Last month, the world's largest audio streaming platform, Spotify (SPOT 2.25%), announced that it had entered into a definitive agreement to acquire the popular audiobook company Findaway.
Though the terms of the deal were not disclosed and, so far, investors have little to no insight into Findaway's financials, this deal marks an official push into audiobooks that could have a major impact on Spotify's future. Let's see why this announcement is such a big deal for shareholders.
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Why Findaway?
Findaway is one of the world's leading audiobook distribution platforms. Similar to Spotify's recent acquisitions of podcast distribution platforms like Megaphone and Anchor, Findaway helps creators (in this case, authors and publishers) get their work in front of the biggest possible audience.
With Findaway, authors and publishers are able to easily create an account, connect with narrators, and distribute their audiobooks to all the top listening destinations such as Amazon's (AMZN +0.55%) Audible, Apple (AAPL +2.08%) Books, or soon even Spotify's own platform. In fact, Spotify's chief research and development officer, Gustav Söderström, left no doubt about this when he said, "Findaway will accelerate Spotify's entry into the rapidly growing audiobooks industry, enabling faster innovation and bringing audiobooks to Spotify's hundreds of millions of existing listeners."
Though the entire audiobook market currently accounts for only around 30% of Spotify's trailing-12-month revenue, it's expected to expand rather quickly. In one of Spotify's news releases announcing the deal, marketwide revenue is estimated to grow from $3.3 billion in 2020 to $15 billion in 2027, more than a 24% annual growth rate. Although these numbers are only estimates, Spotify also has the ability to drive the category on its own thanks to its massive scale. By granting its 381 million total monthly active users access to Findaway's vast catalog of titles, Spotify should be able to help grow the overall industry pie.
Monetizing audiobooks
While the move into longer-form audio likely didn't catch too many investors by surprise, there's still one big lingering question: How will audiobooks be monetized?
Unlike podcasts, audiobooks not only take a long time to create and produce, but they also have much longer shelf lives. With this time-intensive production process, books also tend to be more expensive on a per-unit basis than songs. Therefore, it seems hard to imagine that Spotify would just lump audiobooks into its existing premium subscriptions.
Another payment method Spotify could choose is the commonly used pay-per-book model, where it would make money by taking a small bite out of each transaction. But that wouldn't strike me as a particularly great way to gain market share over competitors.
Instead, I could see Spotify coupling the pay-per-book model with its programmatic advertising network (SPAN) to provide listeners with either an ad-free or ad-supported experience. Adding advertising inventory between chapters should be a relatively easy process since Findaway could leverage Spotify's own streaming ad-insertion (SAI) technology. This would also grant advertisers yet another more-targeted audio solution compared to radio.
The big picture
Though it remains to be seen how exactly Findaway's content will be integrated into Spotify's platform, one thing is for certain: Spotify is no longer just a music streaming service.
With music, podcasts, live audio, and now audiobooks, users will have a plethora of things to listen to. And these new choices also mean new revenue streams for Spotify, in particular -- advertising. This assortment gives advertisers a one-of-a-kind place to try to find their target customers through audio-based ads. On the company's latest conference call, CEO Daniel Ek made this point: "At the very least, this should be 20% of our revenues. But it might possibly be a lot more than that, 30%, 40% even over the next 5 to 10 years."
Shareholders should expect to see the performance of the advertising business lift Spotify's aggregate revenue growth.
