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Spotify Made Huge Investments in Podcasts — Here's How It Plans to Make Them Pay Off

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  • It's been nearly two years since Spotify began turning the podcast industry completely upside down with a slew of acquisitions and deals.
  • Now the company needs to prove its a profitable segment.
  • That's where ad tech comes in.
  • Podcast ad measurement has historically been seen as tricky — podcasters might know how many listeners downloaded a show, but nothing about how far in someone listened, or whether they heard a show's ads. But it's a different story when people listen to podcasts on Spotify.

Since 2019, Spotify has spent hundreds of millions of dollars investing in podcasts. Now it needs to show investors that bet will pay off.

Spotify's podcast library has been bolstered by high-profile deals like its acquisitions of Gimlet Media, Anchor, Parcast and the Ringer. It also gained the exclusive rights to Joe Rogan's podcast, worth an estimated $100 million alone, which has a cult-like following and regularly ranked at the top of the podcast charts. It has since signed TikTok influencer Addison Rae, Kim Kardashian West, DC Comics, Michelle Obama and The Duke and Duchess of Sussex.

Now it needs to show those investments were worth it. Analysts say Spotify's new approach to advertising will help.

"Once the pieces are in place to monetize podcasts in a scalable way, I think it's just going to explode the dollars coming into podcasts. The medium is just made for advertisements," Stifel analyst John Egbert told CNBC.

According to an eMarketer forecast, podcast ad spend is projected to surpass $1 billion in 2021. And Spotify has new tools that will help advertisers glean more from the people who are listening to podcasts, which could help it rake in much more in ad revenue in the coming years.

Traditionally, it's been tricky to measure the return on an investment in podcast advertising. Podcasters might know how many listeners downloaded a show, for example, but don't always know long someone listened or whether they listened to ads.

Spotify's "Streaming Ad Insertion" tool, which it introduced earlier this year, dynamically inserts audio ads into podcast streams on its platform, allowing for more targeting and measurement. For example, advertisers can use the tool to see the age, gender and device type of people who actually heard an ad. That information is valuable to advertisers, but the tool was initially only used for Spotify's original and exclusive podcasts. Now it's opening that up for all podcast publishers with its recent $235 million acquisition of ad tech company Megaphone.

Megaphone offers technology for podcast publishers and advertisers seeking targeted slots on podcasts. The deal will give advertisers more scale when it comes to who they can reach, and enable podcast publishers to make money from their shows. Lots of big companies already use Megaphone to target podcast listeners. Customers include Google, Microsoft, Verizon, Walmart and AT&T, according to its website.

These sorts of investments in ad tech are expected to continue. "You'll see them invest more in technology to monetize podcasting better and monetize in a variety of markets and monetize their ad-supported customers," Pivotal Research Group's Jeffrey Wlodarczak told CNBC of Spotify's year ahead.

As streaming ad insertion tech becomes more prominent, and as podcasts continue to explode in popularity, some advertisers may become more comfortable with spending on many of the other third party podcasts available through Spotify.

"I think what's going to be key is for Spotify to monetize other third party shows," Egbert added. "It's interesting if they monetize their own podcasts, but the real magic would be helping, by using their really unique scale, to bring more ad dollars to podcasting that have ever come to the medium before."

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