Spotify’s Rogan problem is a cautionary tale for other tech platforms

Enlarge / Spotify is in the midst of a transformation, it may not realize it.

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Spotify probably didn’t realize it, but it stopped being a tech company a few years ago.

He was good at all the tech startup stuff – getting users and losing money – but like most companies, he wanted to ultimately make a profit. The company struggled to do this simply by releasing music, which proved costly since labels demanded high fees to access their catalogs. Without another product to sell alongside music, Spotify was hemorrhaging money.

So the company started looking elsewhere, looking for a product that would complement its existing music offerings. He found one in podcasts.

Spotify had finally found its way to profitability. Podcasts were big ad spend, and they could be made for less than it cost to license music catalogs. Additionally, the podcasts kept users coming back. After all, the big streaming services all carry most of the music people listen to, which makes it easy to switch. But exclusive podcasts aren’t available anywhere else. They lock up the fans.

In February 2019, Spotify bought podcast production company Gimlet, which had a sizable stable of shows. Then he bought up a few other companies before making a high-profile acquisition of The Ringer, a podcast network founded by former ESPN sportswriter Bill Simmons. In May 2020, Spotify purchased an exclusive license for past and future episodes of Joe Rogan’s show.

But in the process, Spotify had changed. Now, the company’s future depended not on a better music streaming widget, but rather on the podcasts it produced and the advertisements it sold around them. The music existed to expand the offer.

Other companies might not repeat Spotify’s transformation from platform to media company. It could be a unique case, a necessity given the vagaries of the music streaming industry. But it might as well be a cautionary tale about what happens to platforms when they run out of room to grow.

Advantages of platforms

Today, technology platforms typically have several advantages over media companies. While both use the internet to potentially reach billions of users, the platforms have an advantage as they serve both consumers and producers. They manage the underlying software and infrastructure, and other entities create the content that makes the platform valuable.

On the platforms, users and customers are sometimes different. Facebook and Twitter, for example, sell their users’ data to advertisers, who are the customers. Spotify has muddyed the waters a bit, selling subscriptions to users while using listening data to sell podcast ad space to companies. (Spotify also offers a free tier that serves more ads.)

Additionally, platforms hold a regulatory advantage over media companies. Section 230 of the Communications Decency Act grants platforms broad immunity for what is posted using their tools. This is not the case with publishers, which are generally responsible for the content they produce. Nor do the platforms tend to be held liable for “voluntary blocking and filtering of offensive material”, what we today call “content moderation”.

For years, Spotify has claimed this common ground, acting as an intermediary between music labels and distributors and their audiences. But unlike other platforms like Facebook and Twitter, which get almost all of their content for free from users, Spotify is at a disadvantage because it has to pay for the content it streams.

After years of growth, Spotify faces a dilemma. The company had over 100 million paying subscribers, but it was still losing money. It wasn’t about ‘catching up on volume’, so in order to make a profit, he needed a way to reduce his cost of production. One way would be to negotiate lower rates with record labels, but any gain there is likely just chipping away at the edges. Spotify needed a way to dramatically increase its profits.

Enter podcasts. For in-house series, Spotify can control their production, which can help reduce costs per minute. But the real upsurge has been in ad sales. Podcast ads are relatively good at reaching audiences – most people don’t ignore them – and as a result, they command a hefty premium. Spotify has also automated their placement, adjusting which listeners hear which ads in hopes of raising rates further.

The bet is successful. Ad revenue was up 75% year-over-year in the last quarter, and the company turned a profit unlike it usually does. While podcasts are still weighing on margins, the growth is such that the company expects the tide to turn around soon.

This profit may have come at a cost, however. By getting into production, Spotify is no longer just a neutral platform. While it didn’t catch the eye of regulators, it did raise the ire of its subscribers, which at this stage may pose more risk. Spotify has been in a race to attract as many subscribers as possible, likely hoping its dominant market share will give it more leverage in negotiations with record labels. Producing controversial content like Rogan’s podcast may attract one type of subscriber, but it may also drive away others. If you push too much, Spotify may lose its competitive edge.

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