With the current macroeconomic headwinds, it’s been hard to be a streaming business, both audio and video. As a result, companies have had to get creative with their strategies in order to convince investors of their long-term value propositions.
Though Spotify wasn’t the first to bring podcasts on its platform, it was an early adopter. In hindsight, podcasts proved to be a smart move by Ek. So, when Ek saw that audiobooks had potential to bring in podcast-like success, he had to seize the opportunity. Spotify finalized its acquisition of audiobook distributor Findaway in June.
According to Ek, audiobooks currently represent a roughly $10 billion global market and could eventually grow to $70 billion, with his company commanding a big portion of the market.
Perhaps Ek is on to something. Following the announcement in June, VIP+ analyzed consumer appetite for audiobooks in an exclusive survey conducted with Maru Group.
The survey, conducted among more than 1,500 American adults between June 17 and June 19, found that the number of audiobook subscribers could grow by up to 50%. Among those who do not currently have an audiobook subscription, or about 87% of the population, 7% are definitely/probably going to sign up for an audiobook subscription in the next 12 months. And while 7% may seem small, that does represent about 16 million Americans — or about half of number of current subscribers.
Audiobooks have yet to gain mass popularity among the U.S. population, with only 23% of respondents surveyed having listened to an audiobook in the past month. In addition, only about 12% purchased an audiobook in the past month, and 13% currently have an audiobook subscription.
Despite the lack of active usership currently, there is solid growth potential for Spotify. But there is some competition in the space, and the current market leader is Amazon-owned Audible, according to the survey. Participants also have listened to audiobooks on Audiobooks.com, which is owned by Swedish audiobook streaming group Storytel, and Google Audiobooks.
Spotify is no stranger to competition. When the streaming giant jumped into the podcast business, Apple Podcasts was the largest player, and many had doubts then too. Fast forward to 2022, and Spotify has the biggest market share in the U.S.
With a slew of exclusive podcast deals, Spotify was able to grow its podcast biz among its 433 million total monthly active users, as of the end of Q2. Spotify’s massive user base is its greatest advantage, and management expects that base to grow to a whopping one billion globally by 2030.
The convenience of being a one-stop shop for all streaming audio needs is a major value proposition for Spotify. It said about 30% of Spotify’s user base, or roughly 125 million monthly users, listened to podcasts in the first quarter of this year, which represented 7% of total listening hours on the platform during the period.
Despite the success of Ek’s strategy around podcasts, some are still skeptical of his lofty promises. Even as Spotify’s podcast biz has grown significantly, it’s still not profitable. According to CFO Paul Vogel, Spotify’s podcast business had negative gross margins of 57% last year and losses will peak in 2022. Nevertheless, Ek said in June he believed the podcast business could see gross margins between 40% to 50% over the next five years.
Ek said that audiobooks could ultimately provide similar margins to podcasts if the company can build a marketplace of creator tools around them. Spotify’s creator base is just as important to its growth as its user base.
Even as Spotify has managed to post impressive growth thus far, growth alone is not enough for investors anymore. The real challenge lies in being able to monetize those users and ultimately post margin expansion.
The benefits of its heavy investments into its podcasts business have yet to be realized, and the same narrative will likely play out for its audiobooks venture. When asked on Spotify’s Q2 earnings call about when investors could see the benefits of the company’s audiobooks acquisition, Ek said the full impact wouldn’t be realized until early 2023, but most likely late 2023.
Unfortunately for Spotify, no amount of good news is helping to prop up the stock. As of midday Tuesday, Spotify shares were still about one percent lower amid a broader market decline. So far in 2022, the stock sank nearly 60%.
Bottom line, there is little interest in putting money to work in companies based on short-term catalysts these days, and profitability remains top priority among the investment community. Until Ek can prove his strategy can quickly and efficiently lead to growing profits for the company, investors will likely wait on the sidelines for the time being.
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