Latest / The Pivot Podcast with Fexingo: How Businesses Change Direction and Survive Disruption / How Spotify Pivoted From Music Streaming to Audio Empire
Transcript
- Lucas: So Spotify started as a music streaming service — a pretty simple value prop. Pay ten bucks a month, get access to millions of songs, no ads. But around 2019, CEO Daniel Ek realized that model had a ceiling. Luna: Right — because music labels take a huge cut. Spotify was paying about seventy percent of its revenue in royalties. Hard to build a profitable business on that. Lucas: Exactly. And Ek said publicly that Spotify wanted to become 'the world's largest audio platform' — not just a music player. That was the pivot. And it started with a shopping spree. Luna: They went on an acquisition tear. Gimlet Media, Anchor, The Ringer, Megaphone — all within about eighteen months. Lucas: Gimlet alone cost them about three hundred and forty million dollars. Anchor, the podcast creation platform, was around a hundred and fifty million. The Ringer, Bill Simmons' sports and pop culture network, came in at nearly two hundred million. All in, they spent well over a billion dollars building out a podcast infrastructure. Luna: And this was a bet on podcasting being the next big format for ad-supported content. Music streaming was subscription-driven; podcasting was ad-driven. Different economics entirely. Lucas: That's the key insight. Music streaming margins are terrible because the labels hold the leverage. But podcasting — especially with original, exclusive content — gives the platform ownership. You're not just a pipe; you're a producer. Luna: They also bought Anchor, which gave anyone with a microphone the tools to create and distribute a podcast for free. That was genius — it lowered the barrier to entry and increased the supply of content on their platform. Lucas: By 2020, Spotify had about 1.9 million podcasts on the platform. As of June 2026, that number is over five million. And their ad revenue has more than doubled since 2020, hitting roughly two billion dollars annually. Luna: But the pivot wasn't just about acquisitions. They also started paying big money for exclusive talent. Joe Rogan's deal in 2020 was reportedly a hundred million dollars for three and a half years. That sent a signal. Lucas: The Rogan deal was polarizing. Critics said it was too expensive, too risky — one personality, one show. But it drove massive listener engagement. In 2020, Spotify said podcast listenership grew by over a hundred percent year-over-year. Rogan was a big part of that. Luna: And they didn't stop there. They added exclusive deals with Michelle Obama, Prince Harry and Meghan Markle, Kim Kardashian — though not all of those worked out. The Harry and Meghan deal reportedly ended early. Lucas: That is the risk of exclusive content: high cost, uncertain return. But the broader strategy — making Spotify a destination for all audio, not just music — is playing out. In their latest quarterly report, podcast consumption on the platform grew twenty-two percent year-over-year. Music streaming growth was around ten percent. Luna: So the pivot is working, but there are still challenges. Content acquisition costs are climbing. And advertisers are still figuring out how to measure podcast ROI compared to digital display or search. Lucas: Spotify has been investing in ad tech to solve that. They bought Megaphone, which is a podcast ad marketplace, and they've built streaming ad insertion — the ability to dynamically insert targeted ads into episodes. That makes podcast advertising more like digital advertising. Luna: They've also expanded into audiobooks. In 2023, they launched an audiobook service with over 200,000 titles, and premium subscribers get a certain number of listening hours per month. That's another revenue stream. Lucas: Audiobooks are still a small piece of the pie — maybe five percent of total revenue — but it shows that Ek is serious about the 'audio platform' vision. They're not just a music app that also has podcasts. They want to be the default audio app on your phone. Luna: And they've started to see some margin improvement. In 2025, their gross margin hit twenty-eight percent, up from twenty-two percent in 2019. Still low compared to tech peers, but moving in the right direction. Lucas: A big part of that is the shift toward ad-supported podcast revenue, which carries higher margins than music streaming. Music royalties are a fixed cost; podcast ad inventory is variable and growing. Luna: But there's a tension here: Spotify's core music subscribers are used to an ad-free experience. Introducing ads into the music tier would be risky. So the podcast ads are largely confined to the podcast tier, which is free for listeners. Lucas: Right. They've kept the two experiences separate. Free tier users get ads in music and podcasts. Premium users get ad-free music but still hear ads in podcasts — unless they pay for a higher tier that includes ad-free podcasts. That's a nice upsell path. Luna: So the pivot has changed the company's identity. When you think of Spotify today, you probably think of podcasting as much as music. That's a big shift from five years ago. Lucas: And it positions them differently against competitors. Apple Music is still music-first. Amazon Music has podcasts but it's not the focus. YouTube Music has the creator ecosystem but isn't built for audio-first discovery. Spotify has staked out a unique space. Luna: But I want to push back a little: isn't the pivot also a defensive move? Music streaming is a commodity. Spotify competes with deep-pocketed players like Apple and Amazon. Podcasting gives them differentiated content and a new revenue model. Lucas: That's a fair point. It's both offensive and defensive. Offensively, they capture a growing ad market. Defensively, they reduce reliance on music label relationships, which are always contentious. Remember the standoff with Universal Music in 2024 over royalty rates? That nearly pulled a third of the catalog. Luna: Yeah, that was ugly. And it showed how fragile the music streaming model is. One label decides to play hardball, and suddenly your library is gutted. Lucas: Exactly. So the pivot to owned original content — podcasts, audiobooks — gives them more control. They're not just a middleman; they're a content owner. And that changes the power dynamics with the labels. Luna: Let's talk about the numbers that make this real. Spotify's total monthly active users are now around six hundred and fifty million. Of those, about two hundred and thirty million are premium subscribers. The rest are ad-supported. Lucas: And the ad-supported tier is growing faster. In 2025, ad-supported revenue grew eighteen percent year-over-year, while premium revenue grew eleven percent. That trend is expected to continue as the podcast audience expands. Luna: So the pivot is working financially, but there's still a question of whether Spotify can ever become a truly high-margin business. Their net income is still thin — they posted a profit for the first time in 2024, about three hundred million dollars on revenue of fifteen billion. Lucas: That's a two percent net margin. Compare that to a company like Meta, which has a twenty-five percent margin, or even Netflix at around fifteen percent. Spotify still has a long way to go. Luna: But the pivot buys them time. They have a large, engaged user base, and they're monetizing more of those users through ads. If they can keep growing podcast ad revenue faster than music royalty costs, the margin will improve over time. Lucas: And they have a new growth vector: AI. In 2025, they launched an ai powered DJ that curates a personalized mix of music and spoken content. It's early, but it could increase engagement and reduce churn. Luna: That's interesting. The DJ feature uses generative AI to create a seamless listening experience. It's almost like a radio station, but tailored to you. If it works, it could make the platform stickier. Lucas: And stickier platform means more opportunities for advertising and premium conversions. So the pivot isn't just about adding new content types; it's about rebuilding the user experience around audio, not just music. Luna: If these conversations have moved your work forward in some small way, it's worth mentioning that listener support is what keeps this show ad-free and independent. Lucas: Yeah, it really does. A couple of dollars a month makes a real difference — buy me a coffee dot com slash fexingo, if you've gotten something out of these episodes. Luna: And that support allows us to dig into stories like this one, where a company fundamentally changes its direction. It takes time to research and produce, and we're grateful for the people who make it possible. Lucas: So back to Spotify: the takeaway is that pivoting isn't just about survival. It's about seeing where the market is going and repositioning before you have to. Daniel Ek saw the limitations of music streaming and made a bet on audio at scale. Five years later, that bet is paying off. Luna: And the lesson for other businesses is: don't wait until your core business is dying to pivot. Start experimenting while you still have the resources and the audience. Lucas: Right. And be willing to spend aggressively to acquire new capabilities. Spotify spent over a billion dollars on acquisitions in two years. That's a bet that most companies wouldn't make. But if you believe the thesis, you have to go all in. Luna: It's a good reminder that the biggest risk is often not taking enough risk.