Spotify and Pandora are looking to expand beyond music streaming and into the world of podcasting, as they aim to capture more of consumers’ listening time and, eventually, boost their profit margins.
Podcasting is a small but growing medium that attracts young, engaged listeners. But producers and distributors have yet to hit on a solid model for making money.
Spotify and Pandora say they are well-positioned to do so, in part by tackling one of the medium’s biggest challenges: It remains tricky for listeners to discover new podcasts.
“When you contrast it to music discovery, it’s like it’s in the Stone Age,” Pandora Media Inc. Chief Executive Roger Lynch said. “We think we can expand our audience by bringing people in to listen to a certain podcast and keeping them on the platform with the music we have,” he said.
Over time, profit margins would grow because podcasts cost less than music, Mr. Lynch said.
Neither Pandora nor Spotify Technology SA would disclose details of their nascent podcast businesses, including how much money they pay for programming or earn from it, or how much time listeners spend on the medium.
Each company pays roughly three quarters of its revenue to license music, according to their financial filings, making profits elusive.
Spotify says it carries 150,000 podcasts; Pandora says it has hundreds. Analysts estimate podcasts represent less than 1% of listening time on either service. Monthly podcast listenership in the U.S. has more than doubled over the past five years to 73 million, according to Edison Research.
Although merger activity among podcast publishers has picked up in recent years, the industry remains highly fragmented. Spotify and Pandora are expanding into a market with many distribution players yet no clear moneymaker, despite the huge potential audience.
Apple Inc. — with over 600,000 podcasts available via its Apple Podcasts app — has dominated the distribution market but doesn’t collect revenue on them.
The most-innovative podcasting apps tend to be small and lack the kind of money the big streaming services can spend on engineering and discovery, Stifel analyst John Egbert said.
“That’s where Spotify and Pandora come in,” he said. “They have very strong machine-learning and AI capabilities that have been focused on music for a long time.” Both companies see podcasts as a natural fit: Music is the most popular genre of podcast, according to Nielsen.
Although podcasts have been available on both Spotify and Pandora for years, they have become a priority only in recent months. That has meant building out capabilities to host longer-form content, fast-forward and feature podcasts prominently on the platforms.
Both services are experimenting with ways to make money from podcasts, which are generally available free to consumers and supported by advertising. And both see podcasts as central to their goal of moving listeners off broadcast radio — an industry that continues to command hundreds of thousands of weekly listeners and some $14 billion in annual ad revenue.
“The vast majority of the minutes that are being spent on radio today haven’t yet moved online. So our opportunity really is gigantic,” Spotify CEO Daniel Ek said earlier this month. “As part of that, obviously, we think nonmusic content has a very important place.”
Ad revenue from podcasts in the U.S. grew an estimated 86% last year to $313.9 million and is expected to top $402 million in 2018, according to the Interactive Advertising Bureau. Typically, a host reads sponsorship messages, or ads play during the podcast. Spotify so far sells ads only for its original, exclusive podcasts. Pandora plans to extract some or all of the ads in a podcast and replace them with its own.
Cascend Securities analyst Eric Ross said podcasts aren’t yet enough of a draw to make users jump from one platform to another. But from a longer-term competitive perspective, they are essential, he said. “You can’t lose a customer to someone else because you don’t have podcasts,” he said.
Spotify and Pandora are testing different types of advertising deals with podcasters, exploring fixed fees versus payment based on listenership. They also are exploring content exclusives, either for a limited time or permanently.
Spotify has struck deals to distribute an exclusive weekly podcast hosted by rapper Joe Budden and the first podcast from Vice News, “Chapo, ” about the Mexican drug kingpin Joaquín Guzmán. Spotify’s original podcasts include one with Amy Schumer that will be distributed broadly in its first year before becoming exclusive to Spotify, as well as branded podcasts with sponsors.
Analysts say it could be another five years before podcasts have a meaningful effect on companies’ bottom line. For now, they are about attracting and retaining customers.
Pandora last week unveiled a preview version of its new podcast offering, backed by what it calls the Podcast Genome Project. Similar to its Music Genome Project — which uses hundreds of attributes to sort and recommend music based on user preferences — the cataloging system uses a combination of technology and human oversight to recommend podcast series and individual episodes.
Spotify also is drawing on its music-recommendation experience.
“So much of what makes Spotify great is how it contextualizes the right content for the right people,” Courtney Holt, Spotify head of studios and video, said, adding that podcast listeners tend to be among the company’s most engaged customers. “They’re consuming more overall.”