Survivor Bias, the Risk-Reward Tradeoff, and Spotify's Podcasting Future

I've long thought that marketing and business leaders make the mistake of survivor bias. We look at the few high-risk things that succeed (like Amazon in e-commerce or Dollar Shave Club in D2C) (and calling Dollar Shave Club a success may be generous or premature) and hold them up as models. We often overlook the failures that litter these same innovative categories (such as Pets-dot-com or the recent gloomy headlines about D2C companies like Casper and Glossier.)

Right now, #spotifyexodus is trending on Twitter, and while everyone has an opinion about free speech, Joe Rogan, musicians pulling their music, and subscribers leaving, no one is focusing on the question of if it made sense for Spotify to be in podcasting in the first place. There are dozens of podcast platforms and over 1 million podcasts, and most make little to no money. So, why choose to enter this market?

I questioned this from the start (and have the tweets to prove it), but to me, this was always a question of supply and demand: Like blogs or YouTube channels, podcasts have become common and thus are difficult to differentiate and commercialize. Unless, of course, you're a name with a built-in audience. Hence, Spotify's Joe Rogan strategy.

Spotify signed a deal reportedly worth $100M to secure Joe Rogan. While Rogan is technically a podcaster, he's not some random person in their basement with a PC and a $50 microphone. Rogan's a TV and radio personality who leveraged his fame and popularity to keep and grow his audience with provocative audio content. Spotify was happy to trade on Rogan's content and name to publicize and attract audiences to its podcast platform. This strategy is no different from a movie studio paying big bucks for a bankable star to help "open" a film or a brand buying an influencer's notoriety. And it worked, but at what risk to Spotify?

Spotify has had the largest share of the streaming music marketplace for years. It owns around 31% of the market, more than the combination of Apple and Amazon (the next largest services). It's a tough market, for sure, but no more challenging than podcasting, and there were opportunities to deepen in music. Why not band merchandise, patronage/exclusives (a la Patreon), concert promotion, or even high-quality music? (Years ago, as I upgraded my headphones and speakers, I left Spotify for Deezer since Spotify didn't, at that time, offer a high-quality lossless option.)

It seems Spotify decided to skip innovating in its core music market for a big, risky play in podcasting. Big risks can bring big rewards, but they're still big risks! By choosing podcasting, particularly by paying enormous sums for a firebrand celebrity, Spotify transitioned from a low-risk business--a channel for publishing every artists' music--to a high-risk one--a media outlet choosing which voices to broadcast & sponsor.

It looks as if Spotify treated podcasting as it did music, with little regard for its role in the editorial process or reputational risk. While some object to lyrics in music, Spotify only needed content warnings to protect its interests. The same isn't true of its $100M podcast! Spotify has standards--they're just pretty darn lax, in my opinion. For example, on Spotify, you can say that vaccines will kill you; you just can't say they were "designed to cause death." As the US advances toward 1 million COVID-19 deaths, I find that reprehensible (but I understand people may disagree.)

My point is that podcasting looked a lot like the music business (delivering audio content), but was it? Spotify started as a channel for music delivery, featuring almost the same music content as every other service, but it chose to become a media company with incendiary, exclusive voices akin to FOX News or CNN. It seems Spotify figured it could float above controversy even as it paid nine-figure sums to controversial figures and disseminated misinformation. Now, that risk is biting Spotify.

In May 2020, when the Spotify/Rogan deal was announced, the company's market cap was around $32B. Almost a year ago, the market cap rose to $69B. But the company is now worth half that, having lost $12B this year (a loss of $400M every day).

Market caps rise and fall. This may be a short-term market reaction as the controversy grows with more musicians pulling their music off the platform. But, simply put, Spotify put its core business model in jeopardy to pursue a risky strategy in the congested podcast market.

And maybe it will still pay off for Spotify. Time will tell, but the constant ongoing challenges of media companies make this a question. Paying for and commercializing content isn't easy in a world of unlimited competition and supply. Just ask the tens of thousands of struggling newspapers, former media stars like Tumblr and Yahoo (which have been passed like struggling hot potatoes between acquirers for years), Netflix (whose shares have dropped 37% in the past month over questions of subscriber growth and exploding competition), and Qiobi (which raised $1.75 billion from investors and shuttered after eight months.)

We all love innovative success stories, but every innovative shift in business model brings risks. Podcasting seemed like a can't-miss opportunity akin to music. Spotify is learning it is very different. With Spotify's stock down 29% this month, Rogan's $100M deal looks even more expensive now, and I think the future of Spotify's core business could be at risk.

We should celebrate the survivors of innovation, but we cannot overlook the victims (and strugglers) of innovation. They both teach us lessons we need to hear.