A “messy” strategy, frequent “pivots” and overriding business model that ultimately prioritises subscriptions are all given as reasons for why “Spotify’s ad business is floundering” in a new report by Business Insider. Although, it says, “some in the ad industry think Spotify can turn its fortunes around”.
The report was prompted by comments made by Daniel Ek on a recent investor call, in which the Spotify boss admitted that his company’s advertising sales have been underperforming. That admission coincided with the news that Spotify’s VP Of Global Advertising, Lee Brown, was stepping down.
The streaming firm would apparently like about 20% of its overall revenues to come from ad sales, but it currently brings in just over 10% of the money.
The CEO of ad agency Cheil UK, Chris Camacho, tells Business Insider that “cracks” in Spotify’s ad business “have been visible for some time”, adding “Spotify has struggled to connect ambition with action”.
The streaming service, he explains, “needs to give brands access to cultural moments, not just audio slots”. That means “better content partnerships, richer storytelling formats and measurement that proves value beyond listens”.
For the music industry, Spotify’s ad-funded free tier has always been seen as a necessary evil - to hook new consumers in, especially in emerging markets - rather than something that artists and record labels should enthusiastically embrace.
Spotify needs to sell ads so both it and the music industry can make some money from the free tier users. But - for the industry at least - the ads are also meant to sufficiently annoy the freeloaders that they might consider buying a premium subscription. Which is where the serious money is made.
However, “buy ads to annoy people into upgrading to premium, where you can no longer reach them” has always been a bit of a weird pitch to brands.
That said, while the music industry has always focused more on premium subscription sales, it also routinely moans about the relatively low revenues generated by ad-funded streaming.
Some argue that it’s time for the free tier to be phased out entirely, especially in more mature markets. But others would like to see Spotify sell significantly more advertising, so that the industry’s share of that income would significantly increase.
Meanwhile, for Spotify itself, ad sales have become ever more important since its big push into podcasts, which don’t get a share of subscription income. To get a decent return on its multi billion dollar investment in podcasting Spotify needs to really crack podcast advertising.
In its bid to do just that it has frequently innovated and experimented, and acquired a few businesses, but so far with mixed success. Indeed, all the innovating has been, for some at least, a bit off-putting.
Business Insider says that the “podcast executives and ad buyers” it spoke to said that Spotify's “podcast advertising strategy has been messy, with several pivots in its few years of operation”.
The streaming service “ended some of its original and exclusive programming, cut staff, flip-flopped its stance on areas like measurement and ad pricing floors, and made a pivot to video that is still in the early stages and has yet to prove itself as a guaranteed moneymaker”.
A key Spotify acquisition was adtech company Megaphone, bought in 2020 in a $235 million deal. That deal, Business Insider notes, “was designed to help podcast publishers make more money through its advertising marketplace”.
But “there were hiccups from the start” and one former Spotify ad sales exec said “there was an irony in the company attempting to sell Megaphone to podcasters as a best-in-class adtech solution while Spotify itself uses Google as its ad server”.
Of course, digital advertising is a very competitive marketplace dominated by a small number of major global players. Plus Spotify has always had the extra challenge that it’s primarily an audio platform, but video is often more compelling for brands, and commands a much higher price point. Hence the streaming service’s recent bid to persuade more podcasters to go the video route.
That strategy could as yet deliver, though “several ad buyers told Business Insider that Spotify must prove it can be a meaningful player in video”. Camacho adds that “video here feels like an add-on. If Spotify wants to be bold, brave and first, it needs to reinvent what video within an audio experience could be”.
Meanwhile, the significant down-sizing of Spotify’s workforce in recent years has, sources told Business Insider, resulted in an increased focus on automated ad buying and less responsive sales teams.
One media buyer complained that it can now take days to get responses to queries from Spotify, compared to hours when dealing with its rivals. A Spotify spokesperson denied long response times were the norm, but that’s still something Brown’s successor might want to look in.
However, some of the ad industry execs Business Insider spoke to were positive about more recent developments at Spotify’s ad sales business.
Will Doherty, SVP at The Trade Desk, says that those recent innovations mean Spotify’s ads operation is now in a position to grow. “From a technical standpoint, Spotify is pretty sophisticated”, he said. “It takes time for any business to consolidate and unify an ad stack on a global scale, while managing the various partnerships needed to grow and be successful”.