The Battle for Your Ears

Big market caps come with big expectations. To fulfill these, large tech companies are entering new markets in search of growth. Like a group of concentric circles radiating outward, they’re bumping into each other. Podcasting is a recent flashpoint.

A Podcast a Day Doesn’t Keep Spotify Away

With iTunes and the iPod, Apple helped popularize podcasts. It hasn’t innovated much on them since. This created an opening for Spotify to aggressively enter the market. For Spotify, podcasting represents a key component of its growth strategy and a business model salve. eMarketer, an industry research firm, forecasts that it will eclipse Apple in US podcast market share for the first time this year.

On April 20th, Apple fired back, announcing Premium Podcasts at its Spring Loaded event. Premium Podcasts enable creators to launch paid subscriptions through Apple’s Podcast app, either freemium (listen for free, pay for additional benefits) or fully paid (fans must pay to listen).

Apple seeded Premium Podcasts with keystone studios like Luminary, NPR, Pushkin Industries, and The Athletic. In May, creators who join the Apple Podcasters Program (and pay $19.99 per year), which provides analytics and subscription management tools, can start monetizing their podcasts. Content creators set their own price, which is billed monthly. Similar to the App Store, Apple will take a 30% cut of subscription revenue the first year, and 15% thereafter.

Under Tim Cook, Apple’s strategy has focused on building out digital services to generate recurring revenue and lock users into its ecosystem. Premium Podcasts is another step in this direction.

For podcast creators, Apple offers several advantages. First, a gargantuan (and wealthy) user base. Apple’s install base is over 1.6 billion devices, including over 1 billion iPhones. Second, Apple’s Podcast app comes pre-installed on iOS devices and is popular, greasing listener acquisition. Third, the company’s sleek hardware-software integration reduces friction (think: one click checkout with Apple Pay), boosting conversions and subscriptions. Last, the subscription business model creates new monetization opportunities, particularly for niche content. Advertising models require large audiences to be lucrative. In contrast, subscription businesses can pay off handsomely with (relatively) small fan bases. At a generous $40 CPM, 1,000 listeners generate $40 in ad revenue. At $5 per month, 1,000 listeners generate $5,000 in subscription revenue.

But it’s not all gravy. Apple’s rake means less money for creators. Additionally, as Ben Thompson highlights, Apple owns the customer relationship. Creators won’t be able to directly communicated with their audience.

Spotify ❤️ Facebook: The Anti-Apple Alliance

A day after Apple’s event, executives from Spotify testified before Congress that Apple abuses its dominant position, hampering competition. The hearing focused on app store fees and exclusionary conduct. Later that week, Spotify announced the launch of a competing premium podcast service. In contrast to Apple, Spotify is letting creators keep 100% of subscription revenue.

As Apple expands from hardware into digital services, it’s encountering a growing number of direct competitors. In music streaming, Apple Music competes head-on with Spotify, which is reliant on the App Store for distribution and is required to pay App Store fees. In companion, Apple Music comes pre-installed on iOS devices and doesn’t pay App Store fees. It’s no wonder Spotify executives were eager to testify.

While Apple and Spotify have been jostling for years, in 2020 Facebook joined the fray. Messaging is becoming a key battleground between Apple and Facebook. Additionally, Apple’s push towards greater privacy combined with its ironclad grip of iOS poses a threat to Facebook’s data intensive advertising business. Spotify and Facebook are learning that the enemy of my enemy is my friend.

Congressional testimony wasn’t the only issue raising Tim Cook’s blood pressure. On April 19th, Facebook revealed its audio roadmap. Like Apple, it’s chasing creators and podcasts. Facebook has been dabbling in audio for a while, for example adding calls to Messenger and WhatsApp. Audio intensity will ramp up over the next two quarters, with the company launching several new products and features:

  • Soundbites: Short-form audio clips served algorithmically. What TikTok is to video, Facebook hope’s Soundbites will be to audio.
  • Live Audio Rooms: This feature allows group conversations, similar to Clubhouse or Twitter Spaces. It will launch this summer in Groups. Users can tip Audio Room creators in gold stars, a la kindergarten (yes, seriously). Creators can cash out stars with Facebook for hard currency. Over time, Facebook will let users pay creators directly.
  • Podcasts: As part of an integration with Spotify, users who link their accounts will be able to listen to music and podcasts while browsing their News Feed. The company is also building podcast discovery tools to recommend shows based on interests. You don’t need to be the Oracle of Delphi to see how this could eventually open up podcast discovery ads (similar to what Facebook did with app-install ads).

Underpinning this development is a new suite of audio creator tools. These will allow users to record and produce audio clips, and will be embedded directly into Facebook. This is a play from the super-aggregator playbook and a genius business move. Facebook shells out a small investment for the audio creator tools. Then, creators use the tool to produce user generated content, which equates to free supply for Facebook, helping to engage users and attract advertisers. If it works, Facebook could print money for a low upfront investment. It’s almost alchemy.

While Spotify is all-in on podcasting, Facebook is more of a mercenary, following opportunity. Its previous investments in different forms of content have had mixed success. For example, while launched with fanfare and marketing support, long-form video (IGTV) and Facebook Live are languishing. Audio is hot right now, but Facebook might have a new focus in a year or two.

Creators as Arms Dealers

Just as streaming ushered in the golden age of television, recent developments from Apple, Facebook, and Spotify could herald the golden age of podcasting. Tech giants are increasingly competing for creative talent. In addition, creators have options for how to monetize and where host their work. As tech giants duke it out, creators have the ammunition they need.

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More Good Reads

Stratechery on Apple Podcast Subscriptions versus the App Store. Ben Thompson is a critic of the App Store, but he’s positive on Premium Podcasts. The reason? Choice. Apple’s App Store is the only way to download an app to an iOS device. In contrast, there are multiple other podcast players in the App Store like Overcast, Spotify, and Stitcher. Podcasters have choice, app developers don’t. Matthew Ball’s long, excellent essay about Apple’s chokehold on the internet economy. Below the Line on how Spotify uses design and discovery do spur podcast adoption.

Disclosure: The author owns shares in Apple and Facebook.

Originally published at

Finance at Indeed. Previously finance at Etsy and internet equity research at Deutsche Bank. Find me @kjlabuz.

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