This week on the Plain English with Derek Thompson podcast there was a discussion that put into focus some of my thoughts on Spotify $Spotify Technology S.A.(SPOT)$ . In earnings updates, I’ve covered user growth, operating expenses, and margins, but quantifying the opportunity I see for the business has been difficult.
The Ringer’s Matt Belloni summed it up well when talking about the year in podcasts.
So, I tracked down the Deloitte study. The data is a few years old, but it shows the massive under-monetization of podcasts.
This begs the question why? And how does Spotify fix the monetization problem?
Same Story, Different Verse
There are many reasons podcasts may be underperforming, but we’ve seen this in large tech businesses before. In 2012, Facebook $Meta Platforms, Inc.(META)$ only generated $4.05 per user in advertising revenue. In the last twelve months, that number has jumped to $40.83 per user.
Spotify is currently generating 4.95 Euros per user on a run-rate basis and I think that’s scratching the surface of its potential.
Advertising is a strange business that has a lag between when it can have an impact and when businesses start spending money. It takes time to:
Get a budget
Setup an account/workflow
Build creative assets
Test an ad
Measure effectiveness
Request a larger budget for next year
This is literally a multi-year cycle for large businesses to grow an advertising business on a new platform.
It takes time!
And Spotify is still currently primarily a brand advertising medium, so we haven’t seen demand response (hear an ad, click, buy something) from smaller, more nimble businesses be a meaningful part of revenue.
It’s not entirely clear what the potential is for Spotify in advertising. Is it 5x, 10x, or 20x, who knows?
But Spotify’s ad revenue per user has the potential to grow sharply over the next decade and that’s on top of user growth.
Undermonetizing podcasts looks like it’s Spotify’s biggest opportunity to be a 10x stock from here.
https://asymmetric-investing.beehiiv.com/p/spotify-undermonetization
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