Spotify Technology SA has recently acquired podcast hosting company Megaphone, which creates tools for podcast advertisers, for $235 million so as to broaden its advertising, marketing and publishing toolsets for podcast creators.
Founded by the online news company Slate, Megaphone connects podcast publishers such as Vox and ESPN with networks of advertisers. Spotify will use Megaphone’s network and tools to offer its advertising technology to thousands of additional podcasts.
Reports said that Spotify has made a push for the podcast market since early 2019, striking deals for shows from Joe Rogan, Kim Kardashian, Michelle Obama and others, and buying companies like The Ringer and Gimlet Media. Now, it’s taking steps further to monetize all that content with the help of this new acquisition.
After building up its podcasting operations, Spotify is now trying to line up more advertising, helping it justify the investment in a still-nascent genre. The music streaming giant has now spent more than $800 million acquiring podcast firms, including Gimlet Media, Anchor and the Ringer, aiming to decrease its reliance on record companies.
Podcasts generated $708.1 million in advertising sales in the U.S. last year, according to the Interactive Advertising Bureau. That number has grown every year and should surpass $1 billion within the next year or two.
The deal doesn’t affect Spotify’s own podcasts, it already hosted its shows on Megaphone, but it does mean more shows will have access to Spotify’s proprietary ad insertion technology, called Streaming Ad Insertion.
SAI functions similarly to typical dynamic podcast ads, which are targeted based on a listener. But in Spotify’s case, the ads are inserted in real time as opposed to being swapped out ahead of a listen. This means Spotify’s system is making real-time decisions about which ads a specific listener should hear based on their data and also based on the goals of the various ad deals Spotify is currently running.
This acquisition means all podcasts currently hosted on Megaphone will gain access to SAI after the deal closes. No other hosting services offer SAI, so if podcasts or advertisers want to target their ads to Spotify’s data and potentially better reach listeners, they’ll have to pay to host their show on Megaphone, or they’ll have to pay Megaphone to distribute their ads. Megaphone has over 5,500 shows hosted on the platform from big publishers like Slate, iHeartMedia, Disney, and Vox Media.
Spotify and its investors have been betting that podcasts will have a significant payoff in the long run. The audience for podcasts is growing while the audience for radio, which generates more than $10 billion in advertising sales in the U.S., is shrinking. That potential has helped drive up Spotify shares 83% this year.
Major advertising companies are just starting to experiment with podcasts. Most people listen to podcasts only after downloading them. So podcast distributors have struggled to tell advertisers when or whether anyone actually listened to their spots. Spotify says it can do just that, and that its technology will allow marketers to insert the right commercial at the right time.
With Megaphone, Spotify now owns a fully rounded-out podcasting ecosystem: a network of exclusive shows, a podcast player, podcast creation software, a hosting company, and its own ad sales team.
Spotify shares fell as much as 3% to $266.11 in New York trading Tuesday. Graham Holdings Co., the parent of Slate, rose as much as 2.2% to $445.