Spotify (SPOT +1.27%), the world's largest audio streaming platform, recently announced that the company is acquiring a small New York City-based podcast discovery tool called Podz.
Though the announcement came with an undisclosed price tag, once the tool is integrated into the Spotify platform, it could have a big effect on users and, ultimately, Spotify's financials. Let's take a look at why this audio giant just dipped into the piggy bank to buy a lesser-known podcasting app.
Image source: Getty Images.
What is Podz?
Before considering any possible synergies and benefits from the acquisition, it's probably best to understand what Podz actually does.
Podz, which was founded by CEO Doug Imbruce in 2020, is a machine-learning discovery tool for podcasts. Since podcasts are a longer-form style of audio content, discovering new shows can be quite time-consuming. New show discovery often requires listening to an entire episode or receiving word-of-mouth recommendations. But Podz is trying to change that.
Podz creates 60-second audio clips from podcasts and allows listeners to preview them in order to help users discover new shows based on their listening preferences. In other words, Podz is creating the first audio-only discovery feed. Similar to other user-centric social apps like YouTube or Instagram, Podz is leveraging user data for optimal content discovery.
How does this help Spotify?
Spotify is home to more than 2.6 million different podcasts across its platform with less than 1% of those ever garnering an audience of more than 5,000 listeners. While distribution services like Megaphone and Anchor have made the podcast creation process easier than ever, the discovery process has been much slower to adapt.
However, between Spotify's troves of listener data and a massive catalog of shows, the company can integrate Podz' discovery features into its app to better help users find new shows.
Over recent years, Spotify has been quite clear that it wants to become the one-stop-shop for all things audio. This push has led Spotify's podcast listenership to jump from roughly 43 million users in the fourth quarter of 2019 to nearly 90 million users in its most recent quarter. With the inclusion of Podz, that number should continue to grow.
What does this mean for shareholders?
It's no secret that Spotify's core music offering relies heavily on the major music labels. In fact, 78% of Spotify's music streams come from label-licensed content. And since labels own the rights to most of the music consumption globally, Spotify is required to shell out a large chunk of its subscription revenue to those rights holders. This is the primary contributor to Spotify's low gross margin of about 26%.
However, Spotify is now the largest audio streaming platform in the world with 356 million total monthly active users -- far more than any of its competitors. And thanks to its roughly $1 billion worth of investments in the podcasting space, many of those users are coming to the platform for more than just music.
While it's impossible to predict the exact effect that Podz will have on Spotify's platform, it's probably fair to assume that a quicker and simpler discovery process should encourage previous music-only listeners to test out some podcasts as well. The more that Spotify can diversify the listening habits of its users, the less reliance it will have on the major music labels.
If Spotify's dependence on the labels' content shrinks, the company should begin to hold onto a greater share of its revenue, ultimately resulting in increased profit margins.
