About a week ago, The Information reported that Apple (NASDAQ: AAPL) is planning to launch an ad-free podcast subscription service. The pioneer of the on-demand audio format has lost market share to Spotify (NYSE: SPOT) in recent years as the Swedish music streamer has invested hundreds of millions of dollars in podcast studios and publishing platforms. This subscription service is probably Apple’s grand strategy to reverse the trend.
Should Spotify shareholders be worried about the tech giant increasing competition? Let’s take a look.
Why Apple could make a podcast subscription work
Apple is notoriously secretive about product launches, so we probably won’t know any exact details until the service is actually available. However, according to sources who spoke to The Information, the service will have exclusive content, will be ad-free, and will charge users a monthly fee. This business model has been tried a few times with podcasts in the past, the biggest example being the start-up Luminary. The service was launched in 2019 with the aim of becoming the “Netflix of podcasts”, but as of last May it only had around 80,000 subscribers.
While ad-free podcast services have a weak track record, Apple has a few perks that may finally make it work. First, it has tens of billions in cash on its balance sheet, so it will never have a problem paying creators, which is important to get the value proposition high enough so that people actually want to sign up. Second, its ad-supported Apple Podcasts service, which has hundreds of thousands of shows, has been the leader in podcast listening for many years (although Spotify is rapidly gaining ground). Apple could easily market a premium service to its existing users, while Luminary had to rely on paid advertising.
Finally, Apple will likely bundle this podcast service with Apple TV +, Apple Music, and some of its other subscriptions, making it cheaper for customers to sign up for the service if they’re in the Apple ecosystem.
Should Spotify be worried?
In short, no. Spotify already has an edge in investing in podcast content through its acquisitions of Gimlet, The Ringer, and Parcast. He has also invested in dozens of shows for his in-house studio. Additionally, while it has exclusivity for a few podcasts – the largest of which is The Joe Rogan Experience – most of its content isn’t behind a paywall. Counterintuitively, Apple launching a premium podcast service could actually help Spotify by normalizing the idea of paying for podcasts. Spotify could potentially gain pricing power for its premium offering if it ever decides to put its podcast content behind the paywall.
Outside of the content wars, Spotify has invested in the podcast supply chain. It has acquired two podcast production platforms (Megaphone and Anchor) and developed an advertising technology it calls Streaming Ad Insertion (SAI). SAI is a targeted advertising platform that automatically fills ads where creators enter preset, YouTube-like slots from Alphabet. The technology is currently built into the shows Spotify owns outright, but over time it will likely expand to all of the shows hosted on Megaphone and Anchor.
In a broader sense, premium content from podcasts may never work. The barriers to entry are extremely low – starting a show costs next to nothing, making podcasts more like YouTube than a streaming video service like Netflix. Maybe some high-budget programs will work behind a paywall, but I don’t see many people choosing to pay for podcasts when there are already hundreds of thousands of free options available.
Overall, while Apple has a clear advantage with its installed base and seemingly endless amounts of capital, it’s coming late to the ball game with original podcast content. Plus, even as it starts to overtake Spotify for high-profile shows, it actually has a chance to increase the value proposition of a Spotify subscription. Spotify shareholders are expected to monitor Apple’s plans with podcasts, but there is no need to sell because of this rumor.
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