Spotify is pivoting from podcasts, but have they learnt from their mistakes?

Sascha: [00:00:02] Welcome to The Dive, the podcast that asks whoever said business news needs to be all business. I'm your host, Sascha Kelly. Now it's no use to all of you that I'm a sucker for pop culture news. And I'm a little ashamed to admit that when I read the headlines last week announcing the end of Spotify as a deal with a certain royal couple, I clicked on those stories really quickly. If you're not like me, here's the quick CliffsNotes. Prince Harry and Meghan Markle, who signed a reported 20 million U.S. dollar deal with the audio giant that was brought to a mutually agreed end last month. But this clickbait headline actually points to a much, much larger pivot at the audio company. We've seen an end to similar personality and celebrity-led podcast deals. Last year, the Obamas quietly stepped away after renewing their agreement, and instead they took their production company higher Ground across to Audible. And last month, Spotify also announced the decision to restructure its podcast division, laying off 200 jobs and merging podcast and Gimlet Media with their own in-house Spotify studios. Those two podcast houses were ones that the company spent millions of dollars acquiring. It's Friday, the 7th of July. And today I want to know, is this the end of a podcast? First strategy for Spotify and what lessons have they learnt that they'll take forward to talk about this today? I'm joined by Amrita Khalid, who writes for The Verge and publishes the Hot Pod newsletter, of which I am a keen fan. Amrita, thanks for joining me today.

Amrita: [00:01:43] Thanks for inviting me. Excited to be here. 

Sascha: [00:01:46] So we read a piece that you published on the newsletter a couple of weeks ago talking about Spotify. So let's start at the beginning. Tell me about the lay of the land at the streaming giant at the moment. We've obviously had this really high profile break-up with a certain royal couple, but that's not the only celebrity deal that's fallen through recently or come to an end. Can you give me a bit of a one on one on what that landscape is at the moment?

Amrita: [00:02:12] So this is not just Spotify, but the whole podcast industry is kind of in a crisis right now. As you know, most podcasts make most of their money through ads. That market is very rough this year due to inflation. And you know, on top of that, the streaming industry as a whole is trying to cut costs after kind of spending a ton of money on new content during the pandemic. So we're seeing this across the board. So Spotify specifically is kind of in a unique spot right now, like they've been in business since 2011. Their entire focus was on the music business, right? And so they have become the biggest audio giant in the world, but they've yet to make a net profit. And that's partially due to the fact that the music industry is a really tough business for Spotify. Like, just due to the deals that they made with the record labels. So I think it's $0.70 of every dollar they make goes right back to the record labels. And on top of that, they have to pay Google and Apple 30% of every single transaction that actually happens on the app. So if you have Spotify downloaded on your smartphone and it's linked to your credit card information, either Google or Apple takes 30% of what you spend every month. So around like 2018, you know, Spotify was at a point where they really needed to make money in a way that didn't involve music. So it decided to invest in podcasts and in 2018 hired Dawn Ostroff, who you know, is a very prominent TV executive. They hired her to essentially lead Spotify as podcast content ever. And so, you know, a big focus of Spotify was to kind of invest in these exclusive celebrity podcasts and spend the type of money that you might associate with Netflix in creating original content.

Audio Clip: [00:04:15] Podcast The streaming giant Saying the more than $1 billion committed to podcasting will soon pay Off, including Gross margins of up to 35% for Podcasts Will Soon pay off is the Key here because it hasn't paid off yet, despite the 1 billion investment they've made in content. 

Amrita: [00:04:32] And so for the first time, Spotify kind of got into the business of creating content when before they were, know, just publishing it physically how we got here. So Dawn Ostroff at Spotify spent the next four years spending a total of $1,000,000,000 on basically trying to become the leader of the podcast space. And so if you talk to anybody who worked in podcasts or even radio back in maybe like 2016, 20. 17, a billion was just unheard of. No one had invested that kind of money in podcasts before, but they devoted a chunk of this money to these celebrity deals. I mean, basically these famous people who just aren't necessarily known for podcasts. So Kim Kardashian was one of them. They did a deal with Barack and Michelle Obama's Higher Ground.

Audio Clip: [00:05:24] Obama's new podcast deal, the first couple's production company, Higher Ground, is moving to Audible after a three year run with Spotify.

Amrita: [00:05:31] Ava DuVernay, the filmmaker behind Selma, Bernie Brown most people probably know her from her TED Talk. And of course, Prince Harry and Meghan Markle.

Audio Clip: [00:05:42] It's over, Harry and Meghan's estimated $25 million podcast deal cancelled after less than a year. My wife and I will Moving on. H&M issued a joint statement with Spotify saying they have mutually agreed to part ways and they are proud of the series.

Amrita: [00:05:58] I mean, to Spotify's credit, it's not like they're throwing celebrities random money like left and right. It's not like they were like, Oh, hey, Tom Cruise, here's 5 million Rihanna, here's here's 10 million. You can kind of understand their thinking a bit if you look at the list. They had some sort of track record. But, you know, for the most part, these people have not been in the business of audio. And Spotify was also relatively new to the business of audio. And they were spending money that was record breaking. And so I think the combination of those factors, you know, was kind of a nightmare in the end. 

Sascha: [00:06:36] Yeah, I think it's really interesting as you list off those names, I was going to reference the Sussexes, but as you named some of those other celebrities on the list, they all quite considered choices. You know, if you were head of content, they would make sense. So can you talk a little bit through obviously, they took this Netflix sized investment and put it into this pivot towards podcasts. Did any of these co-productions walk out or in Spotify's mind, have any been a success?

Amrita: [00:07:07] Success is an interesting word in the world of podcasts because you're not going to see the type of success that you associate with movies or film or video games. And I think like Spotify under Dawn Ostroff, we're trying to find the same type of success. So they were trying to replicate the type of success that we associate with film and TV when, you know, podcasting is pretty niche, you know, and even the biggest hits other than maybe Joe Rogan and maybe like the top ten shows, the programming beneath that, they tend to have like hardcore fanbases. But there's just so much out there that you're not going to see the type of big hits that we associate with something like Serial, which was eight years ago. And so I guess like as far as deals that worked. Joe Rogan It was a total of like I think 200 million. They got Alex Cooper, who back then was at Barstool Sports. Her show called Her Daddy is regularly among the top ten. Renee Brown made two podcasts, and then the deal with Ava DuVernay did not produce anything. So I guess you could look at this in two ways. One could be, Oh, they should have been a bit more selective and purposeful about who they picked to produce these shows. But, you know, to their credit, especially in the world of entertainment deals, kind of just don't take off a lot. You know, you'll see this in film and TV networks. They'll spend like millions of dollars in securing creators and nothing might come out of them. But in the world of podcasting, that was pretty unheard of. So I guess I would argue, like the work of creating a podcast actually also takes less time than making a season of a TV show. So you could say, Why are you paying 60 million to someone to essentially record a show? That's kind of the lure of audio, right? It's so cheap to produce and it's relatively quicker to produce than TV or film. So yeah, I think a lot of it confused people across many industries and people kind of saw it largely as sort of like just throwing something at the wall just to see if it sticks. 

Sascha: [00:09:17] Yeah. And I think also on that note, and I've seen this criticism doing the rounds recently is that podcasting in comparison to music is also a cheaper medium to make because the number of hands a record has to pass through before it ends up published is far more than the number of hands a podcast might go through before it's ready for people to listen to. So you brought up the name that I was going to ask you about next, which is Joe Rogan. I think a lot has been published about him and his perspectives and the headache that he has been for Spotify in terms of publicity. You mentioned that he cost them 200 million, which at the time was kind of a record deal in podcasting. I'd love to hear. I he's still such an important part of the Spotify mix, especially in this climate where so many celebrity deals are starting to come to an end or this hasn't worked. What is it about Joe Rogan show that is such a success in their eyes?

Amrita: [00:10:16] So yeah, Joe Rogan is very tricky. He is the number one Listen to podcast in the country. In other countries, here in Canada, much of the English speaking world. So he genuinely doesn't need Spotify or really any other media company. Wherever he goes, his audience will kind of go with him as far as his relevance to Spotify. He makes up such a large core of like podcast listeners, I believe 5% of all podcast listeners in total listen to his show. And so that is a base that Spotify can't afford to let go of. 

Sascha: [00:10:55] And that start really struck me 5% of all podcast listeners on Spotify. Listen to Joe Rogan so you can understand why, at least from a business perspective, he's a really important partnership for the company. I'm going to be back with more of my conversation with Amrita in just a moment. But we're going to talk about what happened to Spotify as two big acquisitions, gimlet and podcast, and also how they're thinking about their approach for the next big pivot, which is advertising. 

Audio Clip: [00:11:28] You've been tracking Spotify. Shares are up by about 30% as the company has made some pretty serious moves in the podcasting space. 

Audio Clip: [00:11:34] Spotify is betting big on Kim Kardashian West, signing her to an exclusive criminal podcast deal. 

Sascha: [00:11:40] It's Sascha Kelley, back with you on The Dive. Just before we get back into my conversation, super quick, a favour to ask you. Could you send this to a friend? Just hit share. Copy this link. Copy. Wherever you're listening to it, throw it in a text message and send it to a mate. It is one small move for you, but it is a massive, massive deal to us anyway. Now you've done that. And a thanks, by the way, from me. Back to more of my conversation with Amrita from The Verge. You mentioned earlier that Spotify acquired two rather successful production houses, and those have also kind of suffered in this reckoning, you would say, of Spotify, looking at their podcast strategy and assessing whether it has worked at the moment. Can you speak a little bit about those decisions and whether they see those acquisitions as a success. 

Amrita: [00:12:30] Back in 2019 as a part of their buying spree when they were looking for new content? Spotify invested, they acquired two podcast studios, Gimlet and podcast. And so this is in 2019, and they're both kind of different. So Gimlet was probably kind of the first modern narrative podcast studio before Gimlet. I mean, most of what we associate with podcasts came from radio. There were a lot of like Internet adjacent radio shows, but Gimlet focussed on kind of like the narrative podcast we see today. So we had a very nice slate of shows that were almost kind of like premium, like they weren't for the mass market, but they had devoted fanbases. So you had shows like Reply All Heavyweight they'd like to call Gimlet, kind of the HBO podcast. 

Sascha: [00:13:22] It's so true because I was definitely a dedicated listener of start up and reply. All that was not an episode that I missed. 

Amrita: [00:13:29] Which I all like. I will try to explain reply all to people who had heard of it, and it's like, how do you Oh, it's these two guys and they kind of solve problems that other people find on the internet. And you know, you wouldn't think it's this massive hit. Oh my gosh. But it had a, you know, a very loyal fanbase and so and then podcast, which made a ton of true crime shows. And I think the thinking behind that mostly was that these shows would be perfect for IP, you know, like they could be adapted into TV shows, documentaries, movies and true crime. You know, there was a ton of buzz around true crime at the time, but the acquisitions did not go well. And I don't think either the employees at Gimlet and podcast nor Spotify would say so, which is funny because Spotify won its first Pulitzer Prize this year and audio for a gimlet show. Essentially what happened over the past few years is that there was a disconnect between what Spotify wanted from these studios and what these studios were used to doing. The type of people that were working at these studios, they were very much kind of I mean, they were audio professionals who were accustomed to creating these high value shows. Spotify didn't necessarily understand or kind of know how to work with them. They didn't get a lot of support as well as far as marketing, as far as assistants and, you know, kind of getting everything together for these shows. And so a lot of employees said they felt like they were kind of on the back burner for the most part. So this year, Spotify essentially gutted both studios. They had two runs of layoffs and they essentially like disbanded what we know of as gimlet and podcast and put them under Spotify, their in-house podcast production studio. So most ex-employees I spoke to felt like that was the end of what is known as Gimlet and Broadcast. But they also said that it was a very long time coming. You know, like it's very much like they felt like an ignored Red-Headed stepchild for much of their time with Spotify. 

Sascha: [00:15:40] So you said that in 2019, Spotify went right our next shift away from music because music's far too expensive for us. We're losing $0.70 on the dollar. We're going to move towards podcasting. And that was obviously what we've seen unfold for the last four years or so. Recently, you've reported that internally they're starting to talk about the fact that advertising is going to be their next big pivot and the next big shift for the company. In your writing, you talked about the fact that Spotify really needs to learn from its mistakes in terms of this next big shift. What are the crucial mistakes that they need to adjust in moving towards this next pillar or this next phase, which is going to be a focus on advertising? 

Amrita: [00:16:26] To your question. About pivoting to podcasts for music. I believe when you look at total listening hours for the first quarter of 2022, podcasts only accounted for 7% of the total listening hours. Wow. And so 93% of that went to music. The vast majority of Spotify users use it for music, even like podcast enthusiasts. Which is so funny because I actually do love Spotify and I use it for podcasts, but a lot of people have their like preferred podcast app. So, you know, as far as repeating the same mistakes, I think that maybe there's an argument to be made that maybe Spotify didn't belong in the business of producing content. They're very much a tech company. They're designed as an audio app, you know. And so I think like what's happening now? Like, okay, like this last phase was Spotify trying to become the Netflix of podcasts? I think about the next phase. I've heard this described in other contexts, but the next phase is Spotify essentially trying to become the YouTube for audio. So trying to become the place for user generated audio content, but music, audiobooks and podcasts. And so by doing that, it's kind of honing in on what? It kind of started doing with podcasts, which are targeted ads. And so relying on these really powerful targeted ads on the user data that they do have and delivering it to advertisers as well as creators. And so that's kind of their big pitch. It's promising. It's a dramatic pivot from what it has done, but, you know, it is different. And so I guess we'll have to see. It's a weird year because obviously, like the ad markets, very soft. You don't see brands spend the same money on advertising anymore. So, yeah, a lot of it is kind of like wait and see. 

Sascha: [00:18:18] But it's so interesting because, yeah, that is how we open the conversation. But if we think about Spotify and their access to our daughter and our access to listening habits, they do have a lot of information that would allow them to make really targeted decisions. Thanks so much for joining me, Amrita. I love your newsletter every week. For anyone who might be curious about learning more about the audio world, where can they find more information about your writing and reporting? 

Amrita: [00:18:43] Sure. So I'm at the verge and free to sign up for the newsletter. There's a free newsletter that goes out every Tuesday. 

Sascha: [00:18:50] Thanks so much for joining me this morning on The Dive, Amrita.

Amrita: [00:18:53] Thanks so much.

Sascha: [00:18:55] My huge thanks to Amrita for joining me to talk about Spotify today. Podcast is on podcasting. Was that a little too matter for you? Let us know what you thought of the topic today or give us suggestions for future ones. All our contact details are in the show notes below. I'm going to be back in your feeds on Monday. Until then, have a great weekend.