Amazon's Putting Pressure on Spotify

Amazon (NASDAQ: AMZN) has officially launched podcasts within its music app as the medium grows increasingly popular. The move is a direct challenge to Spotify (NYSE: SPOT), which has made podcasts a significant part of its strategy. Amazon's broad user base and deep pockets should have Spotify investors afraid of the potential threat posed by bigger tech companies.

Amazon playing catch-up

Over the last few years, Spotify has committed about $1 billion to podcast content and technology. There are now over 1.5 million different podcasts available on its platform, including dozens of original and exclusive shows.

An Amazon Echo Dot on a side table.

Image source: Amazon.

Amazon launched with just 70,000 podcasts and a handful of planned originals and exclusives. But investors can expect that number to grow quickly if the format gains traction on the tech titan's platform.

Last month, Amazon introduced Audible Unlimited, a subscription service through its Audible subsidiary that provides unlimited ad-free access to 11,000 exclusive productions, including podcasts. 

The company now has two channels to acquire and distribute podcast content, which makes it more likely it'll find a successful path forward with exclusive audio content. It also has several other advantages over Spotify besides its deep pockets and willingness to try things.

Three big advantages for Amazon

Amazon has three meaningful advantages over Spotify in its efforts to grow its share of the streaming subscription market.

First is its considerable share of the smart speaker market. As of the start of 2020, Amazon had a 53% share of all installed smart speakers in the U.S. The value of owning the smart speaker platform is that Amazon can set itself as the default platform when a user asks to play a podcast. 

Control over the smart speaker is also particularly valuable with podcasts, which are often listened to over multiple sessions across multiple devices. Spotify does a good job of synchronizing playback across multiple devices, but Amazon's ownership of the platform could provide an even better user experience.

Second, Amazon has millions of Prime members. Those members will get access to its podcast library in addition to the limited ad-supported music library that's included with their membership. If Prime Music listeners behave similarly to Spotify's free listeners with regard to podcasts, it could lead to considerable growth in Amazon's premium subscriber count.

Finally, Amazon has a well-established advertising operation. Between its retail website and connected-TV advertising businesses, it has already established lots of marketing relationships and advertising technology. As a result, the company ought to be able to monetize its podcast content better than Spotify, and it may introduce its own podcast ad technology for other creators -- a key piece of Spotify's strategy. Better content monetization should enable Amazon to ramp up its spend more quickly.

That said, Spotify has been living under the threat of Amazon's massive presence in consumers' homes for years, and it has still been able to grow quickly. The difference now is it has to compete with Amazon for exclusive content, which will make Spotify's podcast strategy more expensive going forward. That'll put pressure on free cash flow, and it could require greater reliance on the debt markets to fuel its growth.

That's not necessarily a bad growth strategy, especially considering Spotify's early results with podcasts have been exceptional. But it will put pressure on Spotify's financials as it aims to establish itself amid competition from big tech companies like Amazon.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Adam Levy owns shares of Amazon. The Motley Fool owns shares of and recommends Amazon and Spotify Technology and recommends the following options: short January 2022 $1940 calls on Amazon and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.

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