Spotify's (SPOT +1.16%) podcast advertising business has surged over the last few quarters. It reported a 200% increase in podcast revenue in the second quarter and remained in the triple digits for the third quarter.
Despite the rapid growth in podcast advertising, there's still a long runway for growth for Spotify.
Image source: Spotify.
Improving podcast monetization
Podcast ad spending in the United States is expected to double between 2021 and 2025, but Spotify can grow its revenue much faster than that. That's because there's a significant gap in the way creators monetize their podcasts, and it favors Spotify's podcast ad network.
According to a survey from Stitcher, 26.1% of small podcasters (those with fewer than 25,000 listeners per month) monetize their podcasts with self-sold ads, and just 9.6% of them use an ad network to sell ads. The gap is even bigger for more popular podcasts -- 57.7% versus 36.6%.
While direct sales theoretically produce greater revenue for podcasts with big enough audiences to sell them -- no middleman, guaranteed rates, and so forth -- Spotify has the potential to produce better ad rates for many podcasts through programmatic ad insertion.
Ads served by the Spotify Audience Network can be even more targeted than other audio advertising networks. That's because Spotify is a logged-in environment, meaning the company has additional knowledge about the listener, including age, sex, location, and possibly even credit card data -- which opens a whole new data set for ad targeting. As such, it could produce better ad rates for many podcasters and reduce the need to pay for a sales team.
Spotify just expanded the ad network to creators using its Anchor platform to produce and host podcasts. The streaming service is also expanding its podcast advertising business's reach through its Megaphone ad platform, which it acquired last year. Meanwhile, podcast listening on its platform -- where it can provide the most value -- continues to balloon. It's now the No. 1 podcast listening platform in the U.S. and counts over 3.2 million distinct podcasts on its platform.
As Spotify's podcast advertising network expands its reach to new creators and proves its value, it should see an uptick in adoption. And if it can produce better ad rates than direct sales can, it may not be long before the percentage of podcasters monetizing with direct ad sales versus an ad network is reversed.
The long tail could be key
The real potential for ad networks like Spotify's may come from smaller podcasts. Only a small percentage of podcasts with less than 25,000 listeners sell any ads at all. Spotify can make it very simple for them to start monetizing through its ad network.
And investors shouldn't underestimate the value of the long tail of podcast listening. With 3.2 million podcasts on the platform, they can represent a substantial amount of ad inventory in aggregate.
Inventory remains the bottleneck for Spotify's podcast revenue growth. "We know the demand is there, we know the advertisers are there, so for us it's just continue to expand the inventory available for advertisers," CEO Daniel Ek told analysts during the company's third-quarter earnings call.
An additional focus on the small, under-monetized podcasters could bring a lot of greenfield ad inventory on board for Spotify. It could push the percentage of podcasters using ads to monetize higher and skew the percentage toward ad networks.
The way things stand today, Spotify has a lot of opportunity to grow its share of the podcast advertising market, which in itself is already set to double within five years. So, despite the stellar growth in ad revenue in recent quarters, there remains much more room to run for the growth stock.
