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On May 19th, Spotify announced that it is signing an exclusive deal with Joe Rogan, the host of famous podcast - “The Joe Rogan Experience”(JRE), to make this podcast exclusive to Spotify starting September 1st. By the end of 2020, all the existing content of JRE would be moved out of other channels like Youtube and iTunes which attract 40 and 60% of JRE’s audience. This means that Joe Rogan will abandon his current audience on these platforms and move to a different platform. That definitely is audacious and should be handsomely rewarded. Guess what's the reward Joe Rogan would get - 100 Mn USD!! Isn't that too high for a limited year podcast licensing? Well let’s find out...
For the uninitiated – The Joe Rogan Experience is a one to one talk show on which celebrity guests like Elon Musk, Mike Tyson, Edward Snowden, Robert Downey Jr. etc. are invited and spoken at length on various aspects of life. Each show typically lasts for 2-3 hours and are uncensored. For instance – Elon Musk on the live show has shared a cannabis joint with Joe Rogan on the show (and got his shares tanked by 9% :P). So obviously the podcast is very popular and is estimated to have been downloaded 190 Mn times a month.
With this Deal Spotify gets rights to stream 5000 hours of JRE content to its users and also migrates the fanbase of JRE from iTunes or Youtube to Spotify. Also Spotify will launch Video Streaming these Vodcasts. So Spotify will use this opportunity to re-introduce video on its platform. This move has the potential to not only make Spotify a leader in the Podcasting space but also make its mark in the Video Streaming space
What makes this deal special is the immediate reception it generated in the public markets. Post announcement, the shares of Spotify have increased by more than 15% adding a huge 1.7 Bn USD to its Market Cap. So this deal has generated 17 x returns (in terms of market cap) on the money invested in the deal (100Mn USD). Let's see why has this move been welcomed by all its investors
Why would Spotify, which we all know as a music streaming company, be keen to sign a licensing deal with a podcast creator? The answer to this lies in one of the CEO letters titled “Audio First” published in 2019. In this letter Daniel Ek, the CEO, says that Audio - Not just Music - would be the future of Spotify. Let’s understand the rationale behind this.
Spotify gets its revenues from 2 main sources: Advertisement Revenue and Subscription revenue. The music industry size is expected to be at 100 Bn USD and is believed to be plateaued while the video content industry is expected to be at a Trillion USD - at least 10 times that of the music industry. Also due to non-ownership of content, music streaming is turning out to be very expensive and less profitable for the company.
So it has to focus on other non-music areas to drive growth. Podcast/Vodcast perfectly fits the bill - It will attract the radio listening customer segment who love audio content which will help Spotify increase the user base. Increased user base increases both Ad Revenue and Subscription revenue proportionately.
Also podcasting is a good solution for the middle-aged urban consumer who leads a fast-paced lifestyle with little time for his complete attention to watch a movie or read a book. Couple this with changing consumer preference to reduce Screen time, one will realize that sooner or later Podcast (Audio) will eat into the share of other forms of content like video or text. This is evident in the rate at which the podcast industry has been growing - The Ad revenue in the podcast industry has increased at a CAGR of 60% between 2014 and 2019
This makes it a perfect time for Spotify to enter this space and become the undisputed market leader by getting all the top-rated podcasts like JRE/ Bill Simmons etc. According to Spotify, the current podcast users spend more than double time than that of sole music listeners. With new content coming to the platform, Spotify expects that close to 20% of the content consumed in the near time will be Non-Music. This non-Music content on the platform will generate new consumer insights on the customer preferences which will help better its ad targeting and get curated content matching their tastes.
These enhanced capabilities will put Spotify on the same pedestal as that of Facebook or Google in terms of targeted Advertising which would drive its growth in the years to come.