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Spotify’s Bet on Video and The Spotify Standard
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Spotify recently hosted their event for creators, Stream On. The company debuted a number of new features with a focus on the following:
Video: long form and short video for podcasts
Creator Tools: Tools to engage with fans with video, polls, and Q&A
These are the biggest product upgrades the company has made since its IPO.
The changes could not have come at a better (or worse) time for Spotify. Spotify and Ek find themselves in a precarious position. The company’s growth has slowed, and prospective growth opportunities look questionable. And as growth decelerates, investors are increasingly scrutinizing the company’s inability to expand margins.
The core KPIs suggest the company is beginning to hit a growth wall for the top line.
The company is saturated in most markets, and subscriber growth is slowing.
Pricing power has not been flexed (likely because of competition).
And the company’s bet on podcasts seems to have been a dud in terms of their ability to monetize and improve gross margins. In fact, podcasts have arguably been a distraction for management and continue to be a drag on gross margins.
Looking at the company’s financial model, the challenges/issues become readily apparent. The main challenge Spotify has is that they do not have many levers in its control anymore. Previously Spotify could focus on growing subscribers and driving ARPU.
However, subscriber growth is/will continue to decelerate because Spotify is saturated in core markets. The company has not flexed pricing meaningfully, but it's unclear how much pricing power they have.
The only thing that could move the needle for Spotify (outside of a favorable label negotiation) is driving more non-music activity and revenue on the platform. Today, non-music revenue primarily means advertising revenue on top of non-music content.
Podcasting was the right bet for Spotify. However, the company over-rotated into owned & exclusive (O&E) podcasts. Spotify became over-reliant on original content as the strategy to funnel podcast demand to their platform.
There are a few reasons why Spotify’s O&E bet has not worked out – but the main ones, in my opinion, are:
The success of new podcasts is not predictable (Archetypes, anyone?)
Discovery and promotion for podcasts are challenging. And this is made much harder when the podcasts are exclusive to one platform that has less than 50% market share.
Unlike TV shows, podcasts are not re-watchable, so Spotify found itself on the content treadmill, excluding the top 1-2 creators (e.g., Rogan).
Spotify effectively went too far in the direction of becoming the New York Times as opposed to what Substack is building. What Ek should have focused on was driving a better experience for listeners that naturally funneled all podcast demand Spotify, exclusive or not. But the company lacked the mechanism to effectively do that.
This brings us to this week’s announcements.
The Spotify Podcast Standard
Most of the press coverage focused on the company’s decision to build TikTok-like features into the app. While I’m sure those features will help with the discovery and recommendation of new content for creators, transitioning user patterns to treat Spotify’s feed the same way one treats TikTok or Reels seems challenging. For one thing, Spotify lacks the diversity of content and creators to take attention away from either Reels or TikTok.
In practice, what the company seems to be positioning itself for is the re-aggregation of podcast consumption around Spotify.
Over the last few years, podcast consumption has unbundled and disaggregated:
The discovery and video features that Spotify launched are designed to position Spotify as the central hub for podcasters to create and publish content for all three formats. This also has the benefit of allowing Spotify to transition itself from an audio app to a general entertainment platform that includes audio, long-form, and short-form videos.
By supporting all three formats and having artists build their videos and experiences around Spotify’s features, Spotify hopes to condition consumers to consume podcasts and related video content on Spotify’s apps. What the company is trying to (re) capture is the time consumers are spending watching podcasts on YouTube or clips of podcasts on YouTube.
Here’s Julie McNamara, Head Of U.S. Studios & Video, at the event:
Many of our top hosts are also pioneers in video podcasting, and it’s no surprise that adding video has really helped them connect with fans on a deeper level.
We’re seeing more and more creators starting to embrace video. In fact, it’s one of the fastest-growing areas of podcasting, and we expect that growth to continue. Right now we have over 70,000 video creators on the platform, and we have a lot more on the way.
Forbidden Fruits with Julia Fox and Niki Takesh will return for season two with an exclusive video edition – I mean who wouldn’t want to see what these two fashion icons are wearing every episode.
And we’re bringing Drew Afualo’s video podcast, The Comment Section, exclusively to Spotify starting on April 5th. We’re also rolling out limited video series from other top podcasters like Mindset Mentor with Rob Dial as well as innovative partnerships with Collab, Creative Juice, Get Engaged Media, Golden Child and Karat.
There are a few important implications for Spotify of bet on video:
Spotify can re-capture impressions/users that were going to YouTube to watch podcasts.
Allows the company to experiment with video ads, which have higher CPMs.
The company can offer a unique in-app experience around video that can help funnel users from other podcast platforms to Spotify.
On the last point, this comment from Bill Simmons caught my eye:
At The Ringer, we love to experiment with different formats. And Video is one that we’ve come back to over and over again. By doing side-by-side interview panels and instant reaction podcasts, we have mastered companion podcasting. We’re always launching fresh new shows that stand out in their own ways, and most recently we’ve gotten excited about an idea of developing a brand-new game show, which we’ll be sharing more info about very soon.
A game show! I would wager that the quiz show will include audience participation.
What Spotify is trying to do here is add functionality that allows podcasters to engage with consumers in more ways. From Spotify’s Head of Podcast Product, Maya Prohovnik
The new Spotify for Podcasters is available to everyone, in every Spotify market, for free—beginning now.
This platform is the foundation that finally enables us to build the future of podcasting—together with you, the creators. It makes it easier than ever to create and grow your podcast. And it also enables us to provide new, innovative features that help you better engage with your listeners.
That includes things like Polls, Q&As, video—and starting today, we’re also adding Podcast Chapters. This feature lets you create thematic sections in your episodes so listeners can easily browse through the topics you cover. Chapters are available now for all podcasts, all you have to do is include timestamps in your episode descriptions and they’ll show up on Spotify automatically.
And that's just the beginning of the features we'll be rolling out this year for all podcasters.
Not only are these features meant to benefit creators, but they are also meant to benefit Spotify. By creating experiences that are only available within (or optimized for) Spotify’s app, the company is subtly making the listening experience worse everywhere else. Imagine listening to a podcast on Apple Podcasts where the podcast host is pointing to Q&A or discussions that are in Spotify. That seems like a crappy user experience for the Apple user.
Alex Cooper (Call Her Daddy) effectively alluded to this scenario/dynamic:
I can create or upload episodes to publish instantly, I can add video, which is a crucial element of my show and helps me take full advantage of that new home feed Gustav shared. And I can add audience Q&As and Polls to my episodes, so I can hear directly from my real fans, and trust me, the Daddy Gang has a lot to say.
Now to be fair, the reason people make content for YouTube or post to Apple Podcasts is that consumers are watching content on those platforms, and creators want to be where the audience is. Spotify’s hope is that it can add functionality and listening/viewing experiences on Spotify that are not replicable on other platforms. A user could start consuming a video or piece of content elsewhere, but Spotify’s app would provide small “hooks” that drive users to Spotify to continue the experience.
Another pertinent example is shows like All-In podcasts that actively choose to show charts/graphs during their episodes. If you’re on the Apple Podcast app and you hear someone on the show talk about a chart, it’s a pretty terrible listener experience – because you cannot quickly open up the app to see the video version of the podcast with the visual.
Spotify’s most natural rival for this end-to-end consumption of audio is YouTube, but they’ve disaggregated the platform into YouTube Premium and YouTube Music.
Podcast and Beyond
If Spotify executes the strategy well, I think we end up in a place where Spotify becomes an end-to-end entertainment app centered around podcast creators. But there are many natural extensions for these podcasters, such as live and narrative content that fits well into video format:
Here’s Alex Cooper again from the event:
I want to share how some of these features have made a big impact for me and my show. Video episodes of Call Her Daddy not only get more engagement than audio-only episodes: They’ve also helped me expand my artistic capabilities to formats like documentary-style reporting.
This strategy is obviously not a slam dunk, and with Spotify, it never is. But it is the first time in a long-time that the company is relying on product innovation and updates to drive the business forward as opposed to throwing money at podcast creators.
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This is not investment advice. Do your own due diligence.