Spotify Takes Aim at Radio, Again

Spotify has launched a radio-like feature set for premium subscribers in the US called Your Daily Drive.Although it is only positioned as a playlist, the content mix includes podcast news content and plays music the listener already likes with a sprinkling of new tracks. This might not sound that special, but this ‘recurrent heavy’, news-anchored programming is Spotify taking the essence of US drive time radio and translating it into a playlist. As we wrote back in early 2018, radio is streaming’s next frontier, and nowhere is that more true than in the US.

streaming playlist usage midia research podcasts

Right now, streaming consumption is fragmented across multiple programming formats with no stand-out use case. Curated playlists are not for music what binge watching is for video. While this is positive in the context of multiple use cases being met within an increasingly diverse user base, if streaming is ever going to seriously challenge the mainstream mass-market audience that is radio, it needs a binge watching equivalent. Streaming needs a simple, easy to understand and access format that translates seamlessly to traditional radio audiences. Your Daily Drive is a very small first step on that journey.

The playlist is now just a delivery vehicle

If we were to rewind just a few years ago, the idea of Spotify delivering drive-optimized playlists interspersed with news may not have sounded totally outlandish but it would nonetheless have only felt a distant possibility. But now that Spotify has extensive podcast capabilities under its belt and a very proven willingness to insert podcasts throughout the music user’s experience, the concept of what constitutes a playlist needs rethinking entirely…largely because that is exactly what Spotify has just done. The industry needs to start thinking about playlists not as a collection of music tracks but instead as a targeted, personalized and programmed delivery vehicle for any combination of content. In old world parlance you might call it a ‘channel’, but that does not do justice to the vast personalization and targeting capabilities that playlists, and Spotify’s playlists in particular, can offer.

In this context, Your Daily Drive is not simply a playlist but instead Spotify’s first foray into next-generation radio broadcasting. There will doubtless be further Spotify playlist announcements over the coming months that leverage podcast content. As with Your Daily Drive, they won’t just be playlists; instead, pay attention to what they are aiming to compete with to understand their true intent.

Making radio work takes more than just making radio work

Radio programming itself will take a long time for Spotify to master – just look how long it is taking Apple. Even when it does, the even bigger challenge is monetisation. Ad-supported revenue simply isn’t growing fast enough, and the Q1 earnings (which recognized the revenue of its new podcast companies) did not indicate that podcasts were going to bring a big bump anytime soon either. To compete with radio in a meaningful way, Spotify will have to invest heavily in ad sales and ad tech to the same extent that Pandora has. That means having people pounding the streets, knocking on the doors of mom and pop stores selling local spot ads, through to competing with Google, Facebook and Amazon to deliver world class ad tech. No small task, but the rewards could be huge.

Spotify, the Decline of Playlists and the Rise of Podcasts

The following is a small excerpt from MIDiA’s forthcoming third edition of its ‘landmark State of the Streaming Nation’ report. For more information about this report email stephen@midiaresearch.com

Most things that Spotify does are scrutinised and cross-examined within an inch of their lives, with vested interests trying to second guess what may be the intended or unintended consequences for them. Most actions are viewed through the disruption lens i.e. how will this hurt or compete with Spotify’s rightsholder partners? The streaming market is of course so much more than just Spotify, but the company acts as a lightning rod for the wider market and most often sets the strategic agenda.

Spotify’s Two Phases of Growth

Two of Spotify’s most significant moves have been playlist curation and podcasts. Spotify is moving into the second major phase of its existence. Phase 1 was about establishing itself as a streaming music powerhouse, Phase 2 is about what it becomes next, extending beyond the streaming music beachhead. This is the typical trajectory of tech companies, establishing themselves in their core competencies and then expanding. This can either be a dramatic expansion – e.g. Amazon moving from eCommerce into video and music – or a more focused value-chain extension – e.g. Netflix moving from simply streaming other’s shows to making its own. For Spotify, playlists were a Phase 1strategy and podcasts are very much part of Phase 2.

midia playlists and podcasts

Podcasts may just have come in the nick of time for Spotify because curated playlists remain much more about potential than they do reality. Just 15% of streaming consumers listen to curated playlists. In fact, of all the key streaming feature activities, curated playlists come lowest. Curated playlists are clearly not to streaming music what binge watching is to streaming video. Instead streaming activity is fragmented across multiple features and just 10% of streaming consumers regularly do all four of the activities listed in the chart above.

‘But wait’ I hear you ask, ‘that doesn’t make sense, look at all these streams we’re getting from playlists’. The key factor here is the difference between the number of playlist users and the number of playlist streams. Playlists over index in terms of contribution to streams. With dozens of tracks per list, lean-back playlist listening can easily generate more streams per user than lean-forward listening. Thus, we have one of the great emerging paradoxes of streaming: passive audiences can generate more streams, and thus rightsholder pay outs, than engaged, aficionados. However, a word of caution, should casual playlist listening become large enough, then the net result will be a dilution of the royalty pool and thus diminishing per stream rates.

Perhaps not the holy grail of promotion

A few years ago, playlists looked like the future of artist marketing, now they are looking a bit like a busted flush. They may be great at generating streams but are not so great at building an artist’s story. The near-obsession with Spotify playlists in label marketing strategy reflects the fact that most record label executives use Spotify and thus often have a Spotify-centric (and therefore playlist-centric) worldview. But labels are now beginning to question the artist ROI of playlists. The growing adoption among casual listeners only compounds matters and means that a playlist ‘hit’ does not necessarily do much to help long-term artist brand building. To put it simply: a playlist is not a shortcut to cultural relevance.

Podcasts could be bigger than streaming

Enter stage left podcasts. With its acquisitions of Gimlet, Anchor and Parcast, Spotify is betting big on podcasts. Already, more streaming users (18%) listen to podcasts than curated playlists while overall consumer podcast penetration is 11%. In Sweden – the early adopter market that gives us a view of where other markets are heading – podcast penetration is 19%, rising to 28% among streamers. Podcasts are a Netflix moment for radio and may even have the potential to be bigger than streaming music (US radio ad revenues alone are $16 billion). Right now, the growth in overall podcast audiences is fairly slow, but engagement is accelerating as are content creation, monetisation and distribution. It is not entirely inconceivable to think that five years from now, podcasts could be a bigger business for Spotify than music. Certainly, creators could be making much more money, even now.

While it remains more likely that music will be the core of Spotify’s business half a decade from now, all the early indications are that Phase 2 will mean a degree of diversification of user experience, business model and revenue stream, with podcasts at the vanguard. Playlists are not dead, but nor are they the golden child anymore.

10 Trends That Will Reshape the Music Industry

The IFPI has reported that global recorded music revenues have hit $19.1 billion, which means that MIDiA’s own estimates published in March were within 1.6% of the actual results. This revenue growth story is strong and sustained but the market itself is undergoing dramatic change. Here are 10 trends that will reshape the recorded music business over the coming years:

top 10 trends

  1. Streaming is eating radio: Younger audiences are abandoning radio for streaming. Just 39% of 16-19-year olds listen to music radio, while 56% use YouTube instead for music. Gen Z is unlikely to ever ‘grow into radio’; if you are trying to break an artist with a young audience, it is no longer your best friend. To make matters worse, podcasts are looking like a Netflix moment for radio and may start stealing older audiences. This is essentially a demographic pincer movement.
  2. Streaming deflation: Streaming music has allowed itself to be outpaced by inflation. A $9.99 subscription from 2009 is actually $13.36 when inflation is factored in. Contrast this with Netflix, for which theinflation-adjusted price is $10.34 but the actual 2019 price is $12.99. Netflix has stayed ahead of inflation; Spotify and co. have fallen behind. It is easier for Netflix to increase prices as it has exclusive content, but rights holders and streaming services need to figure out a way to bring prices closer to inflation. A market-wide increase to $10.99 would be a sound start, and the fact that so many Spotify subscribers are willing to pay $13 a month via iTunes shows there is pricing tolerance in the market.
  3. Catalogue pressure: Deep catalogue has been the investment fund of labels for years. But with most catalogue streams coming from music made in this century, catalogue values are being turned upside down (in the streaming era, the Spice Girls are worth more than the Beatles!). Labels can still extract high revenue from legacy artists with super premium editions like UMG did with the Beatles in 2018, but a new long-term approach is required for valuing catalogue. Matters are complicated further by the fact that labels are now doing so many label services deals, and therefore not building future catalogue value.
  4. Labels as a service (LAAS): Artists can now create their own virtual label from a vast selection of services such as 23 Capital, Amuse, Splice, Instrumental, and CDBaby. A logical next step is for a 3rdparty to aggregate a selection of these services into a single platform (an opening for Spotify?). Labels need to get ahead of this trend by better communicating the soft skills and assets they bring to the equation, e.g. dedicated personnel, mentoring, and artist and repertoire (A+R) support.
  5. Value chain disruption: LAAS is just part of a wider trend of value chain disruption with multiple stakeholders trying to expand their roles, from streaming services signing artists to labels launching streaming services. Things are only going to get messier, with virtually everyone becoming a frenemy of the other.
  6. Tech major bundling: Amazon set the ball rolling with its Prime bundle, and Apple will likely follow suit with its own take on the tech major bundle. Music is going to become just one part of content offerings from tech majors and it will need to fight for supremacy, especially in the ultra-competitive world of the attention economy.
  7. Global culture: Streaming – YouTube especially – propelled Latin music onto the global stage and soon we may see Spotify and T-Series combining to propel Indian music into a similar position. The standard response by Western labels has been to slap their artists onto collaborations with Latin artists. The bigger issue to understand, however, is that something that looks like a global trend may not be a global trend at all but is simply reflecting the size of a regional fanbase. The old music business saw English-speaking artists as the global superstars. The future will see global fandom fragmented with much more regional diversity. The rise of indigenous rap scenes in Germany, France and the Netherlands illustrates that streaming enables local cultural movements to steal local mainstream success away from global artist brands.
  8. Post-album creativity: Half a decade ago most new artists still wanted to make albums. Now, new streaming-era artists increasingly do not want to be constrained by the album format, but instead want to release steady streams of tracks in order to keep their fan bases engaged. The album is still important for established artists but will diminish in importance for the next generation of musicians.
  9. Post-album economics: Labels will have to accelerate their shift to post-album economics, figuring out how to drive margin with more fragmented revenue despite having to invest similar amounts of money into marketing and building artist profiles.
  10. The search for another format: In 1999 the recorded music business was booming, relying on a long established, successful format that did not have a successor. 20 years on, we are in a similar place with streaming. The days of true format shifts are gone due to the fact we don’t have dedicated format-specific music hardware anymore. However, the case for new commercial models and user experiences is clear. Outside of China, depressingly little has changed in terms of digital music experiences over the last decade. Even playlist innovation has stalled. One potential direction is social music. Streaming has monetized consumption; now we need to monetize fandom.

Podcasts: a Netflix Moment for Radio But Perhaps not the Future of Spotify

spotify gimlet anchor podcasts midiaWednesday was a busy day for Spotify: it reported above-expected subscriber growthto hit 96 million paid subscribers, strong total user growth to hit 207 million MAUs, improved margins and its first ever profitable quarter, registering an operating profit of €94 million. And the news didn’t stop there, Spotify also announced the acquisition of two podcasting companies, Gimlet and Anchor.Spotify unsurprisingly referenced podcasts in its earnings note, pointing to 185,000 podcast titles available, ‘rapidly’ growing consumption and 14 exclusives to including the 2nd season of Crimetown, The Rewind with Guy Raz, and the Dissect Mini Series hosted by Lauryn Hill. Podcasts is clearly becoming a big part of Spotify’s plans and the rationale is simple: more owned content, and more cheaply licensed content means higher margins than can be generated by record label content. But for all its commitment to the format, Spotify may find the podcast battle harder to win than expected.

An opportunity with many intertwined layers

After many years stuck on the side lines, podcasts are now becoming sought after by everyone from radio companies, streaming services, newspaper publishers to TV companies and many, many more. Media brands of all forms see podcasts as a part of their future, a way to increase and diversify listening time (streaming services); fight back against streaming (radio); reach new audiences (news); and extend audience engagement (TV). To some degree podcasts can probably deliver on all those expectations, and while the creative possibilities are clear, the path ahead is not so straight forward:

  • A Netflix moment for radio: Netflix transformed the TV market not just by giving consumers a cheap, value-for-money way of getting great TV, but by changing forever the way in which TV is made. No longer shackled by the constraints of linear schedules and needing to keep everyone on the sofa happy at the same time, studios and networks started smashing the boundaries of what could be made and what a TV show looks like. We are now in the golden age of TV. Podcasts do the same for radio, allowing every niche topic under the sun to be explored in huge detail and without any constraints on number or length of episodes. Podcasts create even more of a blank canvass for what was once only radio content than Netflix did for what was once only TV content.
  • Apple iTunes stranglehold: Apple is the powerhouse of podcast distribution. In what is otherwise a highly fragmented podcast distribution landscape, Apple is as close as it gets to a unified podcast platform – which is also integrated into Apple Music. During podcasting’s wilderness years, Apple quietly built up a loyal base of podcast users. Given that more than half of Spotify’s subscribers are iOS users, those that are podcast users are most likely also Apple podcast users. Spotify will have to bank on converting those users while simultaneously flicking the ‘market creation’ switch by converting new users to podcasts. A double challenge.
  • Radio:As MIDiA identified early last year, radio is streaming’s next frontier. Spotify has built a sizeable ad supported audience – 11 million as of Q4 2018 – but it has not yet built a viable ad model – ad user ARPU is just $0.28 which is just one cent up on Q4 2017. To persuade radio’s big advertisers to switch, it needs to woo more of radio’s core audience but it currently lacks the content assets (news, weather, sports etc). Podcasts are a step in that direction but radio companies will feel they have a better chance of owning this space than Spotify, and many are currently investing heavily in podcasts. As Apple has been learning with Beats 1, just because you want to do something does not mean you necessarily can, even if you hire many of the industry’s power players.
  • Programmatic ad buying:Spotify is doubling down on its programmatic ad buying and this will be crucial to monetizing podcasts. Spotify reported in its Q4 earnings that programmatic is growing fast and, along with self-serve, now accounts for 25% of all ad sales – though as ad ARPU is flat (up just $0.15 y-o-y), it is not growing fast enough.
  • Use cases:Lastly, but most importantly, the underlying use cases for podcasts potentially limit the market opportunity for podcasts. The addressable audience for podcasts is not all the time spent listening to audio. Listening to music is a lean back experience that we can do while doing other things like work and study. Podcasts tend to require more of our attention and thus the use cases for podcasts are more limited. Also, unlike TV shows, users are less likely to have a large number of podcasts on the go at the same time. Spotify will hope that it will be able to generate appointment-to-listen behaviour, with users tuning in for their favourite podcasts on a specific day. But that necessitates users re-learning how they use Spotify.

The podcast opportunity is undoubtedly strong but there will be many competing to be the owner of podcasting’s future and radio may well do a better job of winning this battle than it has retaining its music listeners. Spotify is betting big on podcasts being part of the future of streaming, but the future of podcasts may lie elsewhere.