Spotify disclosed some key financial metrics of its podcast business for the first time — and while the $1 billion-plus the streamer has invested into podcasting so far has been a drag on overall profits, the company expects podcasts to eventually have higher margins than its core music biz.
The company outlined its long-term strategy and financial prospects at its 2022 Investor Day event Tuesday.
In 2021, Spotify’s podcast business generated nearly €200 million in revenue, according to CFO Paul Vogel — up 300% year over year. About 30% of Spotify’s user base, or more than 125 million monthly users, listened to podcasts in the first quarter of 2022, representing 7% of total listening hours on the platform in the period.
However, the podcast business in 2021 had a negative gross margin of -57%, according to Vogel — and he said the losses will be even higher this year, peaking in 2022. That said, Spotify monetized only 14% of podcast listening on the platform in Q1, Vogel said, suggesting that the company has room to expand the podcast advertising business. In 2021, Spotify’s music business had a gross margin of 28.3%, up 300 basis points since 2018.
Long term, Spotify believes podcasts can achieve potential gross margins of 40%-50% within the next five years — even higher than its 30%-35% gross margin target for music.
To enter the podcast market, “we had to do a lot more heavy lifting” compared with music streaming, CEO Daniel Ek told investors. Podcasting is “a market that almost doesn’t exist, but it has a lot of tailwinds behind it.” Spotify also has big expectations for the audiobook market, which it entered with the acquisition of Findaway in November 2021.
On the podcast content front, Spotify’s owned-and-exclusive strategy is geared around using “tentpole” shows — like top 10 podcasts “The Joe Rogan Experience,” Alex Cooper’s “Call Her Daddy” and Dax Shepard’s “Armchair Expert” — to attract podcast listeners from other platforms, said Dawn Ostroff, chief content and advertising business officer. In addition, the O&E podcasts let Spotify “engage music-only audiences already on the platform” to “level them up to become both music and podcast listeners.”
Spotify has paid top dollar to get exclusive rights to popular podcasts: In 2020 it inked a deal with Joe Rogan worth more than $200 million over 3.5 years, and last year nabbed “Call Her Daddy” in a $60 million three-year pact with Cooper.
Spotify expects to exceed 1 billion users worldwide by 2030, more than double from 422 million as of the end of the first quarter of 2022, execs said.
The overall message that Ek and other Spotify brass wanted to impart to investors: The company has more upside longer term than many on Wall Street think. “We’ve morphed dramatically as a business,” Ek said. “Frankly, we probably haven’t done a very good job of explaining it.”