The Journal. - Spotify's $1 Billion Bet Isn't Going Well

Episode Date: September 7, 2023

Spotify spent more than $1 billion to build up its podcasting empire. After years of costly acquisitions and celebrity partnerships, most of its shows are still not profitable. WSJ’s Anne Steele unpacks why Spotify’s big bet hasn’t paid off yet. Further Reading: - Spotify’s $1 Billion Podcast Bet Turns Into a Serial Drama  - Harry and Meghan Produce a Hollywood Flop: Themselves  Further Listening: - Neil Young, Joe Rogan and Spotify’s Balancing Act  - Harry and Meghan, Hollywood Royalty?   Learn more about your ad choices. Visit megaphone.fm/adchoices

At the end of 2020, Spotify made a big splash in the podcasting world. Well, you can add Prince Harry and Meghan Markle to your list of high-profile podcasters. Spotify announced an exclusive deal with the couple, saying... Meghan Markle and Prince Harry signed a roughly $20 million deal with Spotify to make several podcasts together. In August of last year, the first episode in a new series dropped. Markle was the host, and she had a lineup of A-listers, like Mariah Carey, Serena Williams, and Paris Hilton, to talk about female stereotypes. Hi, I'm Meghan, and this is Archetypes, my podcast about the labels and tropes that try to hold women back.

Archetypes vaulted to the top of Spotify's charts. This bet was part of a bigger strategy at Spotify to go beyond music into podcasting. But less than a year after Archetypes debuted, it was canceled. The partnership between Spotify and the couple was over. And the crumbling of that deal is just one of several cracks in Spotify's podcast ambitions. How much money has Spotify invested in podcasting? A billion dollars at this point is how much Spotify has bet on this business.

And how much money is Spotify making from that billion-dollar bet? Spotify is not making money from podcasts at this point. Welcome to The Journal, our show about money, business, and power. I'm Kate Leinbaugh. It's Thursday, September 7th. Coming up on the show,

why Spotify's billion-dollar podcasting gamble hasn't paid off yet. McCrispy fans, there's a new jaw-dropping McCrispy at McDonald's. It's called the Firecracker McCrispy. It has the crispy, juicy, tender chicken you love, topped with crispy jalapenos and a super tasty sweet and spicy sauce. You'll wish this spectacle of flavor never ended.

Try the new Firecracker McCrispy today at participating McDonald's restaurants. Donald's Restaurants. Spotify busted onto the music scene in the 2000s with its new streaming platform. Spotify has been a very cool, buzzy company since its inception. That's our colleague Anne Steele. And it came in and totally upended the music business, how we listen to and pay for music, the fact that we essentially rent access to music

versus own music. So it came in and disrupted the music business and became the biggest player by subscriptions and continues to be the industry leader in music streaming. But at the same time, it doesn't make money from that business that it completely transformed. How can that be that it didn't make money? Spotify and any other streamers that do this as well essentially end up paying 70% of their revenue out to labels and artists and publishers. It's just a really, really tough margin business.

And there isn't a lot of room for negotiation there. Those margins aren't going to increase. So they needed to look beyond music streaming to find other ways of bringing in revenue and revenue that they could keep a bigger chunk of. And that is how Spotify found podcasting. Here's CEO Daniel Ek in 2019 talking about his vision. We believe that over time, more than 20 percent of all listening on Spotify will be non-music content. And we strongly believe that this opportunity in audio starts with podcasting.

Starting in 2019, the company spent hundreds of millions of dollars buying up several podcasting studios. One of those studios was Gimlet, which, as you may know, has been a co-producer of our show along with The Wall Street Journal. Gimlet made really high-quality, high-touch, high-production, investigative, narrative pieces. Conviction, Gimlet Media. A story of crime, revenge, justice, injustice.

They also acquire Parcast and The Ringer over the next year. Parcast was heavily into true crime, which is a very important part of the podcast industry. From the beginning, it's sort of like where its niche roots stem from. Get up close and personal to history's most notorious murderers in the Spotify original from Parcast, Serial Killers. And then The Ringer was sort of a bet on pop culture, so sports, talk, and news. Greetings and welcome into The Ringerverse here on The Ringer Podcast Network.

Spotify saw a lot of room for disruption in podcasting because while it was this medium that was attracting a lot of educated, affluent listeners that are attractive to advertisers, there just wasn't the infrastructure and the data to really have a strong money-making business there. Spotify's goal with the studio acquisitions was to draw more subscribers to its service. A former executive compared it to how the critically acclaimed TV show House of Cards established Netflix as a major player in television. And cost was not an issue. Initially, you know, these studios were told not to worry about revenue, not to worry about profitability, and not to worry about spending. The idea was make as much content as possible. Whatever you

think is interesting, swing for the fences, create it, we'll fund it. So for these podcast companies that were acquired by Spotify, initially there was a lot of excitement. You know, if you're an upstart in this fun, funky medium and this big tech company with billions of dollars in revenue comes to you and says, hey, we're going to help you figure out this business. We're going to help your shows find more listeners. It's really an exciting prospect. And it didn't stop there. Spotify started signing some big deals with celebrity podcasters. As part of those deals, the shows would become Spotify exclusives, meaning listeners couldn't get them on any other platform. The first huge one was Joe Rogan. And Joe Rogan is the biggest podcaster in the world and has a giant audience. And the idea was to jumpstart listeners coming to Spotify to listen

to podcasts. They'd come for Joe Rogan and hopefully stay for other shows. Spotify's licensing deal with Rogan was worth well over $100 million, according to people familiar with the matter. Spotify struck deals with other major celebrities to start podcasts from scratch, like the one with Meghan Markle. The company signed a multi-million dollar deal in 2019 with the Obamas, and in 2020 it partnered with Kim Kardashian. 2019 with the Obamas, and in 2020 it partnered with Kim Kardashian. All of these investments help propel Spotify to the top of the podcasting market. They go from zero to having 100 million podcast listeners on the platform. They are also now the top publisher of podcasts in the United States. So to some extent, they succeed in bringing a ton of content to the platform and getting listeners to tune in to podcasts.

However. Oh, there's a however. However, so far, the strategy has not been profitable for Spotify. They have not made money. That's after the break. Summer's here, and you can now get almost anything you need for your sunny days delivered with Uber Eats. What do we mean by almost?

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Uber Eats can definitely get you that. Get almost, almost anything delivered with Uber Eats. Order now. Alcohol in select markets. Product availability may vary by Regency app for details. This episode is brought to you by RBC Student Banking. POV. You're a student listening to an RBC ad. You're learning you can get up to $330 in value with RBC,

including $100 when you open a no-month monthly fee RBC Advantage banking account for students. So you can vibe with friends even more this semester. POV, you're unlocking more perks for less with RBC. Up to $330 in value is a combined total of three available offers, each in accordance with the respective terms and conditions. Limited time offer ends October 31st, 2024. Conditions apply. Visit rbc.com slash student offers. Spotify spent millions to team up with celebrities and make original podcasts. The idea was to attract new subscribers to the platform. But those projects turned out to be challenging.

For instance, Meghan Markle's podcast. You know, the first episode of that show did do really well. There was a lot of interest, but it did not sustain a big audience, and it kind of tapered off. When the two sides parted ways earlier this year, they said in a joint statement that the decision was mutual, and they were, quote, proud of the series. And while the Obamas production studio has produced several podcasts for Spotify, you know, they switched over to Audible last year. And they are now working with that company instead. Have these celebrity podcasts succeeded in bringing in new subscribers?

Spotify found that podcasts really aren't the main reason that people choose a streaming platform. So while Spotify, in part through some of these deals, you know, they got a lot of people to listen to podcasts on Spotify, but they didn't meaningfully draw subscribers away from their rivals. At the same time, Spotify's investment in podcast studios was also struggling. So while initially there was this swing for the fences, don't worry about making money mentality that could only last so long. And I don't think Spotify realized how expensive and time consuming podcasting can be, especially for the studios that invested in, namely Gimlet. According to people Anne spoke with, some shows made by Gimlet could

cost up to $250,000 an episode. Inside the studios, Anne says executives and producers were growing frustrated with Spotify's shifting approach. Spotify would get excited about a different strategy every couple months. So when we were all holed up for the pandemic, Spotify invested in live audio and encouraged podcasters to experiment with live audio. When that faded, it was on to the next thing. You know, there was a big push for a while about integrating music and podcasts,

and that only lasted so long. So there would be this push for experimentation, but that's really expensive and challenging. A Spotify spokesperson told Anne that testing new features is common and that the company shelves the ones that fail to connect with audiences. In June of last year, Spotify executives told investors they expected podcasts to be profitable by 2024. Last fall, the company started cutting costs, canceling a few shows and conducting some layoffs. And this June, it made a big move that would undo much of its original vision. big move that would undo much of its original vision. It canceled most of the shows at Gimlet and Parcast, laid off 200 employees, and merged what remained into an entity called Spotify Studios. Investors are still looking for profitability here. So the cuts were seen favorably by Wall

Street, but Spotify still needs to make good on its promise that it's going to be profitable in its podcasting business next year. And when you spoke with people who used to work in Spotify's podcasting strategy, what was their take? I mean, for these people who came up in the business and, you know, were really excited about Spotify getting into it, it's been a real bummer to have your shows canceled. You know, companies that you helped build from the ground up essentially erased at this point, as Spotify has absorbed Gimlet and Parcast into its overall company. absorbed Gimlet and Parcast into its overall company. So in Spotify kind of coming in to figure out this industry and how it could make money from it, you see these premier players

that were a big part of this then niche industry kind of become collateral damage. this then-niche industry kind of become collateral damage. Spotify said the cuts at Gimlet and Parcast were part of a strategic realignment. What is Spotify saying about its future in the podcasting space? So Spotify describes the past five years as sort of its initial phases of podcasting. It says that, you know, it was coming from nowhere in podcasting, and it needed to, one, bring podcasts to Spotify,

make them available on the platform, and two, get listeners listening to podcasts on Spotify. And the company has said that it has done that. And now it says that phase is over and we're on to the next and the next phase is profitability. And in this next phase, the company is focusing on its advertising business and also selling tools and advertising to different podcast creators outside of Spotify. Going forward, Spotify executives have said the company will focus more on using its technology to help independent creators make new shows. Executives have talked about becoming more like YouTube, selling ads to run with creators' content and sharing the revenue.

Not only does Spotify want to sell ads against its own shows, but it wants to build, you know, an advertising business where it sells ads against lots of publishers and network shows. And so that piece of its business is really where the focus has shifted in recent months and really where there seems to be a promise of success and ultimately profitability. So is Spotify still a disruptor company? So without Spotify making this bet that it did, we wouldn't have seen this arms race across the podcast industry. So it was Spotify's investment and, you know, very vocal message that podcasting is a big tentpole of the future of our business that got these other tech giants, every other tech giant got into podcasting after and because of Spotify. It really did bring podcasting as a business a lot further, but it ended up being a tougher business than it realized when it initiated this billion-dollar bet on the business.

That's all for today, Thursday, September 7th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Sarah Krause. Thanks for listening. See you tomorrow.