Spotify’s Podcast Strategy Is Working
The music streaming giant has improved its margins by moving aggressively into podcasting
Part 1 of a 2-part series on Spotify’s podcast business
Spotify is a fascinating company. Despite being a fraction of their size, it regularly competes with and wins against giants like Apple and Amazon. To unshackle its financial model from record labels, it has boldly moved into podcasts. It’s also attempting to define a category (audio).
Gross Gross Margins
Spotify is at the mercy of record labels. Sony BMG, Universal Music Group, and Warner Music Group control about 70% of music licenses and they know it. For every dollar of music streaming revenue that Spotify earns, it pays out about sixty cents in royalties. This is a variable expense, growing in parallel with revenue. This constrains Spotify’s profitability — for every extra dollar of music streaming revenue from here to infinity, it needs to pay out those royalties — and is the cornerstone of the bear thesis on the company. This manifests as low gross margins.
Spotify’s move into podcasts, and audio more broadly, is an attempt to kick off these shackles. Unlike the variable expense structure of music streaming, podcasts are largely fixed costs, providing a…
