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Spotify Wants to Recommend a Podcast for You

Music-streaming leader Spotify (NYSE: SPOT) is betting big -- as in, $400 million big -- on podcasts. That's how much the company has spent this year on three different acquisitions (Gimlet, Anchor, and Parcast) designed to supercharge its podcasting capabilities in an effort to transform Spotify into an all-encompassing audio platform beyond just music streaming.

"With the world focused on trying to reduce screen time, it opens up a massive audio opportunity," CEO Daniel Ek wrote in a February blog post announcing the new strategy. "This opportunity starts with the next phase of growth in audio -- podcasting."

Spotify app displayed on a tablet, smartphone, and computer

Image source: Spotify.

Discovering podcasts

This week, Spotify announced that it was launching Your Daily Podcasts, a personalized playlist that algorithmically recommends new podcast episodes to users. Content discovery is one of Spotify's greatest strengths and most powerful differentiators, so the move comes as no surprise. The company already offers other types of personalized playlists -- like Daily Mix and Discover Weekly -- designed to unearth new music for users.

Any user that has listened to at least four podcasts in the past 90 days will see Your Daily Podcasts in their Spotify app. The company's algorithms will analyze recent streams and follows, among other podcast-related behavior, to recommend new episodes. The machines will know to play story-driven shows in order, so they won't spoil any endings.

Your Daily Podcasts is rolling out to free and premium users in markets including the U.S., Sweden, the U.K., Germany, Canada, Brazil, Mexico, Australia, and New Zealand.

Podcasts are already paying off

The pivot to podcasting holds significant potential to improve Spotify's cost structure, particularly to the extent that it can incrementally shift some engagement to exclusive podcasts that it is now producing internally. Those shows don't carry the same type of royalty burden -- Spotify's largest cost by far -- that licensed music does. The company launched 22 original podcasts in the third quarter.

Spotify posted a surprise operating profit of 54 million euros ($59.8 million) in the third quarter, which it attributed primarily to better-than-expected gross margin. "Royalty costs were more favorable than expected due to product and revenue mix," Spotify wrote in its shareholder letter. "We also had lower content expense resulting from both lower overall spend and the slower rollout of developed shows."

Podcasting hours streamed jumped 39% in the third quarter, although the company acknowledges that this growth was coming off a small base. Approximately 14% of Spotify's 248 million monthly active users (MAUs) are now listening to podcasts on the platform, and podcasts are helping drive deeper engagement, as well as conversions of free users to paid plans.

By its own admission, Spotify's podcasting strategy is still in the early innings. The company says some of the data points are "almost too good to be true," and it's working to "clean up the data to prove causality." Still, management is encouraged by the initial trends and plans to keep investing in the initiative.  

"We're going to talk to you about the scale of the podcast investment next quarter," CFO Barry McCarthy said.

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Evan Niu, CFA owns shares of Spotify Technology. The Motley Fool owns shares of and recommends Spotify Technology. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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