07: Spotify’s podcast bet

0:00In early 2019, Spotify surprised everyone with an announcement. We were no longer going to be only a music company. We were going to focus on audio and become an audio-first company. It started with the strategic acquisition of two podcasting companies, Gimlet, the HBO of podcasting, and Anchor, the YouTube of podcasting. Spotify and Anchor are teaming up. This is a big deal. A year later, we brought on board the sports podcast network The Ringer. The Ringer is consistently putting out new stuff really, really quickly. And I'm so biased towards Spotify. I've used Spotify for years. This just is so, so exciting.

0:48Since then, we announced that the Joe Rogan Experience, one of the most popular podcasts in the world, was coming to Spotify via a multi-year exclusive licensing deal. Hello, everybody. I have an announcement. The podcast is moving to Spotify. And launched exclusive shows in partnership with Barack and Michelle Obama, Kim Kardashian, and Harry and Meghan, the Duke and Duchess of Sussex.

1:17In a very short period of time, and for the first time ever, we went from only creating technology to also creating content, which left a lot of people both inside and outside of Spotify wondering why.

1:36I'm Gustav Söderström, and this is Spotify, a product story. The podcast that brings you the untold stories of Spotify's biggest product launches and the lessons we learned from them, told by the people who actually lived it and made it happen. On today's episode, we'll open up about how we stumbled upon our first second product, the ongoing big picture strategy behind our evolution into an audio company, and what we're betting that exclusive and original content will bring about a golden age for podcasting.

2:15I'm going to start by letting you in on a secret. Even at the inception of Spotify, this is the kind of little known part, we couldn't decide which was the better business to be in. So we actually looked at TV and we looked at music. Yes, you heard that right. That's Spotify's co-founder and CEO, Daniel Ek, saying that Spotify, the most popular audio streaming service in the world, could have been a video company. My passion was in music and I wanted to do music, but it felt like a much worse business. So the investor memorandum, the very first one, had the optionality of also doing and pivoting into TV.

2:50And I think that's important because it was clear to me at the time that the media system we were building would probably be appealing to other forms of content than just music too. We now know he wasn't wrong. In many ways, entering the music industry was very fraught. An uphill battle all the way to the top, which we've described in earlier episodes.

3:17We fairly quickly moved on from the video idea and instead embraced our core mission of bringing our users something that, unlike video, they couldn't get anywhere else. The perfect listening session. Pursuing that single goal for the first 12 years brought Spotify to over 2 ,000 different devices, from gaming consoles to smart speakers. And it led us to invent a whole new way to approach personalization that we call Algotorio. So the way we differentiate the service in our case was by differentiating it with a better consumer experience, being on more platforms, just overall thinking through that user experience.

3:57Editorial, recommendations, everything around the content, but not the content itself. Exactly. So if anything, the superpower of Spotify is taking commodity content and unlocking better user experience on that commodity content.

4:17Eventually, like any successful company, we grew to the point where we needed to expand in one form or another to find our next product. Our first, second product, if you will. We needed to develop some service or feature that built off of what we were already doing so well and at the same time set us apart from the competition by propelling us into a new opportunity. Because the reality was every other place had Justin Bieber, including YouTube and radio and all of these other services. So we won by other things. But ultimately, it would be harder and harder for us to compete in that world. And so we knew that eventually the final point of differentiation would be to differentiate on the content itself.

5:01After years in the music business, we knew that differentiating ourselves by offering exclusive songs or albums wasn't viable. It would be bad for listeners and bad for business. Because if we took that route, our competitors would surely follow. And that would break the core consumption object of music, the playlist. Catalog completeness, that is, the ability to put any song you want into a single playlist, was baked into Spotify's proposition from the start. You can't have the perfect listening session if you have to switch back and forth between two different apps to hear the two songs you love back to back.

5:39But while exclusivity in music was bad because it would break the consumption object, in video, where the consumption object is instead a single show, like a Narcos or house of cards, it had brought about the golden age of TV, giving consumers who used to pay$20 for two hours of movie entertainment almost unlimited movie quality entertainment for just$10 a month.

6:10So when it came time for us to experiment with our first second product, our eyes naturally drifted to the world of streaming video. We figured that tech is more or less the same, and video was exploding. So why not give it a shot? We even started a couple of top-secret video projects, but they all failed. Who knows, maybe we'll talk about those in the next season. What had happened was, in our video envy, we had forgotten our very own product strategy lesson. Look at the competition, and then do something completely different. We were back to square one. Behind the scenes, the hunt for our first second product continues.

7:01Completely unbeknownst to us at the time, this trajectory that Daniel is describing, of differentiating your product through an outstanding user experience, and then moving on to differentiation through exclusive content, mapped perfectly onto a framework later developed by Matthew Ball. A framework we touched on way back in the prologue episode. In general, there are about three different ways for competition in media services and distribution. Matthew is a media strategist and managing partner at Appillion Industries, a venture capital fund. And according to Matthew, the first phase is access.

7:35The premise of access-based competition is that it solves a hard problem. That hard problem is how to get content to the customer in the best possible way. Spotify indeed started out by competing on how people access music with our proprietary low-latency streaming technology. And then we continued to refine that access through tools like Personalization for Music Discovery, which helps people access new music, and Spotify Connect, which helps people access their music on any device. They were all just different forms of access innovation. But over time, that problem gets easier.

8:18You can think of this as commodification of the solution, of the innovation. When Netflix came out with streaming video in 2007, it was incredibly hard to reliably deliver video over the internet. It was incredibly hard to build apps that ran on every consumer device, and it was harder still to distribute them. And yet a decade later, the shift has gone from access as a key innovation in video to access as the table stake. You need a streaming service. You need apps. You need high-quality, reliable delivery. Which in turn leads to the next wave of competition. And that generally refocuses competitive pressures around the purpose of solving for content distribution and access content itself.

9:02Everyone is focusing on taking back their content rights, building their own service, and competing based on having more, better, higher quality hits.

9:15And that brings us to today. Disney Plus scaled massively in its first day because of the strength of its content. But that was built off the prior decade and a half of access innovations. We know this because it took Disney Plus a few hours to get 10 million subscribers. It took Netflix seven years to add 10 million in a year. It took Hulu six years to get to 10 million total. This is a reflection of the fact that the access wave has changed. We've moved on to a new phase in which access is not the hard problem, but high quality content is the differentiator. That's the hard problem. Essentially, the question our first, second product needed to answer, and answer quickly, was...

9:58How do we build on-demand streaming music towards building a service that is differentiated so that you are giving consumers a reason to choose you as the access solution, as opposed to others?

10:12In order to figure out how to redefine the space we were in, we needed to be absolutely clear on exactly what space that was. Rather than trying to copy the competition, we had to ask ourselves, what are we? Are we a music company or a streaming company or are we something entirely different? Because from a technology point of view, we can stream anything. And then something we never could have seen coming happen.

10:50And so in Germany, one of the more interesting things that ended up happening was that the record companies also owned a lot of audiobook rights and uh they because spotify was growing and the revenue was growing they had started realizing that a way for them to get more revenue was also uploading their entire catalog including those audiobooks as music tracks actually right yeah music albums yeah because that was the only way they could upload them of course to the platform at the time and we started seeing because the team was showing me the top 100 chart and and And a few of these audiobooks were actually on the top 100 music chart, ironically enough, and they were highlighting that as a problem.

11:31But I think it's an amazing thing when you have a platform that people are using for things that you didn't even contemplate happening in the first instance. So that was a big aha moment for me. And that kind of told me that we had not only a potential to do things in audio because consumers were doing it but we had a real license here to go after that space because people were consuming it despite the user experience which was terrible at the time right there was no skipping 15 seconds within the chapter of that audiobook because it was uploaded as a track so it would skip the entire chapter it would start from the beginning every time it was a horrible user experience and in spite of that actually the the producers uploaded it and the consumers consumed it so much that it ended up on the charts.

12:15Yeah, and even on the free experience, because it was shuffled, you ended up with chapter one, one second, and then chapter five. A randomized chapter book. Yeah, I mean, it was just a horrible user experience. And that brings us to our first lesson in product strategy. Lesson number one, follow the hackers.

12:37You can always find interesting and important information among the users that challenge the limits of your product. If you see someone hacking your system, that could be an indication of a real unmet user need. So instead of seeing them as breaking your product, listen, learn, and let them lead you. What use cases are they exploiting? Why are they adapting your product rather than the existing alternatives? And what would happen if you actually embraced it and elevated their user experience? What we saw from the Germany data is increased overall engagement. It actually increased music engagement too.

13:14The user data in Germany showed us that the people who took part in this truly awful audiobook listening experience actually listened to more music on Spotify as well. At the same time, we were running a test on what people like to listen to in the car. And we found that even in a Tesla, where we had a totally seamless Spotify music integration, people still listened to a lot of radio. because while they wanted to hear their music, they also wanted to hear their news, traffic, and weather. Now, what do audiobooks and talk radio have in common? Well, they're both spoken word content. You know what else is spoken word content and haven't been innovated on for years?

13:55Podcasts. There were so many signals that pointed out that this was the right thing. And then ultimately, if we could do this and if we could merge podcasts with music and basically get into audio, we would be in a much better place strategically as well as the service. And suddenly we had the answer. We weren't a music company or a streaming company. We are an audio company. We would have been a nice music company, but going for audio, especially because it also helped the music, Lens just became a no-brainer. And when I actually thought about it, not as podcast, not as music, but as audio, it was clear there wasn't anyone that was globally going after this opportunity.

14:39And that opportunity is massive.

14:46We had a second product, but we had no strategy. Just the conviction that podcasts were going to be our content differentiator. Even if we didn't know quite how yet. We need to figure out monetization. We need to figure out content licensing. We need to figure out content production. We need to figure out personal sessions. So all the components of Spotify, all the functions of Spotify needs to be involved. That's Deen Garmark. He had some consumer experience at Spotify. You might remember him from previous episodes.

15:20In order to become a podcasting powerhouse where creators would like to have their podcast content exclusively, you have to have a large podcast audience. In order to build your podcast audience, you have to have catalog completeness. And in order to have catalog completeness, you have to have an app that can actually play podcasts.

15:47But even this seemingly simple step was infinitely more complicated than you might think. Before we could even begin to tinker with the tech, we had to make a very big decision. Should we follow the trend and create a whole new podcast app called a podcatcher, or add new podcast-friendly features to our existing app. Features like skipping ahead by 15 seconds or saving state, meaning that Spotify would remember what you left off in the episode instead of always playing from the beginning the way it does with music. On the other hand, adding new features would be much, much harder from a design and engineering point of view.

16:23And it wasn't immediately clear if it would ever pay off. So we did what we always do. We talked. So what we've learned is that a lot of these things can be debated away. Like we could debate our way to understand if something's not going to work, so let's not even do this test. So let's spend time up front talking, because it's pretty cheap to talk, getting the right experiences, the right perspectives and data from different angles on the problem so we can, the tests that we do and the bets that we put have higher likelihood of success. So this is what we did here as we then moved to the next phase of the podcast strategy was to figure out why we're doing it.

17:05Why should we be doing podcasts? What's the purpose? What can we do for consumers? What can we do for creators? What can we do for advertisers? What can we do for ourselves? And what can others do? What can we uniquely bring to this marketplace? place. So this is the idea from science, kind of that you can get surprisingly far by reasoning and people still underestimate how far you can get. If you have a diverse set of smart people, you can get really far with reasoning. If it's just a few people are the same people, you tend to get stuck in some local optima pretty quickly. But if you have the right skills, you can reason past really bad A-B tests without actually doing them just by talking to people and debating ideas, right?

17:51But this is not what a company normally does. A company tends to push out, divide and conquer responsibilities and budgets and P &Ls and so forth. So it's something surprisingly hard to do because you need to talk about other people's strategies and they need to get into your strategy. It's very messy, but surprisingly effective on a longer timescale, I would say. So when we started debating this, what our strategy should be in podcast. How did that evolve? Now, I think when we decided to go into podcast, we felt pretty confident in that we should be leveraging our existing users base to drive significant consumption growth and engagement.

18:33But at the same time, it is a second product. We were never naive to think that this is the same thing as music. It's not. No one is going to open Spotify to expect someone to talk to them. We knew that we're going to be violating the expectations of Spotify. And there was some dissonance there. And that was the big opportunity, but it was also a big challenge. So, I mean, very roughly speaking, you could imagine that we put podcasts in the product, but no one is opening Spotify when they could listen to a podcast, like very simplistically speaking. If you looked at podcasts at the time, there was this one podcast app, from our biggest competitor no less, that had about 98 % of consumers.

19:18And then all the other podcast apps combined shared the remaining 1.5 % to 2%. That led us to believe that if you didn't have a differentiated strategy for how to reach consumers, you're going to be dead on arrival, no matter how great your app is. Even if we built a standalone app that was 5 or 10 times better than the dominant player, because those apps already existed and almost no one used them.

19:47We saw the success of companies like WeChat in China, which had gone in the opposite direction and bundled everything together instead of creating a bunch of separate apps. And we had a hunch that that should be our strategy. Bring the podcast to the people, not the people to the podcast. And we had one more crucial piece of user data, ourselves, which at the time was at least a few thousand people. During Spotify Hack Weeks, our engineers had been experimenting with adding podcasts into the existing music player for years because they wanted their podcast in Spotify. You might recall the lesson from the episode on machine learning that said, start by building for yourself, but don't build for yourself exclusively.

20:31Well, the first part of that sentence is start by building for yourself. And that's exactly what our engineers had done. And it turns out that early internal traction of a new feature has always been very predictive of its long-term success for us. We knew it could be done thanks to Hack Week. We knew there was a big user need thanks to Germany. And we knew it could be huge thanks to WeChat. But what we wanted to do was we felt like we have an audio product. And we felt that one of the big things that we could do, we can accelerate podcast growth. We think this is a fantastic medium. And it had seen a lot of growth, but it's not a true mainstream product yet when we started, and it's arguably still not.

21:17There's so much headroom and so much more people and so much more time spent that could be on podcasts for the benefit of consumers, that would create demand for creators that don't know that they're going to be podcast creators yet. So if we start doing that, if we put that in front of people, it's not in the moments where they first see it, where they're going to start listening to it. But they could get used to the idea, oh, I can use this for listening to talk. So there was this virtual cycle that we could just accelerate. And we thought that if we integrate it with something that is so well understood and mainstream is music, we can really drive this growth and accelerate this growth.

22:00On the surface, it may have seemed like we were going to cut into music listening by adding podcasting into the app. But the data in Germany indicated that, in reality, we were going to increase listening overall, both in podcasts and music. Besides, let's take that one step further. Remember how we said that you can't fight a macro in? Even if podcasts would have turned out to cut into music listening, unless Spotify could have somehow stopped podcasting from happening, it would eventually cut into music listening anyway, right? Of course, in this case, the macro wind turned out to be a positive.

22:36But there is a lesson here. Product strategy lesson number two. You're better off competing with yourself than competing with someone else. When you see something new or unexpected, something scary that could derail you, instead of pretending it doesn't exist or that you actually control the world and can stop it, accept it. The first one to accept and adopt always wins. And if you go back to that core mission of creating the perfect listening session, it made sense. Incorporating everything into a single player would make it that much easier for podcast fans to toggle back and forth between their music and talk.

23:14At the same time, it would introduce podcasts to millions and millions of Spotify listeners who never would have sought out a podcatching app of their own.