Spotify (SPOT -0.70%) has drawn comparisons to Netflix on multiple occasions, particularly as the streaming-media company invests in podcast content. Spotify's latest investment is the exclusive rights to Dax Shepherd's Armchair Expert, which follows its deal last year with Joe Rogan.

The move to build up a library of exclusive and highly differentiated content rights, even at significant costs, echoes Netflix's shift in strategy around 2012. It worked out well for Netflix, and looks like it'll work out well for Spotify, too.

A man in a leather jacket standing in front of musical instruments.

Spotify CEO Daniel Ek. Image source: Spotify.

Following Netflix's lead

In Netflix's 2013 first-quarter letter to shareholders, management wrote, "As we continue to focus on exclusive and curated content, our willingness to pay for non-exclusive, bulk content deals declines." It subsequently let a lot of old content deals expire and struck new exclusive streaming-rights deals for highly differentiated content.

For example, it bought the exclusive streaming rights to Disney's film output starting in 2016. (That deal subsequently expired in 2019 with Disney choosing not to renew.) More recently, it's made deals with top television creators like Shonda Rhimes and Ryan Murphy.

Now Spotify's looking for its own version of Disney and Shonda Rhimes. It bought Bill Simmons' The Ringer, The Joe Rogan Experience, and now it's bringing on Dax Shepherd. The Dax Shepherd deal includes a first look at any output from the Armchair Umbrella Network.

Dax Shepherd's Armchair Expert is one of the most-listened-to podcasts in the world, Spotify noted on its blog post announcing the deal. It's likely that listeners will follow the podcast to Spotify.

Management said, "The Joe Rogan Experience performed above expectations with respect to new user additions and engagement," in its first-quarter letter to shareholders. That was a likely impetus for its deal with Shepherd. Indeed, the company added 25 million active users in the fourth quarter when Joe Rogan went exclusive with Spotify, and 11 million more in the first quarter.

The clock is ticking

Spotify may have a limited period of time to capitalize on the ability to buy exclusive podcast rights. Not only does it face potential competition from other podcast distributors like Apple, but there's the potential for media companies and independent podcast creators to opt to go it alone without a major influx of cash from Spotify or another rights acquirer.

Earlier this year, Apple announced new tools for creators to monetize their podcasts with subscriptions. Spotify had previously announced similar plans. As more platforms make it easier for podcasters to grow and monetize their audiences, we may see more podcast media companies opt to go it alone, maintaining their independence and control over distribution.

The reason Disney movies are no longer available on Netflix is because it became more economically advantageous for Disney to offer its content directly to consumers and control its distribution. But Netflix managed to transition from its big deals with media companies pretty much unscathed because it had used their content to build a massive audience. It then grew the popularity of its original content by getting it in front of more people.

That's the next phase for Spotify. It's growing its library of exclusive originals alongside these big exclusive deals with Rogan and Shepherd. Someone finding Armchair Expert on Spotify after it goes exclusive may also be interested in listening to Renegades with Barack Obama and Bruce Springsteen.

Investors should expect Spotify to make more of these deals when the opportunity presents itself because it's likely the company won't have as many opportunities in the future. And when the well runs dry, Spotify should have a stable of popular original podcasts.

These content investments will likely be a continued drag on Spotify's ad-supported streaming gross margin. Investors should pay attention to user growth, the percentage of users listening to podcasts, and any commentary about how these deals perform relative to expectations.