Why Spotify paying $100 million for Joe Rogan is a genius move
On May 19, Joe Rogan announced by the end of the year, all of his podcasts would be exclusively available on Spotify. Considering Joe…
Full disclosure, I own stock in Spotify.
On May 19, Joe Rogan announced by the end of the year, all of his podcasts would be exclusively available on Spotify. Considering Joe Rogan is unquestionably the biggest podcaster in the world, this news is a big deal.
On the day the deal was announced, Spotify’s stock jumped by more than 8%. That’s roughly equivalent to about $3 billion in market cap. So the Joe Rogan Experience might actually be the first podcast that the market values at more than a billion dollars.
First off, big shout out to Joe. Who knew the host of Fear Factor would be this rich and this culturally relevant in 2020? Also, this is a great move by Spotify. Let’s talk about Spotify’s current situation and why this move makes so much sense.
Why Spotify is in a rough place
Spotify’s got a lot of good things going for it. The company has a great mobile app and an awesome overall user experience. Discovering new music on Spotify is really easy with all of the personalized playlists it offers. Plus, Spotify is probably the coolest company that a young person could possibly work for, so the company is able to recruit the best young talent.
However, the company isn’t doing as well as you might think. The stock has been stuck at around the $130-$150 level since the end of 2018.
So what’s been holding back Spotify’s growth? Two things: Spotify is being crushed by monopoly power on one side and oligopoly power on the other.
Spotify crushed by monopoly power
Spotify’s biggest competitor in the market is Apple Music. I’ve used both platforms and I think Spotify has a much better user interface. It seems like I’m not alone in that opinion because studies show that Spotify has a significantly higher net promoter score, which means that it has higher customer satisfaction and loyalty. However, Apple Music still manages to beat Spotify in terms of paid users inside the United States. There’s a reason for this: Apple’s monopoly power.
Right now, Spotify has a big problem. It’s biggest competitor also owns the means of distribution. Apple Music comes as a default on most iPhones. Apple also owns the App Store, which is the only way that iPhone users can download apps like Spotify.
According to Spotify, Apple has used this position to crush the competition. Apple has repeatedly denied Spotify important app updates and threatened to remove it from the App Store for violations that sound totally made-up. Last year, Spotify filed a complaint with the European Commission over Apple’s abuse of power. While nothing notable has come out of that yet, it’s going to be an interesting case to watch.
Maybe one day the Department of Justice will force Apple to spin-off the App Store. Until then, it’s just another problem Spotify has to deal with.
Spotify crushed by oligopoly power
Apple isn’t the only company hurting Spotify right now. There are also the three major music labels that control 80% of the US music market: Universal Music Group, Sony Music Entertainment, and Warner Music Group.
If Spotify doesn’t have any music, they don’t have a business anymore. As a result, the three major music labels have all the power when they negotiate revenue sharing with Spotify. Spotify has no choice but to take the terms that the labels want.
That’s a big problem for Spotify. While music streaming is a $4.3 billion industry, most of this revenue doesn’t go to Spotify. The money doesn’t go to musicians either, who make something like $.006 every time one of their songs is streamed.
The main beneficiary of streaming is the music labels. Just a decade ago, record labels were in serious trouble due to piracy. Now, they’re in a similar position as they were during the 90s when everyone was still buying CDs.
Maybe as time goes on, more musicians will choose the independent route, and eventually, Spotify will no longer be dependent on the parasites that call themselves music labels. Of course, this is a slow cultural shift that will probably take some time. Publically-owned companies need to show progress every quarter. Spotify needed to make a big move and they did.
Why Spotify is going after podcasting
This isn’t the first move that Spotify has made in the podcasting space. Spotify dropped $196 million on The Ringer, Bill Simmons’s podcasting and media company, and a total of $393 million on three other podcasting companies: Gimlet Media, Anchor, and Parcast.
Side note: Looking at these numbers, it seems like $100 million for Joe Rogan was a steal.
Buying all of this original content is a great way to further differentiate Spotify from Apple Music. For whatever reason, Apple hasn’t really shown any interest in podcasts. My guess is the industry isn’t big enough just yet. Right now, Apple’s focus is on winning the streaming wars and figuring out how it’s going to release the 5G iPhone with all of the supply chain disruptions from COVID-19.
Side note: Publically-owned companies need to show growth every quarter to keep stock prices high. As a result, trillion-dollar companies like Apple need to go after giant opportunities to show solid growth. Going after small opportunities is simply not worth the company’s time.
Right now, the big opportunity is in video streaming, which was estimated to generate more than $38 billion in revenue in 2018. Apple is trying to get into this market with Apple TV+. Meanwhile, podcasting generated $479 million in the same year. Since Apple is a trillion-dollar company, that $479 million isn’t worth its time right now. However, they might try to make more plays in the podcasting space if the size continues to increase in the future.
Even though the podcasting market isn’t that big yet, there’s a real opportunity for revenue here. According to Edison Research, 104 million Americans listen to podcasts monthly and that number is definitely going to grow.
Why sponsoring podcasts is hard right now
If you’re a regular podcast listener, you’ve probably noticed there are a few companies that seem to run ads on every podcast. (Squarespace and ZipRecruiter)
There’s a reason for this. If you’re in marketing (like me), it’s tough to justify spending tons of money on podcast ads when you can’t track how many people are listening to those ads. While it’s easy to track traffic and click with a Google or a Facebook ad, it’s not easy to do that with a podcast. So if your CEO pulls you in for a meeting, you don’t have any charts or data to show that your podcast ads are leading to real results.
Also, building relationships with individual podcasters is inconvenient and time-consuming. I can tell you right now that sending outreach emails to different podcasters to see if they’re willing to take ads from us is not something that anyone on my team has time to do. So most companies probably just don’t have the time or the resources to focus on podcast ads.
All this explains why the podcasting market is still relatively small in comparison to how many people listen to podcasts. Marketers just don’t have the tools they need to successfully advertise yet. But Spotify can provide those tools.
How Spotify can make podcast advertising easier
In the long run, Spotify can make the process of podcast advertising significantly easier for businesses. Instead of podcasters having to read out an advertisement, Spotify can serve you a personalized ad based on your previous listening history.
Businesses also won’t need to reach out to individual podcasters. All they have to do is place an ad with Spotify. The platform can then target the ad towards consumers who have relevant interests. That means there’s a better chance that advertisers can reach people who actually might be interested in their products or services. Spotify can also offer advanced analytics for businesses looking to do advertisements, so they can better understand what kind of return on investment they’re getting. All of these things will help to make it easier for marketers to buy podcast ads.
Of course, every shift in the marketplace has winners and losers. In this case, the losers are going to be podcasters. While Spotify might be throwing money at them right now, eventually the company is going to be taking a big share of those advertising profits. In a few years, we might look back on this time as a Golden Age of Podcasting, where it was a lot easier for podcasters to make tons of money.
How this helps Spotify
Right now, I use the Apple podcasts app. There’s no real reason why I chose to do this. I just started using Apple podcasts when I first started listening to podcasts in 2016 and I never really had a reason to switch. But now, I’m going to have to switch to Spotify if I wanted to listen to the next Joe Rogan- Elon Musk interview. So are millions of other people.
Getting more podcast listeners will also help Spotify in its push to become the #1 player in the podcasting space. That means that its advertising platform is going to be more appealing for businesses.
All of these new listeners are also more likely to become premium Spotify subscribers. Spotify’s free version has been a huge driver of subscriber growth in the past. The company has said that half of the engaged users using the free tier eventually turn into paying customers.
Side note: Spotify never actually defined what an “engaged” listener was. Still, the stat sounds pretty impressive.
Plus, if Spotify’s business isn’t totally reliant on the music label’s content for money, that means that they’ll have more leverage the next time they negotiate terms. After all, losing music won’t mean the end of their business anymore.
Spotify made a great move. While they’re still going to have to fight monopoly and oligopoly power, they’re in a much better spot than if they only had music to rely on.
Summary
Spotify is fighting against Apple’s monopoly on the side, and the record label’s oligopoly on the other.
Spotify having original podcast content can help them beat all of these opposing forces in the long-run.
Spotify can make it significantly easier for marketers to run podcasting ads.
Awesome move by Spotify, but probably bad for podcasters in the long-run.