Every acquisition or partnership Spotify (SPOT -2.19%) makes should be looked at through the lens of its long-term strategy to expand its audio products. Put simply, Spotify wants to "own your ear," and it's spending big to do just that.
The strategy started with music, expanded into podcasting, and now includes audiobooks. Last week's announcement that Spotify is acquiring Findaway, a leader in digital audiobook distribution, for an undisclosed sum fits that strategy perfectly, and Spotify's wide distribution and monetization model could make this a big win for investors.
From music to audiobooks
Spotify is known for music, but the company's ambitions are much bigger. In the Findaway acquisition announcement, Spotify's Chief Research & Development Officer Gustav Söderström said, "It is Spotify's ambition to be the destination for all things audio both for listeners and creators." This is why I say Spotify wants to "own your ear."
From the listener side, if Spotify can be the go-to place for your audio content, it'll attract creators. That has been true in music, and that's playing out in Podcasts too, with more and more exclusive content moving to Spotify.
If listeners are already on Spotify listening to music and podcasts, it makes sense that they may like audiobooks as well. This is how Spotify wants to attract listeners. But it's the monetization strategy that will ultimately keep creators coming back to Spotify's platform with more and more content.
The initial business model for Spotify and Findaway seems straightforward. People buy audiobooks, and Spotify takes a small cut from each audiobook sale. But that may only be the beginning.
The fastest-growing segment in Spotify's business is ad-supported revenue, which could fit nicely into the audiobook business. Ad revenue grew 75% in the third quarter versus a year ago to 323 million euros, compared to 22% growth in premium subscriptions to 2.18 billion euros. While premium subscriptions are bigger for Spotify, ad-supported revenue is growing far more quickly, and it's just getting started.
What's interesting about ads in the audio format is that Spotify can match listeners with advertisers dynamically, generating revenue for each listen. It's the same idea as radio station ads, but ads can be targeted on an individual level. In theory, the company will be able to exploit this opportunity and share a portion of revenue with creators.
Spotify's scale and ad infrastructure could make adding audiobooks to the mix a no-brainer. And ads could allow for "free" audiobooks for users.
Building the audio ecosystem
If Spotify is going to "own your ear," it needs to have content everyone wants to listen to. Music, podcasts, and audiobooks fit naturally together, and to monetize them the company has premium and ad-supported options. This looks like a great business model that could be a market beater for decades to come.