Amazon (AMZN 1.60%) has quietly built an extremely popular audio platform in the United States. Amazon Music will overtake Sirius XM's Pandora Radio in total listeners next year, reaching 52.5 million listeners, according to an estimate from eMarketer.

Amazon still trails Spotify (SPOT 1.23%) by a wide margin, and it may never close that gap. But as the online retailer's audio platform grows, it could play a role in Amazon's expanding advertising business.

Person in a chair holding a smartphone and wearing headphones.

Image source: Getty Images.

Bring in lots of listeners, monetize later

Many of Amazon Music's listeners come to the platform through their Amazon Prime subscriptions. Prime includes access to about 2 million songs for free, and it encourages users to sign up for Music Unlimited with a 20% discount for $7.99 per month.

In 2019, it started allowing users to listen to all the songs in its library with intermittent ads. It began with just Echo device owners, but it quickly opened the option for listeners on all devices.

Last year, it started serving podcasts in the Amazon Music app. It quickly moved to invest more in the podcast space, acquiring Wondery (a podcast studio), Art19 (a hosting and monetization company), and the rights to the popular podcast SmartLess.

If any of this sounds familiar, it's because Spotify did almost the exact same thing. It grew its audience with ad-supported music listening, incentivized paid upgrades, and started investing heavily in podcasts in recent years. Over the last four quarters, Spotify's advertising business generated nearly 1 billion euros (over $1.1 billion) in revenue. Granted, the premium subscription business has generated far more revenue, but it shows the value of audio advertising.

The market's only getting bigger

Digital audio ad spending will increase from $5.6 billion in 2021 to $7.9 billion by 2025, according to eMarketer's analysts. The bulk of that growth will stem from podcast advertising.

But there's potential for even more growth. In 2019, radio advertisers spent $14 billion to get their messages on the airwaves. But that number fell to about $10 billion in 2020 as fewer people commuted (prime radio time). But even as people go back to the office and start going out, radio ad spending isn't coming back. Instead, advertisers are seeking alternatives.

Digital audio is a natural home for much of that spending, and it could result in much stronger growth over the next few years. 

Amazon has the audience, the data, and the technology to serve those advertisers. That's what really makes it competitive with Spotify. Amazon is also able to offer advertising across more platforms than Spotify, such as connected TV, its video streaming services, and its retail website. That could make it more attractive to some advertisers looking for an all-in-one solution.

A growing number of advertisers could also entice podcast creators into using Amazon's podcast monetization platform, Art19, bringing in more revenue from the industry.

While Amazon may never catch up to Spotify in terms of listeners, it's building a formidable competitor. It should be able to take a sizable share of the market and produce yet another source of high-margin ad revenue.