Crypto News: Spotify's surging ad business, Facebook’s music talks

Good afternoon from sunny Los Angeles. My colleague Ashley Carman is writing a newsletter about all things audio (podcasting, music, audiobooks and the like). I've talked about this newsletter once or twice before here, and we are now just a couple weeks out from launch.

I wanted to give readers a taste of what that will look like this weekend. Take a read and subscribe here if you like what you see. We're back to our regularly scheduled programming next week. Without further ado…

Spotify avoided the sales slowdown crippling many of its peers, and is one of the few digital media companies in a stronger position than it was a few weeks ago.

The company's stock jumped 12% Wednesday after it reported financial results that topped Wall Street forecasts and shares ended the month up about 16%. You can read our earnings coverage here.

Today I want to call your attention to a specific metric: Spotify's advertising revenue grew 31% year-over-year, reaching 360 million euros with "healthy" double-digit music advertising growth in the past year and "strong" double-digit podcast ad growth.

A slowing ad market has crushed some tech stocks, including Snap Inc., Roku Inc. and Meta Platforms Inc. (Facebook). Snap stock dropped as much as 36% after its earnings call last week while Roku plunged more than 20% Friday. Meta didn't drop quite as much, but it did report its first-ever quarterly sales decline.

So, why has Spotify been spared?

There's no single answer, but the immaturity of Spotify's advertising business may work in its favor. For one, social networks thrive on advertisements from small businesses that are bought and sold programmatically in live auctions. Audio ad deals are more often the result of hands-on work. Sales teams sign deals, court brands and make sure they receive satisfying results. This means they often make deals with big-name brands and that won't pull back their spending as quickly. Meta, as a contrast, sees people come through its self-service funnel. The machine runs itself.

That's Spotify's dream, of course, and Chief Executive Officer Daniel Ek said as much during this week's earnings call. He believes audio is a particularly strong medium for local advertisements, a space we have yet to see Spotify crack — a source familiar with the company tells me the majority of ads on the platform come from enterprise brands.

I see that play out in my experience on the platform, too, particularly in podcasts. Most of the ads I'm served promote big brands programmatically and direct-to-consumer operations in the host-read ads, not my local sandwich shop. Spotify only recently started allowing self-service audio ads for podcasts in the US, and most advertisers aren't yet savvy enough in the audio ad landscape to look for the option.

Another factor benefiting Spotify is that the podcast ad market is so nascent. Spotify sold 360 million euros in advertising last quarter while Meta generated $28.8 billion in quarterly revenue. Mark Zuckerberg makes as much from advertising in a couple weeks as Ek makes in three months. But the podcast advertising market is one of the fastest-growing segments in digital media.

John Goforth, the chief revenue officer of Magellan AI, which maintains a podcast ad database, estimates podcast ad spend was up 48% year-over-year and 18% over Q1. Spotify is going the same way as the broader market.

(Sales efforts at Meta and Snap have also struggled due to Apple allowing users to opt out of cross-app tracking, an issue Spotify mostly avoids because it targets listeners on its own platform with its own data.)

Goforth speculates that Q3 could be softer than publishers forecasted, and sure enough, Spotify's Chief Financial Officer Paul Vogel suggested as much during the earnings call and in a conversation we had.

"I'm definitely paying attention to the weekly ad numbers now more than I have in the past," he told me this week. "We had a good Q2 and feel like we'll have a good Q3. We'll see. Could it be better? Sure. Could it erode further? 100%."

Yet even if advertising slumps, Spotify has an advantage on many of its tech peers. Unlike Meta, Snap, Roku and Alphabet, it makes more than 80% of its money from subscription, not advertising. And unlike subscription video services Netflix, Disney and Warner Bros Discovery, it doesn't have a ton of direct competition. While Apple, Amazon and YouTube all have music services, none of them is anywhere near the scale of Spotify in terms of paid music.

People paying for multiple video services might cut back from five to three during a recession. But people pay for one music service (if that). They could cut back to free YouTube, but if they want to access any of their playlists they'll have to keep paying for Spotify. — Ashley Carman

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In a trend I've been monitoring since "Office Ladies" became a hit, rewatch podcasts continue to draw audiences. Podcast network Dear Media's "Back to the Beach With Kristin and Stephen" recaps "Laguna Beach: The Real Orange County" episodes and briefly surpassed Joe Rogan's show on the Spotify charts. (It's remained in the top five this past week.)

I normally don't put much stake in podcast charts, but given that I was out to dinner with friends this past weekend who also mentioned the show and how excited they were, I have to assume it's breaking through to people somewhere. Rewatch pods! We love 'em.

Something's happening with Meta and the music business

Three separate stories over the past week underscored tension between Meta and the music industry.

The first: Epidemic Sound, which offers subscribers licenses to its artists' music, is suing the company for $142 million, alleging that the company infringed on its licenses. The company alleges that Facebook's behavior allows for "80,000 new instances of theft of Epidemic's works per day."

The second: Kobalt Music Publishing pulled its 700,000 songs from Facebook and Instagram. Kobalt's licensing deal expired and the two entities have yet to sign a new one. Music Business Worldwide first reported the development and obtained a letter the publishing company sent its partners.

The third: Facebook announced that creators can now monetize certain videos, not Reels, that feature licensed music. The video creators will receive 20% of the revenue with Meta and the rights holders divvying up the rest.

Facebook is in the process of negotiating contract renewals with the music industry, and these talks often get messy.

The social networking giant first agreed to pay for music rights in late 2017 and renewed those deals a couple years ago. Getting paid by social media companies such as Facebook, Snap and TikTok has generated billions of dollars in additional revenue for major music companies.

Facebook has much, much bigger concerns than music right now. That includes its slowing advertising business, being sued by the Federal Trade Commission and competition from TikTok. Investing a lot of time and money into expanding its relationship with the music business isn't a huge priority. It does want to let creators monetize videos with music so that it can compete with TikTok, but it doesn't need much help from record labels to do that.

Facebook has already renewed its deal with Universal Music Group, the world's largest music company, but it doesn't have deals with everyone in the big 3 (Universal, Sony and Warner). It is also at odds with some of the independents. Kobalt, one of the larger independent publishers, has selected the nuclear option of yanking its music.

Don't expect the majors to follow. Universal and Warner are now both public companies, so they don't have much interest in jeopardizing an important source of revenue. They just want Facebook to pay up. There is a related dispute over how much songwriters specifically get paid (relative to recording artists), and we may delve into that at a later date.

One week, two podcast deals

I want to float two stories from last week because they're harbingers of what's to come.

The first: I broke the news that Pushkin Industries, the audio company co-founded by author Malcolm Gladwell, acquired Transmitter Media, an independent production studio.

The deal amount wasn't disclosed, but this piqued my interest because a) Pushkin has a different business model from most podcast operations in that they create audiobooks, too, and b) I've been curious how independent production companies are faring in an economy teetering on the brink of a recession. Many production companies have looked to sell themselves to a bigger parent company.

If the economic downturn gets even steeper, independent studios may be duking it out with the big platforms for a shrinking pie of advertising dollars.

The second deal to discuss is Acast, a Sweden-based podcast hosting and monetization platform, buying a company called Podchaser, which catalogs podcasts, guest appearances, and advertisements.

Yes, the platform bought a database. On the surface, this isn't very sexy, but it'll be important moving forward. Whenever I talk to music executives, they tout their datasets. The first person to identify an up-and-coming artist might be able to sign them and capitalize on their success.

In podcasting, especially for a company that shut down its podcast player, which Acast just did, data could also end up being key. Acast appears to be betting $34 million that this database will not only help inform its own decisions, but possibly also help it sell more ads.

That's it for today, but if you have feedback, tips, ideas, or whatever else, we want to hear from you. I previously wrote a newsletter at The Verge and one of my favorite things was hearing from readers, so please, do reach out. Message me at acarman5@bloomberg.net, or you can securely message me on Signal and my Twitter DMs are open to request that number. I don't receive replies to this email, so please don't do that, thank you.

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