The Strategy Behind Spotify’s Joe Rogan Deal
Last week, Joe Rogan announced a multi year licensing deal with Spotify and that his podcast, The Joe Rogan Experience, will be exclusively on Spotify’s platform on September 1st. In my opinion, this is undoubtedly Spotify’s strategy of enhancing their ad capabilities around podcasts, a strategy that became evident when Spotify acquired Gimlet and Anchor last year. Spotify’s podcast strategy l comes down to one thing — network effects. For full disclosure, I learned this in class :)
For those that want the upfront conclusion, here is what Spotify’s doing:
- Spotify is restructuring the industry by centralizing ads
- Spotify attracts established podcasts content creators → attract more listeners → attract more advertisers → increase bottom line → increase pay for podcast content creator → attracts more podcast content creators (and the cycle continues)
Now let’s dive deep into the analysis.
While podcasts aren’t the first thing that people think about when they think Spotify, they seem to have more control of the podcast ecosystem (as shown below). Spotify’s been strengthening their position in the podcast space by doing to podcasts the way Google and Facebook did to the internet — centralize ads. With how it stands, the podcast industry is highly fragmented which is not ideal for advertising.
According to Porter’s Essential Test, a theoretical strategy framework that explains the conditions under which diversification will truly create shareholder value, the podcast industry is generally not the most attractive industry. So why get involved? It is worth mentioning that a section of Porter’s Essential Test mentions one reason an entity can enter an industry is if they believe they can restructure. This theory seems to hold true and is evidently what Spotify is trying to do with their strategy with ads. It is obvious that Spotify isn’t interested in creating podcasts, rather consolidating the advertising around podcasts which will in turn restructure the podcast industry.
Recently, Spotify released a feature for podcast creators and advertisers called Streaming Ad Insertion (SAI), enabling Spotify to insert ads in real time. With SAI, Spotify is capable of providing podcasts and advertisers detailed analytics such as ad impressions, frequency, reach and anonymized audio info, such as age, gender, device type and listening behavior. However, Spotify requires its own content to insert these ads. The more podcasts Spotify has, the more opportunities Spotify has to insert ads, growing their advertising capabilities. If we think about it, this is exactly why Anchor and Gimlet was acquired. Gimlet provides Spotify podcasts (to insert ads) and Anchor lures more podcast content creators to grow podcast ownership. Since Podcasts are a fixed cost, the more listeners that can be added to the platform, the more profits will be added to the bottom line.
Having considered all the above, it should make sense as to why Spotify pursued the licensing deal with Joe Rogan. If Spotify attracts more podcasts on their platform, particularly established and big name podcasters on their platform, they will attract more listeners. As Spotify increases their listener base, they will attract more advertisers who want to insert their ads into Spotify. Ultimately, the more advertisers are on Spotify’s platform, the more revenue Spotify can generate which they can offer podcast creators. It’s this cycle (which is shown below) that Spotify is capitalizing on as a way to grow their podcast position in the market.
Spotify never fails to surprise and is constantly thinking ahead. This transaction is a big win for Spotify. What I’m still wondering about is Apple and what moves they’ll make in the future as Spotify is making strides towards becoming the leading audio platform in the market.
