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Can Spotify Become an Advertising Giant?

By Ryan Henderson – Oct 14, 2021 at 7:12AM

Key Points

  • Spotify's Audience Network consolidates all of its advertising capabilities.
  • Granting access to Anchor's catalog of podcasts should unlock plenty of new ad slots.
  • Expect Spotify's advertising revenue growth to outpace its premium business.

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Most people know Spotify as a subscription business. But watch out for its big push into advertising.

It's no secret that the global audio streaming company, Spotify (SPOT -2.49%), has made a big push into podcasts in recent years. Whether through its myriad of acquisitions or original and exclusive shows, Spotify has spent more than $1 billion on podcast-related expenses.

But last week, the company expanded on this push toward podcasting by making a dual announcement around its Spotify Audience Network (SPAN) that could have massive implications for its advertising revenue. Let's see why.

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Image source: Getty Images

What is the Spotify Audience Network?

Before diving into the announcement, it's probably best to lay the groundwork for Spotify's advertising strategy. 

In February 2021, Spotify introduced a first-of-its-kind advertising marketplace for the audio world. Known as the Spotify Audience Network (SPAN), the company brought together all of its advertising capabilities into a single place. Using Spotify's streaming-ad-insertion technology for automatic ad inserts, this dual-sided platform allows advertisers to target listeners while simultaneously letting creators monetize their content. 

Companies can market themselves in a variety of different advertising slots including through ad-supported music, third-party podcasts created on Megaphone or Anchor, or even Spotify's own original and exclusive shows. With all the data that Spotify's users have provided such as age, gender, listening habits, and plenty more, SPAN can help advertisers find the optimal listener base. 

What does the recent announcement entail?

Unfortunately, up to this point, Spotify's audience network capabilities were limited to an exclusive group of big advertisers and only a small subset of podcasts. While Spotify likely rolled out the platform this way to help fine-tune any early problems, it left most of the potential platform users waiting -- but now, the wait is over. 

In Spotify's Oct. 6 press release, the company announced that it is bringing SPAN to Anchor -- the podcast distribution platform that Spotify acquired for $140 million in 2019. According to the company, Anchor is responsible for powering 70% of all the podcasts available on Spotify's catalog. And since Anchor distributes shows to all the places that listeners get their podcasts, that 70% figure is likely similar across all platforms. With all of these podcasts powered by Anchor, advertisers now get access to a much more expansive choice of shows.

But it's not just the content side that's getting larger. In the same press release announcing the Anchor news, Spotify mentioned that it will be rolling out its self-serve advertising capabilities to companies of any size in the coming weeks. Whether it's a Fortune 500 company, a local retail store, or even other small independent podcasters trying to garner more listeners, anyone can use podcasts as a way to attract the right audience.

What do shareholders need to know?

In Spotify's most recent quarter, the company grew its revenue from podcasts by 627% versus the same period a year ago. While that may have come from a small base, it was also during a period when only a select few companies had the ability to advertise. Since this new announcement drastically expands both the advertising inventory and the universe of potential advertisers, it's probably fair to assume that Spotify will see robust podcast revenue growth in the coming quarters. 

In fact, this impending announcement may have even been one of the reasons behind CEO Daniel Ek's comments on the most recent quarterly conference call, when he stated, "It's clear to me that the days of our ad business accounting for less than 10% of our total revenue are behind us." Though not all of the advertising revenue comes specifically from podcasting, it looks like, over time, the majority will be given its current growth rate.

Additionally, as podcasts begin to account for a higher percentage of the company's revenue, profit margins should also expand, since Spotify isn't required to pay out the same big fees to rights holders that it has to in its core music business. This combination of higher profit margin potential and significant revenue growth points to a bright future for Spotify shareholders

Ryan Henderson owns shares of Spotify Technology. The Motley Fool owns shares of and recommends Spotify Technology. The Motley Fool has a disclosure policy.

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