Latest / Business Strategy Talks with Fexingo: Competitive Advantage, Market Positioning, and Growth Planning / How Spotify Built a Two-Sided Moat in Audio
Transcript
- Lucas: So Spotify ended 2025 with over 650 million monthly active users, and about 250 million of them are paying subscribers. That's a lot of scale. But here's the thing that I find really interesting — unlike Netflix or Disney+, Spotify doesn't actually own most of its content. The music is owned by the labels. The podcasts are owned by creators or networks. So how do you build a durable competitive advantage when you don't control your own supply? Luna: It's a great question, because on the surface it looks like Spotify is just a middleman. But clearly it's been able to defend its position against Apple Music, Amazon Music, and a bunch of others. Lucas: Exactly. And I think the answer lies in what economists call a two-sided network effect. Spotify's value to listeners increases as more creators put their work on the platform. And the platform's value to creators increases as more listeners show up. That's the classic flywheel. But the hard part is getting it spinning in the first place — and Spotify spent years and billions of dollars to do that. Luna: Right, the early years were basically a land grab. They were signing up users with free tiers and building scale, often at a loss. Lucas: Exactly. And that's a legitimate moat. If you're a new entrant trying to compete with Spotify today, you're not just competing with its technology — you're competing with a decade of data about what people listen to, when they listen, how they discover new music, which podcasts they skip. That data is incredibly hard to replicate. Luna: So the data itself becomes a barrier to entry. But let's talk about podcasting specifically, because that's where Spotify made a really aggressive bet starting around 2019. Lucas: Yeah, and I think that bet was fundamentally about strengthening the two-sided network. Music streaming was becoming commoditised — the labels have similar catalogs across platforms. So how do you differentiate? By adding a whole new category of audio content that listeners can't get anywhere else — at least, not in the same integrated way. Luna: They spent over a billion dollars on podcast acquisitions — Gimlet, Anchor, The Ringer, Parcast. And they signed exclusive deals with Joe Rogan, Dax Shepard, Alex Cooper. That was a huge bet. Lucas: It was. And there was a lot of skepticism about whether it would pay off. But look at where they are now. Spotify has become the number one podcast platform in many markets, and podcast listening on Spotify has grown significantly year over year. That creates a new layer of stickiness for the listener — and a new reason for creators to prioritize Spotify over other platforms. Luna: But it also created a problem. Because exclusive deals mean you're paying a lot of money for content that might not have long-term value. And some of those big names have moved on or gone non-exclusive. Lucas: That's the tension. Exclusives are expensive and they can be temporary. So I think Spotify's real bet is not on any one star — it's on building the infrastructure that makes it the best place to create and distribute podcasts. Anchor, now Spotify for Creators, gives anyone with a microphone the ability to upload, monetize, and distribute their show. That lowers the barrier for creators, which brings more supply, which attracts more listeners. That's the two-sided flywheel again. Luna: And that's different from what Apple does with Apple Podcasts. Apple has a huge installed base, but it doesn't actively court creators the same way. It's more of a directory than a platform. Lucas: Right. And Spotify has been adding tools for creators — analytics, ad insertion, video podcasting. The goal is to make creators feel like Spotify is their home base, not just another distribution channel. If a creator builds their audience on Spotify, moving to another platform means rebuilding from scratch. That lock-in is real. Luna: So the moat is not just about listeners — it's about creators. And that dual lock-in is what makes a two-sided network effect so powerful. Lucas: And now they're trying to do the same thing with audiobooks. In 2024, Spotify started offering 15 hours of free audiobook listening per month for Premium subscribers. That's a direct play to increase the value of a subscription and to pull users away from Audible. Luna: Which is interesting because Audible has its own two-sided network, but it's much more closed. Amazon owns the content through Audible Studios, and the pricing is credit-based. Spotify's approach is more like 'come for the music, stay for the audiobooks.' Lucas: Exactly. And the data they get from audiobook listening — what genres you prefer, when you listen, how long you listen — feeds back into the recommendation engine. That makes the entire experience more personalised, which makes it harder to leave. Luna: But let's be real — there are limits to this moat. Apple Music has a lot of the same data. Amazon has Alexa and a huge ecosystem. YouTube Music has the advantage of video. Spotify's lead is not unassailable. Lucas: No, it's not. And that's why they've been investing so heavily in AI. In 2025, they launched a feature called 'AI Playlist' that lets you generate a playlist from a text prompt — 'sad indie music for a rainy day' — and the results are surprisingly good. That kind of personalisation is a differentiator, and it gets better the more data you have. Luna: So the moat is partly data, partly creator tools, partly user experience. But it's also about scale. A smaller platform can't afford to offer 15 hours of free audiobooks per subscriber. Lucas: That's right. And that brings us to the economics. Spotify's gross margin has been improving — it was around 30% in 2024, up from 25% a few years earlier. That's still low compared to software companies, but it's moving in the right direction as podcasting and audiobooks have higher margins than music. Luna: So the strategy is to layer higher-margin content on top of the music base. Music gets you in the door, but podcasting and audiobooks generate better profits per user over time. Lucas: Exactly. And if they can keep growing the subscriber base and keep improving margins, the business becomes more defensible. But there's a wild card — what if AI makes it possible for anyone to generate personalised audio content on the fly? Like, what if you could have an ai generated podcast tailored to your interests every morning? That could disrupt the whole creator model. Luna: That's an interesting thought. But I think the counterargument is that people still want human connection in audio. The most popular podcasts are hosts talking to each other, not scripted content. And Spotify is investing in that human side too — they just launched a feature that lets listeners send voice messages to podcast hosts. Lucas: That's a good point. So the moat might be a combination of network effects and human relationships, wrapped in a really good recommendation engine. It's not a single thing — it's a system. Luna: And that's harder to copy than a single feature. Speaking of which, if this kind of strategic thinking is useful to you, a lot of listeners support the show through buy me a coffee dot com slash fexingo. It's a small thing that helps us keep these conversations ad-free. Lucas: Yeah, it really does make a difference. And it means we can keep digging into questions like this without worrying about sponsors. So thank you to everyone who chips in. Luna: Alright, back to Spotify. One more angle I want to explore — the role of advertising. Spotify has a huge free tier supported by ads, and that's a key part of the flywheel too. Lucas: Absolutely. The ad-supported tier brings in users who might not pay, but they contribute data and listening hours. That makes the platform more attractive to creators and advertisers. And Spotify has been building out its ad tech — they acquired Megaphone and Podsights, and they have a self-serve ad platform for podcasters. Luna: So the free tier isn't just a loss leader — it's a strategic asset that fuels the two-sided network. Lucas: Exactly. And the more listeners you have on the free tier, the more data you collect, and the better your ad targeting becomes. That attracts more ad spend, which lets you pay creators more, which attracts more listeners. It's a virtuous cycle. Luna: But there's a risk — if the ad market softens or if regulators crack down on data collection, that cycle could break. Lucas: Sure, and that's why Spotify is also pushing hard on subscription revenue. They've raised prices in many markets — Premium is now $11.99 a month in the US. And they've introduced things like the 'Basic' tier that strips out audiobooks for a lower price. They're testing price sensitivity. Luna: So the moat is really about the combination of scale, data, creator lock-in, and multiple revenue streams. It's not unbreakable, but it's pretty wide. Lucas: I think that's the right way to think about it. And the question for the next five years is whether Spotify can extend that moat into new audio categories — live audio, ai generated content, maybe even music creation tools. They've already started dabbling with AI DJ and AI playlist. Luna: I'm curious about the live audio angle. Remember Clubhouse? That peaked in 2021 and then kind of fizzled. But Spotify has the user base to make live audio work if they integrate it well. Lucas: They actually launched a live audio feature called 'Spotify Live' in 2022, but it hasn't taken off. I think the challenge is that live audio requires a different kind of engagement — it's synchronous, not on-demand. And most Spotify usage is background listening. Luna: Good point. So maybe the future is more about personalisation than social features. I'm thinking about the potential for ai generated personalised podcasts — like a daily news show that pulls from your listening history and interests. Lucas: That's exactly what they're building toward. They already have 'Your Daily Drive' which mixes news with music. And 'Daylist' which changes throughout the day. Those are steps in that direction. Luna: So the ultimate moat might be a personalised audio feed that no other platform can replicate because only Spotify has your listening history across music, podcasts, and audiobooks. Lucas: That's the vision. And if they execute on it, the switching costs for users become enormous. Leaving Spotify would mean losing a personalised audio universe that knows your tastes better than you do. Luna: It's a fascinating strategy. And it shows how a company that doesn't own its content can still build a powerful competitive advantage — by owning the relationship with both listeners and creators. Lucas: Exactly. And I think that's the lesson for any platform business in the creator economy. The moat isn't the content — it's the network, the data, and the tools that make the platform indispensable to both sides.