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Why Spotify wants to be the Netflix of audio

The radio industry may be in for a Netflix-style shake up as Spotify moves its focus to podcasts and seeks high value advertisers, writes Richard MacManus.

Podcasting is a version of radio optimised for the internet era, but it’s still a relatively small market. The US podcasting industry earned US$314 million in revenue in 2017, according to a report from the Interactive Advertising Bureau (IAB) and PwC. But that pales in comparison to the US radio industry, which earned US$22.1 billion in 2017.

This could all about to change, if Spotify’s recent splurge on podcasting startups is any indication.

Earlier this month Spotify bought Gimlet Media, a podcast network and producer founded less than five years ago, for a staggering US$230 million. It also spent an unspecified amount purchasing Anchor FM, a podcast creation and hosting service.

These two acquisitions are just the beginning for Spotify. In announcing its fourth quarter financial results, the company said it may spend up to US$500M on “multiple acquisitions” this year in the podcasting sector.

The deals also mark a clear strategic shift for Spotify. Founding CEO Daniel Ek wrote in his blog post announcing the news that Spotify would be “audio-first” going forward – meaning not just music anymore. As part of this new strategy, Spotify is specifically targeting radio users.

“People still spend over two hours a day listening to radio,” wrote Ek, “and we want to bring that radio listening to Spotify, where we can deepen engagement and create value in new ways.”

Despite being the second-largest podcasting platform already, Spotify’s strategic bet on podcasts is somewhat surprising. Many industry observers assumed it would be Apple who would aggressively move to dominate podcasting. That’s because Apple’s iTunes has been the default platform for podcasts for many years now. If you’re a regular podcast listener like me, you’ll be familiar with the regular plea by podcast hosts to “leave a 5-star review” on iTunes for their show.

But even though Apple is podcasting’s resident 800-pound gorilla, it has in fact done very little to advance the industry. iTunes is barely serviceable as a podcasting app, because Apple hasn’t put much effort into developing it. There are many better indie apps out there – such as Overcast for iOS, the one I use. Apple also hasn’t made any significant acquisitions in the space, despite having had a big head start on Spotify.

So in effect, Apple has ceded the floor to Spotify on advancing the podcasting industry.

Why did Spotify pay $230m for Gimlet?

Expect to see more exclusive podcasts on Spotify, as a starter. Gimlet Media currently has about twenty-five shows, and some (if not all) could become exclusive to Spotify.

But that’s small scale compared to, say, Netflix, which offers hundreds of exclusive TV shows on its app. $230m would be an awful lot to pay for a couple of dozen exclusive podcast shows. So there must be more to the deal than exclusivity. Why did Spotify pay so much for Gimlet Media?

Perhaps the real value of Gimlet Media to Spotify is in Gimlet Creative, its branded podcast division. As podcasting analyst Nick Quah explained on the Techmeme Ride Home podcast after the news broke, “it’s essentially their team which produces both advertising … and branded shows.” Quah thinks Gimlet Creative is the key to unlocking more revenue for all the podcasts Spotify will release in future, not just Gimlet Media’s shows.

If you listen to podcasts currently, you’ll be familiar with how advertising works in the format. Typically the show’s host will read a semi-personalised version of the ad copy. A collection of small advertisers appear over and over again across today’s popular podcasts – mattresses, razor blades, underpants… these are some of the staple products of the podcasting advertising industry.

Gimlet Creative, however, has landed some notably bigger fish in the past few years. Its clients include Ford, Microsoft, Google and HP. If podcasting is to eventually take on the radio industry, it’ll need to entice many more of those large companies to advertise on podcasts. That’s what Spotify is banking on, to make its $230m acquisition truly pay off.

New Zealand podcast market

Locally, there are few – if any – success stories in podcasting, at least if revenue is the measuring stick.

The Access Granted podcast, an interview show that covers the local tech scene, started in 2014 – about the same time Gimlet Media launched.

But unlike Gimlet Media, advertising revenue has been hard to come by for Access Granted. Co-host Mike Riversdale said on Twitter, “I know of no-one in NZ making serious $ off podcasting, and don’t expect anyone to ever do so. It’s the loss leader to other activities.”

That view was echoed by Richard Scott, host of Radio NZ’s Podcast Hour show. He said on Twitter that he’s “yet to meet” anyone in NZ making serious money from podcasting.

So what’s the secret sauce of Gimlet Media, other than its knack for creating good advertising copy for corporations? The answer is narrative stories. What Gimlet does very well is tell compelling nonfiction stories using audio.

Audio storytelling is the key

This isn’t, of course, a new innovation. Many radio stations, including our own national network Radio NZ, have a long history of telling audio stories – and doing it exceedingly well. What’s different is simply the distribution format; podcasting is online and on-demand.

It’s no accident that one of Gimlet’s founders, Alex Blumberg, came from the radio world. He was a former producer of This American Life, a popular American public radio show (and now a podcast), and host of NPR’s business podcast Planet Money.

Narrative podcasts had a breakout year in (you guessed it) 2014, with the Serial podcast. Developed by This American LifeSerial was the first podcast show to get major mainstream attention.

What Spotify is aiming to do now is multiply Serial’s success a hundred, or even a thousand, times. In other words, Spotify wants to become a Netflix for audio.

Mike Riversdale from Access Granted is skeptical this will happen. Serial and similar shows “will always be looking for a more traditional audience delivery mechanism,” he told me. He thinks that audience is more likely to be where audio books are (which is mostly Amazon’s Audible), rather than the music-centred Spotify app.

I’m more optimistic about Spotify’s chances of bringing podcasting to the masses. As a listener, there are still plenty of opportunities to tune into audio stories throughout the day – for example when you’re on your daily commute, when you’re at the gym, or when you’re chilling on your sofa and you’ve exhausted your Netflix watchlist.

Yes, radio is traditionally what you’d turn on at such times. But podcasting brings the on-demand world to audio, just as Netflix did to video.

There’s no reason why Spotify’s app can’t do to radio what Netflix did to TV. It’s certainly a bet worth taking for Spotify. And if it does succeed, you can be sure that podcasting will take a good chunk of the radio industry’s multi-billion dollar annual revenues.

You can find Newsroom's weekly business podcast, Two Cents' Worth, on Spotify as well as iTunes and PodBean. Two Cents's Worth is produced in collaboration with Radio NZ. The latest episode looks at how New Zealand changed the way governments all over the world run their economies.

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