and investments in technology, the opportunity is just not big enough to move the needle for Apple.

By comparison, Spotify generated less than 8 billion euros last year. It also has a pre-existing audio advertising business on the music side, and podcasts present an opportunity to diversify its revenue source and gain operating leverage. In other words, the opportunity is much more attractive for Spotify than Apple.

That won't stop Apple from taking shots where it sees an opportunity. It's reportedly discussing a premium podcast subscription service, which fits much better into its business than advertising. It could include premium podcasts as part of its larger Apple One subscription bundle in order to improve retention. Spotify also just released a feature that allows creators to offer subscription-only podcasts on its platform.

While Apple's position in podcasts has greatly diminished over the last few years, and will continue to do so, the company never had a big opportunity in the space relative to its size. It's possible premium podcasts can play a role in the tech titan's services business in the future, though. Apple has had great success building products and services that weren't necessarily first to the market, but were able to accelerate adoption. For now, however, Apple is fine ceding the podcast advertising opportunity to Spotify.