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Why Spotify cannot afford to make it three out of three with podcasts

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by Mark Mulligan

It has been a couple of weeks that Spotify would be glad to forget – if it could. Although many of the arguments have been emotionally charged and the debate says as much about people’s political beliefs as it does business strategy, it is indisputable that there is a lot at stake for Spotify. Podcasters are its big bet on the future, music artists are the current bet that pays the bills. Both constituencies need to be kept happy, but can they both be kept happy enough and at the same time? Spotify’s big-future podcast vision has been sold to investors, divesting or censoring Joe Rogan would shake those investors’ confidence in Spotify’s ability to execute on podcasts. But it would be more than just that, it would be the third time that Spotify has had to backtrack on a big bet. Once may be careless, twice bad luck, but three times would most certainly not be a charm.

It is worth remembering why Spotify is betting big on podcasts. Strategically, it wants a slice of the $30 billion radio advertising business, and it wants to ensure it is competing in all lanes of audio. But that is more about the opportunity, the potential. There is also a more prosaic motivation: podcasts represent the ability to grow higher margin revenue and give Spotify more control over its own destiny. Rather than be beholden to music rightsholders and face continual calls for higher rates from artists and songwriters (which risks making margins even smaller), Spotify can plot a course to a future where it owns much of its own content. This means both more control and higher margins. Win-win.

Spotify as a label

The only problem is that as a music platform that has acquired its hundreds of millions of users through music, music rightsholders and creators do not take too kindly to feeling like they are yesterday’s game despite still driving the vast majority of the revenue. And yet, it need not have been this way. The origins of Spotify’s podcast bet lay in the failing of their second big bet: direct artists. In September 2018, Spotify opened up its platform to artists to release their music directly on the platform. The labels of course saw this as a massive threat of disintermediation, shook their fists in fury, and compelled Spotify to swiftly backtrack, dissipating the service in July 2019. The irony is that Spotify was trying to achieve the same objectives with direct artists as it is with podcasts: more control and higher margins. The labels managed to get the strategy killed off, but in doing so they pushed Spotify into pursuing what may be an even more disruptive strategy. Competing with Spotify as a label might have been daunting to the music business, but at least the world’s leading music subscription service was still going to be squarely focused on getting its users to listen to music…

Spotify as a video service

If direct artists was Spotify’s second failed big bet, then video was the first. Back in January 2016, Spotify announced that it was becoming a video service. Featuring original content commissioned from giants of TV, such as Viacom and the BBC, Spotify went big on video. Unfortunately for Spotify, its users did not and Spotify quietly backed away from what briefly looked like a major expansion of Spotify offering away from music. Recognise the trend?

Fortune favours the brave

Spotify’s bet-based strategy is both admirable and has underpinned its huge success to date. It is just unfortunate that the biggest, highest profile bets have not panned out. If Spotify were to fail with the podcast bet too, then the consequences could be catastrophic in terms of investor sentiment. But Spotify has to bet big. It is a tech growth stock, and thus its market value is defined more by what it can be tomorrow than by what it is today. Being the leading player in a commodified and slowing DSP streaming market is not the sort of growth story that underpins valuations like Spotify’s. So it needs big dreams to aim at. 

Yet the irony is, if podcasts do not pan out then Spotify will be back at where it started: as a music streaming company (just as it was after the first two failed bets). This would be an interesting contrast to Netflix, which (occasional foray into games excepted) has had a singular focus on being a video service and is still a video service, with no failed side bets along the way.

The House of Cards moment

The likelihood is that Spotify will make a big success of podcasts, and audio more generally –and the Joe Rogan phase will be looked back on like Netflix’s House of Cards phase: a hint of what will come, the genesis of something much bigger, much more culturally impactful, and far more pervasive. But Netflix did not get to where it is without antagonising (and losing) partners along the way. TV networks that had been licensing their content to Netflix suddenly realised it was now competing with them too. By making their shows available on Netflix they were actually helping a competitor compete against them. Disney and Fox took it so seriously that they pulled their catalogue.

Netflix cause ill feeling among some TV networks and became an outright enemy. That is something Spotify cannot do with music rightsholders and creators. Spotify is currently causing ill feeling among the music community by going to great lengths to accommodate its podcast creator community, which is in stark contrast to the numerous missteps it has made with the music creator ecosystem over the years. It can do so, because it has leverage over music creators (few feel bold enough to remove themselves from Spotify), but Spotify (despite being the leading podcast platform) is still a long way from having that sort of hold over podcast creators.

‘Too big to fail’ is not enough

Netflix survived its backlash, not because it was ‘too big to fail’, but because the video streaming market is fragmented, so it could survive without the networks it antagonised (and two of those networks could go it alone via Disney+). The music streaming market is very different – losing labels and artists would simply reduce Spotify’s value proposition compared to its competitors. Spotify cannot afford its podcast ‘House of Cards moment’ to be followed by a ‘Disney moment’ for music. Matters just got further complicated by a major investor now raising concerns about Spotify’s podcast editorial policy – which means that this is no longer even a clean case of managing investors-vs-the music business. Spotify has an intensely delicate path through which it must find its way.

If it does, then third time really will be a charm for Spotify. 

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