Today, Spotify confirmed that it is acquiring Gimlet Media, one of the leading podcast production houses. The price is about $230 million, higher than the $200 million previously cited. Spotify is also acquiring Anchor, a podcast authoring, hosting and monetization platform—one of several popular podcast platforms in the market today. Both deals should close by the end of March. In all, Spotify expects to spend half a billion dollars to increase its presence in the podcast market.
Spotify needs to do this to help differentiate its offerings from those of Apple and Google. Yet once Spotify starts paying for podcast content, the financial value becomes questionable: right now, the vast majority of revenue in podcasting comes from advertising, but the numbers show that while podcasting has big growth potential, it has a long way to go.
The Interactive Advertising Bureau (IAB) and PwC do an annual study of podcast ad revenue, which started two years ago. The latest IAB/PwC studyshowed $314 million in ad revenue for 2017, up from $169 million in 2016. Podcasting listenership is also increasing at a healthy pace. But podcasters aren’t earning anywhere near the revenue for that listenership that streaming music services earn—which in turn is a lot less than traditional broadcast radio earns.
We can calculate how many dollars these various audio services earn per listener (ad revenue per listener, or ARPL) by simply dividing ad revenue into total listenership:
This figure shows ARPL (vertical bars) juxtaposed with total listenership (horizontal lines). It shows listenership numbers for broadcast radio (orange, Nielsen figures via the Radio Advertising Bureau), streaming music (blue, Edison Research figures), and podcasts (dark blue, Edison Research figures) from 2015 through 2017. Streaming music is “online radio,” as defined in Edison Research’s Infinite Dial study (“AM/FM radio stations online and/or listening to streamed audio content available only on the Internet”), so it combines “pure play” Internet radio as well as streams of AM/FM radio stations; it’s unclear whether the numbers include on-demand music services such as YouTube and Spotify. Ad revenue figures for podcasting come from the IAB/PwC study (2018 figures should come out in June). Streaming music ad revenue combines PWC’s annual figures for online radio with figures from Pandora and RIAA-compiled figures for ad-based on-demand music services (mainly Spotify Free and YouTube). Broadcast radio ad revenue figures are from PwC.
The above figure shows that podcasters earned about $5 per listener in 2017, which is less than one-fourth the $22 per listener that streaming music services earned—and less than one-twelfth the $65 ARPL of terrestrial radio. That makes podcasts a great deal for advertisers (provided, of course, that the podcasts reach the right audience) but not so wonderful for investors in podcast businesses.
However, podcast ARPL is growing at a vastly more attractive rate than other forms of audio content. This figure shows the same listenership figures against ARPL growth rates:
This shows that broadcast radio ARPL is flat and that streaming music ARPL growth is slowing, while podcast ARPL is on a hockey-stick growth path. Some industry commentators have suggested that companies like Spotify and Pandora are getting into podcasting to capture ad dollars that are leaving terrestrial radio. But it looks like the revenue isn’t leaving old-fashioned radio so much as it’s being redistributed among digital channels, from streaming music into podcasts.
In addition, podcast listenership is growing at a slightly faster rate than streaming music: Podcast listenership was 33% of online radio listenership (to use Edison Research’s term) in 2015; it rose to 39% in 2017 and again to 41% last year. So after another couple of years, the audience for podcasts could be half as large as the audience for online radio.
However, projections of both ad revenue and listenership for podcasts indicate that it’s going to be a long time before podcasts are as valuable an advertising medium as streaming music. PwC projects $659 million in podcast ad revenue by 2020. If Edison Research’s growth trends for podcast listenership continue over the next two years, listenership should increase to about 85 million; this means that ARPL growth will slow down and reach only $8.
Nevertheless, Spotify operates on a long-term time horizon to profitability, so Spotify’s big bet on podcasting could make a lot of sense in a longer timeframe.
This article originally appeared on Forbes