Spotify Technology SA built the world's largest audio-streaming service by convincing millions of people around the world to pay for music. Founder and Chief Executive Officer Daniel Ek now sees an even bigger opportunity in advertising.
The US radio industry generated about $18 billion in advertising sales in a recent year, and a large share of those dollars will shift online to services like Spotify, Ek said in an interview with Bloomberg Television. "It's obvious today that the music business is focused on paid subscriptions," Ek told host Emily Chang. But radio advertising is "larger than the entire streaming industry is for music."
Advertising accounted for just 10% of the company's sales last year, and that part of Spotify's business has taken a hit so far this year because of the coronavirus. But Ek's interest in ads underpins his company's two biggest new initiatives: an aggressive push into podcasts, and efforts to get music artists to buy ads on Spotify.
Boosting ad sales is vital if Spotify is going to deliver more profits, and reassure Wall Street that its business model has long-term potential. The company loses money because it gives music companies the majority of its sales. Both podcasts and music marketing could dilute music companies' share in the long run.
Acts including Justin Bieber and The Weeknd have paid for Spotify to notify potential listeners when they dropped new albums. This practice has been controversial in some music-industry circles, as record labels and artists question why they should be paying Spotify for promotion. Spotify, they argue, pays them for their music.
Ek is convinced people will come around when they see how effective promotion on Spotify can be. Artists also used to balk at the value of Spotify's playlists, preferring large billboards on the Sunset Strip. But now, every act wants to be at the top of Rap Caviar and Viva Latino.
"Over time we think it's a significant revenue opportunity for Spotify, and the music industry," Ek said. "A huge barrier for a lot of artists today is the ability to market their music in an efficient way."
Podcasts may take longer to deliver business results. While the industry has grown rapidly, its total advertising sales are still short of $1 billion.
Spotify is working swiftly to change that. Listening on Spotify has more than doubled over the past year, and Spotify has acquired three podcast studios, Gimlet, Parcast and the Ringer, to fill the app with new material. It also acquired the tools and services company Anchor. The company has introduced dozens of exclusive projects, and unveiled new advertising tools in January.