Good morning everyone,

I am away next week for a mini-vacation with the family. The Marketing BS newsletter will return on Tuesday, February 25.

— Edward

Spotify Brings in a Ringer

In 2011, writer Bill Simmons launched Grantland, a sports and pop culture website (owned by ESPN). After ESPN shut down the site in 2015, Simmons founded a similarly themed platform — The Ringer. In addition to long-form articles, The Ringer began creating original podcasts. As of this week, The Ringer Podcast Network features more than 30 podcasts that discuss sports, movies, restaurants, and other sports and pop culture topics.

Last week, Spotify — the largest subscription music streaming service — purchased The Ringer. An article in the Wall Street Journal provides more context:

Spotify Chief Executive Daniel Ek said as consumers’ listening habits move from radio to online, sports will be a key part of Spotify’s podcast expansion efforts. “We look at this as we just bought the next ESPN,” he said during an interview after the deal was announced. Spotify spent much of last year building out its podcasting business, shelling out $400 million for three podcast companies and striking more than two dozen deals for exclusive or original content.

Although the WSJ mentions three podcast companies, I believe that Spotify actually bought FOUR companies this year:

Gimlet (producer of Start Up, Reply All, Homecoming, etc.) Parcast (producer of Female Criminals, Tales, and Unexplained Mysteries) Anchor (a tool for producing podcasts) SoundBetter (a marketplace for music production used by sound engineers, singers, studios, and session musicians)

Spotify began (in 2006) as a music streaming platform, and music remains the core product of their business. Approximately 16% of Spotify users also listen to podcasts, but as the company explained to the WSJ:

People who listen to both music and podcasts are more likely to become paying subscribers than people who listen only to music, thanks to higher engagement and retention among those listeners ... and consumption hours [of podcasts] nearly tripled in the fourth quarter from a year earlier. [Emphasis mine]

Spotify described the acquisition of The Ringer as buying the “ESPN of audio.” What is Spotify’s play here? Quite likely, Spotify is attempting to become the Netflix of audio — something they cannot accomplish on the back of music alone.

Dominating the music streaming industry is an uphill task. Because of the way licensing agreements are structured, music has become a commodity. Every streaming platform features (almost) exactly the same music content; there are some exceptions for artists who have exclusivity deals with one company or contract grievances with another.

From the consumers’ point of view, buying a subscription to Spotify or Amazon Music or Apple Music (or one of the many others) has nothing to do with their available catalogue of music. Instead, music streaming services compete on price, convenience, and user experience.

Notice that the music industry operates in sharp contrast to the video streaming wars, especially over the last few months. People signed up for Disney+ in order to watch The Mandalorian, not because of the user interface. Likewise, people subscribed to Amazon Prime to catch episodes of Fleabag, not because of the stability of their video platform.

But the only reason my family subscribes to Amazon Music instead of Spotify? Pure inertia.

Spotify’s expansion into podcasts is their gamble to break the deadlock. By owning podcasts that are distributed exclusively through Spotify subscriptions, the company hopes to differentiate themselves from all of the other streaming platforms.

Will Spotify’s plan work, and what might this strategy mean for marketers?

Share Marketing BS with Edward Nevraumont

The Podcast Golden Age

Podcasting is a relatively new medium. The year 2004 is generally cited as the beginning of the podcast era, although the first few years were quiet. Apple increased the popularity of podcasts with the 2005 release of iTunes 4.9, which featured native support for the medium. British comedian Ricky Gervais’s eponymously titled podcast was the first show to achieve pop culture traction, with 261,000 downloads in one month. Just five years later, The Adam Carolla Show was hitting 60 million downloads per month.

Many people got hooked on podcasts in 2014, when Serial — an investigation of a high school murder case — attracted coverage from mainstream media outlets like Entertainment Weekly. Serial profoundly changed the podcasting landscape: after listeners finished with the miniseries, they enthusiastically searched out other podcasts, leading to a boost in audiences across the board.

Stephen Dubner, host of Freakonomics Radio, described the impact on his show: “The month before ‘Serial,’ I think we had about 5 million downloads. The month after ‘Serial,’ we’ve got 7 million downloads a month.”

In the five years since Serial first aired, podcasts have continued to grow in popularity. One of my first Marketing BS letters covered Mary Meeker’s “Internet Trends” annual report (for 2019). Meeker included information about podcast listenership:

Check out some more specific statistics about podcasting in the US (February 2020 data):

32% (90 million) listen to podcasts at least every month

22% (62 million) listen to podcasts weekly

Podcast listeners listen to an average of 7 different shows per week

Despite the surging popularity of podcasts, we need to frame these numbers in terms of total media consumption. Per year in the US, podcast fans spend approximately 15 billion hours listening to their favorite shows. That figure might seem impressive, but it works out to roughly 7.5 minutes a day for each American adult. In contrast, the average American adult watches approximately 3.5 HOURS of television each day. Plus, adults spend another 6.3 hours a day consuming digital media. Bottom line: podcasts have experienced tremendous growth, but total engagement lags far behind television and digital media.

Monetizing New Media

We know that podcast listenership is rising, but what about revenues?

There are three basic models for podcast monetization:

Advertising Subscriptions Tipping/donations

The tipping model is prevalent in China, but very rarely implemented in North America. (There are contextual reasons to explain China’s embrace of tipping their favorite content creators, but we’ll save that for another day).

Some podcast hosts have attempted subscriptions, most notably Tim Ferriss — author of The 4-Hour Workweek and other books. As I mentioned in a post last year, Ferriss experimented with a subscription model. What was the outcome? The test was an absolute disaster, and he quickly reverted back to an advertising-supported model. Ferriss chronicled the process on his blog:

This is a quick public service announcement: I will be stopping the fan-supported podcast experiment and moving back to an ad-supported podcast. This post will explain a few of the reasons…

The feedback and data have been overwhelmingly clear. Given the size of the audience — the podcast passed 400 million downloads a month ago — experiments can sometimes yield conclusions much more quickly than expected…

It turns out that most of my listeners have a strong preference for an ad-supported model compared to other options. Many folks have come to use the podcast and 5-Bullet Friday for discovering new products and services, and that has been reflected in the comments since launch. After weeks of consistent feedback from my audience, it’s now loud and clear that my vetting and sharing of sponsors is better received and a better fit…

Pre-launch polling on social media almost perfectly predicted the outcome. Here’s the tweet I used to test the waters, which had nearly 18,000 respondents. The results were:

72% – No, I wouldn’t donate.

24% – I would give $5 per month.

4% – I would give $10 or more per month. [Emphasis mine]

To the best of my knowledge, no major podcasts are primarily supported by a subscription model. Podcasting (at least right now) is an advertising-delivery vehicle.

The challenge of monetizing

As an effective advertising platform, podcasting still has a long road ahead. The IAB (Interactive Advertising Bureau) estimates that the total advertising dollars spent on podcasts last year was approximately $479 million (or about $0.03 per listener hour). In comparison, approximately $45 billion was spent on television ads (almost $0.10 per viewing hour).

I believe the discrepancy in ‘cost per hour’ for podcasts versus television is driven by some significant issues with podcast advertising units:

1- Limited targeting. A few of the major podcast producers offer some regional targeting; I tried this approach and discovered that it does not work very well. Generally speaking, you only want to advertise on podcasts if you are looking to reach a national audience (or, even better, an international audience). For additional targeting, you should consider the specific podcast program (which can share some light demographic information of their subscribers). In this way, podcast advertising bears closer resemblance to Reddit than to television. At this point, podcasting lacks the sophistication you might expect from a digital channel.

2- Limited auditing. There is no standardized and authenticated method for tracking podcast listenership. Many of the top podcasts post their audience numbers (often as a publicity tactic), but there is minimal data about the vast majority of podcasts in existence. Even when podcasts do share their information, there is (1) no reliable way to verify their claims, and (2) no clear details on how to interpret the data. The ‘number of subscribers’ is a common metric, but this figure does not indicate how many subscribers actually listened to the podcast (or who started the episode but quit before the end). For instance, I subscribe to dozens of podcasts that I rarely get around to playing. As an analogy to older digital media, think about the problems with evaluating the success of email newsletters exclusively on open rates.

3- Limited scale. As I mentioned earlier, despite the rapid growth of podcasts, the total hours of engagement are still dwarfed by television and digital media. As such, podcasts are facing a problem with REACH. Once you advertise on a few of the most popular podcasts, you may find that advertising on additional podcasts will just increase your frequency rather than your reach. Overloading on podcast advertising will result in more and more impressions on the same listeners.

If you’re a regular podcast listener, you have definitely heard multiple ads from a few companies — you can probably recall the verbatim pitches for Squarespace, Mailchimp, or ZipRecruiter. Most of the regular podcast advertisers are venture-backed businesses selling a high price point or subscription product. As those companies go public and their finances are exposed, I expect we will see a rationalization of that spend. You no longer hear podcast ads from Blue Apron. Ads from companies like Casper could be the next to disappear.

Without question, the podcast industry NEEDS to change. When media companies started on the web, they were also driven by advertising. Today, the more successful media businesses collect the majority of their revenue from paid subscriptions. For instance, in 2018 The New York Times earned $400 million from paid subscriptions versus $259 million from digital advertising. Consumers seemed unwilling to pay for digital news, until — quite swiftly — people’s preferences shifted (probably because paid platforms offered a higher quality of content than you can find on most free news sites).

Spotify is betting that a similar transformation will occur in digital audio. When “shock jock” radio host Howard Stern moved over to (subscription-based) Sirius Radio, he took a lot of his (previously unpaying) fan base with him. In 2019, less than 4% of Tim Ferriss’s subscribers were willing to pay $10 a month, but you can imagine the situation changing in the future.

If Spotify can convince audiences that paying for premium podcasts is worthwhile, that will allow the company to move from being a commodity provider of music to a monopoly-supplier of differentiated audio content. If their strategy proves successful, it may ALSO afford them with the opportunity to provide better podcast ad units. If the majority of podcast listeners are using the Spotify platform, you would expect that the company will try to control the timing and content of ads. Such a system would allow advertisers to target listeners based on geography, demographics, or even interests — at scale and with clear auditing. Thus, Spotify could solve both the advertising problem AND the subscription problem. In short, Spotify could “own” podcasts in the same way that Google and Facebook “own” digital engagement. At least that is the theory.

Final Thoughts

After news broke that Spotify had purchased The Ringer, their stock price dropped slightly (-4%). More likely than The Ringer acquisition, though, analysts believe Spotify’s price dropped due to missing fourth quarter estimates and lower-than-expected first quarter guidance. Podcast investments might lead to accelerated growth in the future, but Wall Street seems skeptical enough that they are punishing the company for underwhelming short-term results. I will not argue on the merits of Spotify as an investment, but it seems to me that trying to find a way to NOT be a commodity is the best path forward as an overarching strategy. Especially when the alternative is going head-to-head without differentiation against the tech giants.

Keep it simple,

Edward

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Edward Nevraumont is a Senior Advisor with Warburg Pincus. The former CMO of General Assembly and A Place for Mom, Edward previously worked at Expedia and McKinsey & Company. For more information, including details about his latest book, check out Marketing BS.

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