Square Makes Tidal Waves

Every now and then, a company does something that makes people just sort of go “…huh…why?”.

This last week was one of those times. 

Sure enough, last week, Square (the fintech company that created Cash App and shares a CEO with Twitter — Jack Dorsey) announced that they were buying “a majority ownership stake” in the music streaming service Tidal, led by Jay-Z. 

Not too surprisingly, this announcement was widely met with that “…huh…why?” reaction. A financial technology company buying a hip-hop-led music streaming service? What’s to be gained there?

The answer, interestingly, is: quite a lot!

Some M&A deals are strange because the two companies’ business models appear entirely opposed. Amazon buying Whole Foods in 2017 was a pretty unexpected move and appeared, on the surface, a strange one; while working hard to drive the shift to online commerce, why would you suddenly spend almost $14B to acquire a massive retail footprint across the United States? It quickly began to make more and more sense, as Amazon made further pushes into physical retail through Amazon Go and started building out their online grocery shopping service, Amazon Fresh. What seemed like a step backward initially proved to be a strategic long-term move.

Other M&A deals seem strange not because the two companies’ models are so opposed, but because they’re so (seemingly) unrelated. These are the more fun ones to figure out, and happens to be the type of deal we’re looking at today.

The best part about these deals is that they offer a great opportunity to dig into trends that might otherwise go unnoticed if you’re not paying particular attention.

So, let’s dig into it: why would a financial technology company want to spend almost $300M to own a relatively small music streaming service in a space dominated by entrenched giants?

Well, there might be a few reasons…

Hip-hop’s love for Cash App

To lay out the context, Square has had close ties with the music industry for a little while.

Square’s consumer mobile payment product, Cash App, in the last few years, has been met with much love by the music industry, and more specifically the hip-hop industry.

Though not explicitly marketed to artists and the music industry, Cash App has seen massive word-of-mouth growth through artists doing cash giveaways contests to their fans through the app. Quickly, as the trend grew among artists to engage their audiences with these sorts of giveaways, the brand gained attention in hip-hop culture in particular.

For a more detailed write-up of Cash App’s success in the hip-hop space, you can have a read of Dan Runcie’s brilliant piece at Trapital

Square itself isn’t even too sure what initially sparked such interest in Cash App in the music scene. Here’s CEO Jack Dorsey in a 2019 investor conference: 

“This is also something we weren’t expecting, but I think Cash App has touched in the culture. We’ve just benefited from people loving it and wanting to sing about it, and putting it in their music videos, and it’s amazing how much that spreads.”

As their traction in the space grew, Square (Cash App) was quick to lock in the interest, partnering up with massive artists to do virtual cash giveaways and get the Cash App brand front and center.

Fast forward to today, and Square’s purchase of a music streaming platform led by a huge hip-hop and rap figure begins to seem a little less random, although this is just the start to painting the full picture.

Considering Cash App’s massive brand presence in the industry, acquiring more significant inroads into the space lets Square start to take more control of the transactions that happen on and around its payments platform. This begins with Cash App, but goes much further. 

It’s worth noting that in early 2020, Spotify introduced the ability to directly donate money to artists through PayPal and Cash App. When the acquisition settles, it’ll be interesting to see whether Square revokes this access in favour of offering it only via Tidal, or would prefer to take their rake of all transactions regardless of platform, and leave the feature (assuming Spotify doesn’t prefer to remove the Cash App option themselves).

Spotify questions aside, the Tidal acquisition signals a strategy in two parts.

  • On one side, Square is taking a more active role in the transactions that happen between artists and fans in the music world — this through Cash App.
  • On the other side, Square is positioning itself perfectly to offer more complex financial services to the artist side of the industry, through point of sale transactions, subscription services, and much more.

Square, artists’ new best friend

To understand how Square is looking to integrate itself across multiple layers of the artist-audience stack, it’s worth quickly laying out how Square segments its core “Square/Seller” business, and Cash App. We’ll mostly be focusing on the Seller business in this piece, but the difference is important.

This graphic from their most recent 10-K saves me some work…

To give a rough rundown of the differences: Square itself primarily focuses on SMB clients (retail stores, restaurants, hair salons, etc.). It offers a full range suite of services starting with point of sale tools (wireless digital card readers, order-placing interfaces, etc.) and spanning the gamut of payment and payroll management systems, team management systems, banking services, and plenty more.

Cash App, on the other hand, is primarily consumer-focused. It began by offering a way to quickly send and receive money simply through the app, no bank account required. Today it’s expanded its services to include direct deposit banking, stock and crypto trading features, and a Visa-issued debit card.

Square’s mission, from its outset, was to provide new tools to help companies better run their business and help them secure new income formats. When they launched in early 2009, this took the form of simplifying the process for small businesses to accept debit and credit cards by leveraging new technologies of the time.

Over the last 12 years, the company’s mission has stayed the same: to provide tools to help owners better found and run their businesses. Today, that takes the form of a wide range of tools and technologies that centralise and answer all the financial needs a business can have to run its operations. Quoting from the 10-K (emphasis mine):

Square offers a cohesive commerce ecosystem that helps our sellers start, run, and grow their businesses. We combine software, hardware, and financial services to create products and services that are cohesive, fast, self-serve, and elegant. These attributes differentiate Square in a fragmented industry that traditionally forces sellers to stitch together products and services from multiple vendors, and more often than not, rely on inefficient non-digital processes and tools. Our ability to add new sellers efficiently, help them grow their business, and cross-sell products and services has historically led to continued and sustained long-term growth.

I quote from the filing at length because it’s so relevant to the recent acquisition.

In just a single paragraph, Square has laid out the entire root of its strategy as it looks to get a foothold in the music space. Though the “fragmented industry” they talk of in this passage refers to traditional small businesses, the principle is the same. 

For creators, creation is no longer the most challenging part of the process, distribution, and — crucially — monetisation are. Artists today have to work hard to produce good content, absolutely hustle for distribution (to the point that “Check out my SoundCloud” has become the de-facto follow-up under any successful Tweet), and someday, somehow, hope to make some actual money off their craft, beyond the few cents per thousand plays that Spotify offers.

The last decade has made the ability to record, produce and release new music fantastically accessible to all, but artists have never made less per listen of their songs than today. 

The key monetisation routes for artists looking to grow a small fanbase, or begin to earn money from a larger one, are typically through merch sales, album or (occasionally) vinyl sales, a negligible bit of streaming revenue, and ticket sales. The first and last ones of these have been, well… killed over the last year. As chance would have it, these two also tend to be by far the most profitable.

It’s right about here that the needs of creators intersect quite perfectly with the offerings that Square and Cash App propose. Sure enough, this has been the public line that Jack Dorsey shared on Twitter.

Square has sought to empower businesses with new tools to facilitate making money, and Tidal long has too, by creating a platform that sells itself as being more “by artists, for artists” than the more corporate and inaccessible Spotify or Apple Music.

With this new opportunity, Square is in a perfect place to provide the backbone for the quest to help artists gain income from their work. Tidal is the entry key for Square to be the middle-man facilitating the artist-fan transactional relationship. This acquisition is not really about Square gaining a foothold in the streaming space, it’s a move to empower the individual artist. 

This was clear as day in a Billboard interview with the incoming interim head of Tidal, Jesse Dorogusker, stating (emphasis mine):

“We think the streaming service is an important part of it, and it is growing and will continue to grow, but we’re especially interested in creating new adjacent opportunities in service of the whole artist experience and their experience with their fans in addition to the streaming service.

The possibilities for monetisation streams that a Square x Tidal duo can offer creators are endless.

Picture in-app integrated product and merch lines that can be ordered in just a couple taps (through Square/Cash App of course), exclusive content drops, early access to new releases, private livestreams and concerts, all hosted under a Square-owned property. Giving creators such avenues is the exact way forward to empower them, as the company’s mission statement lays out.

It’s not to say these services don’t already all exist individually. Teespring has been a go-to in the creator space for years; private access to content through Patreon and Bandcamp has been a staple of online creator relations for a while now. What Square changes here is unification. Bandcamp can come close, offering private releases, merch fulfillment and more, but they don’t control the streaming experience — the entry point of the artist-fan relationship.

Tidal and Square do.

Escaping the ticket cartel grip

In fact, Tidal wasn’t slow to spot the opportunity to control a deeper (read: more $$$) relationship beyond streaming. Very quickly after launch, Tidal announced TIDAL X:

TIDAL X is a program that connects artists directly with fans by giving them a platform to engage with them in unique ways, including one-of-a-kind live shows, events, artist meet & greets, and concert tickets for TIDAL members to enjoy.

Through Tidal X, artists can already offer exclusive content to paying audience segments, and through close ties with top artists, Tidal has gone a step further.

What no other platform (Bandcamp, Patreon, Spotify, etc.) has been able to do at scale is bridge the gap between small exclusive releases and real-life, physical experiences. Tidal has been the first to put this in place at scale, providing exclusive access to select listeners to tickets to concerts and listening parties, for artists like Kanye West, Jay-Z, Beyonce, and plenty more.

What’s interesting about this isn’t that a billionaire hip-hop star was able to offer free tickets to his own concerts or those of his wife and friends, but that it’s one of the rare opportunities for concert-holders to go direct to consumers, completely circumventing the shady and seemingly inescapable grip of the ticket sale/resale cartels.

Just a handful of ticket resale companies are responsible for almost 100% of online ticket sales to sport events, concerts, festivals, etc. A report from Grand View Research estimates the online event ticketing market to reach $68B by 2025 — almost entirely driven by resale companies like TicketMaster, StubHub, or SeatGeek.

If you’ve ever tried to buy a ticket to almost anything online, you’ll not be surprised that these platforms are little liked by almost anyone — fans or artists. Performers struggle to circumvent the stranglehold these companies have on the ticketing market, fueled by instant-purchase bots designed to resell tickets at a significant markup. Meanwhile, event-goers have to pay a multiple of the original ticket price for the same thing.

Square and Tidal are in a position to build off their subscription model to build out a true artist-first method of selling tickets to fans.

By offering exclusive early access to upcoming concert tickets only to paying Tidal subscribers, Tidal and Square can offer a best-in-class artist and consumer experience for artists’ most dedicated fans, while circumventing the bot resale market, as ticket purchases would be linked with personal information through their billing information in existing accounts.

Square’s customer relationship management suite is perfectly positioned to combine with Tidal’s existing platform to build exclusive fan-artist relationships, all while now tapping into more personal user data thanks to transactions through Tidal.

For Square, the benefits are obvious.

  • Firstly, for artists (Tidal), where the main benefits come from process centralization and being able to control the entire fan relationship experience.
  • Secondly, the collaboration increases the ability for artists to effectively integrate and value upsells: as you’re at the checkout for your concert tickets, Tidal can directly integrate up/cross-sell related products such as merch to wear at the concert (bonus points if it’s limited edition, exclusive merch just for this event).
  • Finally, this allows artists to take back control of their ticket distribution, a stage that has long challenged artists of all sizes. No more scalping (or at least less, if they still sell a part of their tickets through traditional channels), so no more wild markups, and no more profiteering off the artist’s back while granting them no additional profit.

Going physical

With Square now perfectly centred in the online artist-fan relationship, there’s still further opportunity to be found. The last money-making stage of this entire process — a stage in which Square is now front and center — happens in real life, at the event location.

Square has long followed the strategy of investing in its best clients’ ecosystem.

From supplying a free Square reader to new client businesses, to creating the Square Kitchen Display System to streamline restaurant operations, Square is no stranger to spending money to make money, by helping their clients make money.

Square is following the same approach in the music industry.

By investing in a key potential customer segment, they’re accelerating their ubiquity in the space and making themselves the go-to through point for transactions.

Onto the subject of at-event transactions. Square organises around how people gather and transact, namely focusing on the under-banked or under-served. In their SMB and restaurant verticals, the data they gather tells Square where, when, and in what quantities all different types of transactions are taking place — helping identify burgeoning trends and gaining insights into seller industries. This same principle applies perfectly to the music and concert vertical.

By sitting at the point of conversion from the digital to the physical realm, Square now gets a deep look into what is driving signups, which events and artists are gaining traction, what sort of merch lines are attracting the most attention, and a probably infinite list of other data points to mix and match.

This helps bridge the physical divide as consumers make real-life payments rather than online, and establish Square more prominently among merch vendors on-site at concerts, developing new reward programs or exclusive deals along the way.

Imagine you’re a growing artist with a merch stand at your concert to 200 people.

Offering Square’s Cash App QR scan feature or using the Square card reader at the point of sale, you can seamlessly announce, say, a 30% discount on all merch purchases at the concert but only if you’re a Tidal subscriber. No complicated integration setup required. No needing to show proof of subscription at the merch stand. No having to scan the buyer list, cross-referencing the buyers with registered Tidal accounts and then issuing the 30% rebates (in the more needlessly complicated scenario). Square makes it easy to offer new ways to reward your most dedicated fans.

Now, when your fans’ Tidal accounts are linked to the same identity as their Cash App account or your Cash App virtual card, Tidal x Square will automatically deduct the discounted amount from their purchase (and probably subsidize you the artist a % of the difference).

Of course, this isn’t just charity by either company, but an incentive program to drive subscriptions to Tidal. After all, recurring revenue — even at a lower monthly price point — is almost always more valuable than sporadic higher-value purchases. By incentivising fans to subscribe to Tidal to benefit from digital exclusive offers and on-site discounts, Square is building a win-win-win situation: 

  • The artist sells more merch (and gets more data about who’s buying),
  • Square/Tidal get new recurring revenue subscribers (and also get valuable purchase data which can be packaged and offered to third-party buyers — such as indie merch stores wanting to get an early lead in stocking up on rare merch drops),
  • The fan gets a deeper relationship with the artist, gaining access to limited-release events and drops, all while getting discounts on things they already wanted.

Final thoughts

The benefits to both companies having been made increasingly clear, there’s, there’s still been a nagging question on my mind: why now?

Tidal has been growing new subscribers steadily, increasing revenues over the reported years. On the surface, Tidal X seems like a strong initial opening through which they could have developed many of these features and integrations themselves while retaining (relative) independence. Its exclusive releases are already fairly established and seem to offer plenty of chances to expand in the ways we’ve explored. Why give up control?

The answer, I believe, lies largely in the timing of the deal, during the largest drought of events in recent history. For a subscription platform that particularly differentiates itself through upsells and benefits around the subscription service itself, a lack of events equals a lack of revenues.

The COVID context has only exacerbated the financial difficulties that Tidal has been facing for a while, as net losses deepen despite growing revenues, and they face increasing challenges in paying licence-holders, and legal investigations loom. 

Given the situation, the instant cash injection provided by a majority share acquisition likely sounded like a solid deal to solve a fair few short-term struggles and let the company think about a longer-term outlook. Not to mention, on Square’s side, the situation and timing almost certainly helped lock in a more attractive price for an expansion that might have been in the plans for a while.

Price aside, sure, Tidal could surely have built out more complex artist tools and routes to monetisation over the next few years. But they’ve decided that Square’s involvement might speed up the future enough to be worthwhile.

Looking at this larger picture, what started as a “…huh? Why?”-type deal might well shape up to be a handsomely profitable move for Square, as they gain new data streams and a foothold in a new vertical, and a fuel injection for Tidal to build the tools critical to their mission.

In one aspect, though, the underlying gain is the same for both brands. Each has gained a partner aligned with their worldview, as they work to empower the non-conformists and the creators of the world.

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Palantir: The Most Mysterious IPO of 2020

Preface: bit of a lighter, less analytical one this week, as Fanny I take a little time away from the office. Back to regularly scheduled programming next Sunday, though. Enjoy!

Palantir is one of those companies that almost everyone (in the tech world, at least) has heard of, but very few actually know much about.

This blind spot when it comes to the secretive deep-tech company began to come into the spotlight through the first half of 2020, as there have been talks of a possible Palantir IPO on the horizon.

Sure enough, after years of quiet rumors about the company one day going public, and hopefully offering even just a glimpse at the intriguing inner workings of the firm, Palantir quietly filed documents with the SEC with intent to go public later this year. No date is set as of yet, and no public S-1 has come out of it so far, but the news has definitely pushed the company into the tech and investing world spotlights.

This week, I want to dive into a look into Palantir’s story, what they actually…do, and explore some recently leaked figures from the company ahead of its public debut. With that said, here we go!

Some numbers

TechCrunch recently published an article with some key figures from Palantir’s upcoming S-1, “leaked” (quotation marks very much mine) by a company insider. The first look into precise numbers from the company was long-awaited and, honestly, kinda surprising!

Sure enough, the leak offered an unexpected key figure, in the form of a net loss of roughly $580M in 2019 on top-line revenue upwards of $742M for the period. This number was maybe the most surprising from this most recent leak. Tech companies incurring significant operating losses is nothing new, of course. What is new though, is a tech company running a 78% loss going into its 17th (!) year of activity.

In fairness, revenue is trending upwards, up over 25% YoY from 2018, and net losses are reducing, in turn, gradually — from a 97% loss in 2018.

Equally surprising was the discovery that around $900M of the combined losses spanning 2018 and 2019, were attributed to spend on sales and marketing. For a company known for having primarily governments as its core clients, the figure raised some eyebrows. Of course, there’s no breakdown available quite yet of how this spend was calculated. Ex-insiders at the company claim that a large part of this cash burn can be attributed to the extensive technical development carried out in the client pitching process — building custom solutions on a prospect-by-prospect basis through the deal process. Nonetheless, a sales and marketing spend representing around 40% of expenditures for a company with just roughly 125 clients as of Q2 2020 is something you don’t see every day.

This consolidated client base was an interesting reveal, too. It would appear that just the 3 top clients of Palantir represent almost 30% of the firm’s 2019 revenue — the top 20 being responsible for 67% of revenues.

This short list of active customers and the disproportionate revenues generated by just a handful of accounts has the effect of making Palantir look increasingly like less of a technology product company and more of a digital services consulting firm. Add this to their extensive investment in the RFP process through custom-built solutions long before a deal is on the table, Palantir begins to resemble a McKinsey or Bain quite quickly, albeit even more secretive. Similarly to the traditional consultants, Palantir promotes its “forward-deployed engineers” on-site at its clients’ offices — integrating client systems with Palantir’s, the company starts to look like a hybrid software/consulting agency — quite a distance from the pure technology company it bills itself as.

So, what’s a Palantir?

With all that number-stuff out the way, let’s have a look at what Palantir actually… does.

Palantir, in a nutshell, specializes in big data analysis and technical systems development. It works primarily with governmental organizations from national health authorities to defense ministries in developing custom software to drive operations via big data insights.

Trying to explain that without sounding boring is a challenge of its own. It gets more exciting in a minute, promise.

Oh, but first a fun fact! The company is full of nerdy references. Offices by the name “The Shire” and “Rivendell” can be found, for example across California. The company name itself, in fact, comes from The Lord of the Rings, in which palantír were “seeing-stones” which allowed their users to communicate with each other or to see faraway parts of the world — a fitting name, then. Don’t even get me started on their counter-terrorism division named Palantir Gotham

The firm was co-founded by a team of 5, 4 of whom were recent PayPal alumni. Of the squad, the most recognizable member remains, of course, renowned tech billionaire and face of the PayPal Mafia, Peter Thiel. The company was largely formed from the talent which once comprised the financial crimes division at PayPal — and this served as one of Palantir’s key entry points into its market. Some of the company’s first clients were members of the United States Intelligence Community (USIC), across financial crime and national security verticals.

Today, the company has 3 main client and service segments, spanning:

  • Financial institutions
  • Law firms
  • Governments

It’s these operations with governmental clients that Palantir is best known for today, primarily for its numerous projects with the US Department of Defense — whose engagements have a large counter-terrorism focus. For these clients, Palantir’s primary value proposition is one of ‘connecting dots’ between agencies. Building powerful cross-platform and cross-agency intelligence databases with massive data mining functionalities has made Palantir the go-to choice for a number of government agencies’ intelligence platform needs.

Palantir offers such a wide range of services that any one specific use case can be hard to discern without digging a bit. So I’ll give an example of the types of use cases Palantir has been used for in the past.

leaked document from 2013 offered some insight into a Palantir-powered solution, here, working with the Pentagon, where Palantir was used to track patterns in roadside bomb deployment and was able to conclude that garage-door openers were being used as remote detonators.

In the finance space, Palantir’s technology helped the Securities Investor Protection Corporation (SIPC) sift through over 20 terabytes of text and financial data spanning 40 years of records, leading to the arrest of a Mr. Bernie Madoff.

Connecting the dots of various agencies, aggregating data from wildly disparate sources, then, appears to be a powerful business! Though — as these recent leaks would indicate — a questionably profitable one.

More broadly, Palantir claims its platform has 4 main uses:

  • Data integration
  • Search and Discovery
  • Knowledge Management
  • Collaboration

Let’s have a quick look at each, one by one.

Data integration

As roughly described above, their data integration capabilities, synthesizing data sources from various formats and locations, connecting it in an ‘object based model’ via the framework Palantir calls “Dynamic Ontology”.

It’s this unique format of relationships between different data structures which fuels the Palantir platform’s ability to uncover ‘relationships’ between otherwise disparate data sources.

Search and Discovery

Through the renowned interface of the platform, non-technical users are able to query all types of data, across satellite imagery, financial records displayed in visual formats.

It’s this complex ability to take that synthesized and aggregated data, and use AI combined with human expertise to visually represent and analyse those connections that constitute’s Palantir’s best known benefits.

Knowledge Management

With such heavy roots in the intellignce community, military and other gonvernment entities, the regulation and oversight required in classifying sensitive and classified information is vital.

In a blockchain-esque breadcrumb trail of each access and modification of any and all data on the platform, Palantir’s software pitches itself as being the most highly-secure entrant on the market.

Collaboration

In connecting expertise across various verticals and analytical focuses, Palantir brings teams together from around the world, offering them the combined data lakes to foster cross-agency, cross-border collaboration.

Individual analysis gets published to a broader network on the platform, allowing others to collaborate and built on top of existing work.

Headwinds

Believe it or not, a private company helping governments expand their military capabilities doesn’t often go without its fair share of public controversy over the years, and Palantir leads the way in that department. From public admission of involvement with the Trump administration by assisting ICE in the deportation of undocumented immigrants, to taking up a Pentagon contract to deploy and monitor military drones (a project dropped by Google following significant backlash), Palantir’s governmental operations have been heavily criticized.

In 2016, it was revealed that Palantir had seen over 20% employee turnover, an eye-catching figure, given its staff of over 2,000 at the time. Later, the US government sued the company on allegations of hiring discrimination against Asian applicants.

Morale and public perception of Palantir were already lacking by this time, following its (unfortunately, quite public) failed attempts in 2014 to create a data-sharing “consortium” across US consumer goods companies, which would have led to an unprecedented bundling of market data across the CPG industry, powered by Palantir insights. Coca-Cola’s subsequent announcement in the following months — among other consumer goods giants — of their refusal to sign onto this inter-firm partnership did little to boost perception of the firm throughout the public sphere, nor industry professionals.

The IPO Path

Talks of a potential Palantir IPO have been long underway in tech and finance circles, largely fueled by intrigue into the inner workings of a company bound to such secrecy.

Investors once believed their chances of ever getting a peek at a fabled Palantir S-1 were little more than a pipe dream, after a 2016 statement by Alex Karp, CEO of Palantir, that the company wasn’t exploring an IPO, namely for the reason that it “would make running a company like [Palantir] very difficult”.

Fast forward to 2020, and investors are finally getting a chance to rejoice in the news of a planned upcoming public offering of the company later this year. Recent sources, though, would indicate that Palantir is looking to follow in the footsteps of Slack and Spotify these past couple years, opting for a direct listing, avoiding the IPO roadshow and fanfare, but also the cash infusion that goes with it.

Through a direct listing, a company doesn’t sell additional shares to the public market, rather just allowing existing shareholders (existing private investors and employees) to sell their stock to public market participants. This decision to forgo the cash-raising opportunity of an IPO is, it too, a surprising bit of news for a company that, well, needs the cash.

Instead, Palantir looks to be opting for the private money approach, having just recently raised over half a billion in new private capital, primarily fueled by Japanese holding company Sompo Holdings. 

In passing up the public money, Palantir is free to raise funds more quickly via private investors, all while skirting the roughly 7% fees collected by the banks underwriting the IPO — all while keeping the possibility to raise extra funds down the road via the public market, but without the bulky IPO process that goes along with it.

Parting Thoughts

All in all, the Palantir public listing is shaping up to be an intriguing one. This first half of the year and, you know… all that came with it… has made 2020 a bit of a quiet time for public offerings, be they IPOs or direct listings (at least we’ve had SPACs!).

I’m excited to dive into the (hopefully) soon-to-come release of the company’s S-1 filing and finally, maybe, just maybe, get a (heavily redacted) glimpse under the hood of the mysterious entity that is Palantir.

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Spotify Audiobooks

The last couple of years have been a busy period for Spotify.

While the company is obviously best known for its music streaming, since 2018, the Sweden-born team has been hard at work setting the groundwork for a true audio empire.

The first entry in the space was of course podcasts around 2016. In suit, Spotify’s last 2 years have been a headfirst dive into the podcasting arena. When they announced they were coming, they didn’t say it quietly. I wrote in Twitter and the Cool Kids Club:

The podcasting space is hotter and more highly contested than ever before. In the last 18 months, Spotify has shown that they are not messing around when it comes to long-form and podcast content.

In early 2019 they announced a deal to purchase podcast network Gimlet Media, and Anchor, a podcast creation platform. This reportedly ran them over $340M. Under a year later, they made waves again by acquiring the huge podcast network “The Ringer” for almost $200M.

A just couple of months after that, the Twitter tech world near-on imploded when news broke of Spotify signing a deal with Joe Rogan, bringing all future and past podcasts exclusively to the platform for a rumored $100M. More recently still, Spotify has announced new deals with Kim Kardashian and Warner Bros, to create exclusive new content for the platform.

All of that to say: the podcast space is a difficult one to compete in right now.

Spotify has been throwing around its weight in the audio streaming world full force and shows no signs of stopping. In fact, while one hand was climbing the podcast production ladder in acquiring studios, networks, and household-name talent, the other was busy getting a better feel of the wider audio landscape, with regards to horizontal expansion.

A few days ago as of writing this, a job posting appeared on Spotify’s recruitment directory for a Head of Audiobooks — leading a team within the original content focused Spotify Studios branch.

Some of the role’s broad focuses are listed as:

  • Developing and executing the book strategy for Spotify 
  • Identifying third-party content to license and package on Spotify 
  • Managing a book Editorial team and strategy
  • Helping develop a long-term strategy for audiobooks

This isn’t the first official mention of audiobooks by Spotify, but it’s by far the most significant. A range of audiobooks already exist on the platform in a mostly unofficial format if you dig deep enough within the spoken word categories. The company has explored some initial entries into licensing longer-form narrated content, but the format has been little integrated into the platform overall.

That may be about to change though.

Streaming Strategy

Content is expensive. Music content, especially the larger an artist is, is exceptionally expensive. It’s for this reason that Spotify, and all major media companies, past a certain size, have begun exploring alternatives to content licensing to fuel new releases on their platforms. The playbook is tried and true: Netflix, Prime Video, HBO, and now Spotify are all getting into the original content game.

Sure enough, at scale, it’s much cheaper to produce and distribute your own content than it is to license 100% of your library. Once initial costs are out the way, no royalties to pay, no license agreements to be renewed, it’s all profit.

Spotify understood this as well as anyone else and turned to new formats to build their catalog of original content, this has primarily taken the form of podcasts. Today, audiobooks look like the next step in the move.

The Audiobook Opportunity

The audiobook market is ripe for adoption. The audiobook market for the US alone has been growing at a roughly 20-25% CAGR for the last few years and is expected to continue in suit — at a size of roughly $2.7B+ as of 2019.

The market, though, is more than 50% controlled solely by Amazon as of 2018. Via their Amazon-own audiobook service and primarily through their standalone Audible platform, Amazon sits leaps and bounds ahead of the next nearest entrants, such as Apple, Scribd, or Google Play.

Challenging the audiobook market, then, is to challenge Amazon. Historically, a pretty bold task.

That said, Spotify has solid — or at least not terrible — odds in the fight.

When it comes to long-form content, particularly spoken word, discovery is a challenge. In a 30-minute listening session, music streaming platforms can get some reasonable initial insights into the type of music you like, and, therefore, what will keep you on the platform longest. By song 10, a not too rough first persona can be gauged from your listening habits, in order to recommend and algorithmically queue other songs and artists likely to keep you listening.

Long-form content is harder. By minute 30, you’re barely done with one podcast, and definitely in the early days of one single book, if not one single chapter. This means that for product-first companies like Amazon and Audible, initial recommendations and cross-discovery engines have been primarily limited to analyzing keywords and category genre. For audio-led companies such as Spotify, their recommendation engines dig much deeper than surface metadata to curate well-targeted recommendations and autoplays.

Already analyzing BPM, tone of lyrics, etc, Spotify already has strong inroads in place to analyze audio content and help craft tailored suggestions. Beyond just analyzing the main themes of an audiobook and recommending others, Spotify’s offering across music, podcasts, and audiobooks perfectly positions it to offer rich cross-format recommendations.

Imagine being 5 chapters deep into Lord of the Rings, and Spotify recommends an associated soundtrack, or suggests a LOTR lore discussion podcast, or chapter by chapter breakdown show. Beyond consuming audiobooks as a relatively siloed experience, Spotify is well-positioned to build more immersive long-term experiences in content discovery. Audiobooks tend to be consumed over days/weeks, this cross-format experience offers an immersive timeframe in which Spotify brings you into an augmented media world, full of spinoff discussion shows, book discussion groups, and soundtrack playlists.

This type of 360-degree consumption experience is of course possible on third party sites, specifically crafted to offer the most immersive reading/listening experience, but creating them would be wildly time-consuming, manually crafted.

Spotify has the perfect technology and positioning to facilitate the process.

Means of Production

Speaking of time-consuming, even making the audiobook itself isn’t quite a walk in the park.

On the surface, the process seems pretty simple: sit down with your book, a mic, and a few days to kill; stitch it all together, export, then hit upload.

In practice, though, the task quickly becomes much harder. ACX (Amazon’s audiobook production network), by virtue of its ubiquity, largely sets the baseline for content quality standards across the audiobook world: dictating specific dB ranges to adhere to, bitrates, credit formats, etc. The process isn’t exceedingly hard to figure out, but most authors will avoid it where possible, typically looking for freelance help on ACX.

Spotify’s audiobook game, though, is one step ahead.

As I linked in the job post at the top, the Head of Audiobooks the company’s looking for works more specifically within Spotify Studios, the original content division, and coincidentally, the one that now controls Gimlet Media and Anchor, a studio/network and a platform both highly capable of developing, producing and pushing out intricate long-form content at scale. No more Findaway Voices needed, Spotify Studios has spent the last 2 years making itself into a lean, mean, content machine.

The infrastructure crossover between podcast production and audiobook production almost entirely matches. While podcast studios of course tick the easy boxes of having the right equipment and quality setup environments, Gimlet Media stands as the perfect entry into audiobooks for its (much more valuable) process knowledge. Having an established chain of production, equipment, experts, industry veterans, and a chunky Rolodex will prove invaluable to Spotify, able to circumvent the growing pains of production at scale almost entirely.

The Amazon Problem

This strategy sounds all good and well so far. Production is no issue, the market is steadily growing, and Spotify has some best-in-class features to differentiate itself in the space. So what’s the catch?

The catch, unfortunately, is a cool $71 billion in cash on hand for Amazon.

Amazon’s leverage power in the book, ebook and audiobook space is, to put it lightly, significant. And that’s no coincidence.

Amazon was born into the book world, building the roots of its empire on a groundwork of books. Amazon has unrivaled negotiating power and gravitational pull with both existing and first-time authors, with the pockets to bankroll any opportunity at a moment’s notice.

Beyond that, the ecosystem they now control today was precisely crafted to offer a self-sustaining process of solidifying their leverage. Amazon dominates the online book market, the ebook market, and audiobook market, proportionally unrivaled. The ability to bundle contract offers to publishers across physical, digital and audio releases of a single piece of content drives down their incremental costs, and for just a little less retained commission, secures them exclusive license rights to almost any and all new book releases in the United States initially, and increasingly further afield.

It’s these slightly pricier exclusive rights (Amazon retains 60% of revenue on exclusives, compared to 75% on non-exclusives) that set the barrier to entry extremely high for any determined new entrant into the audiobook market — and not just new entrants:

For Audible listeners, the yellow band on a book cover reading “only from Audible” facilitates a feeling of access to premium content, but for the rest of the book world, it’s an access barrier. 

It means that the audiobook in question can only be sold through Amazon’s Audible. No other retailers or providers can sell or distribute the digital audiobook, including bookstores and libraries. 

I’m not here to port judgment on the ethics of exclusive distribution rights, rather to show that for the majority of authors lacking an existing large reader audience, capturing that extra 15% on audiobook sales seems like a no-brainer. For most authors, namely the increasing number of self-published writers, where else are you realistically looking at distributing your book/audiobook at any significant volume. Amazon has the audience, Amazon has the infrastructure in place, might as well go full-Amazon — most everyone would have bought from Amazon anyway!

This outsized leverage is the major hurdle to overcome for audiobook entrants, Spotify very much included. Growing a library is hard when your lead competition outlaws the distribution of, well, almost all books. When faced with barriers to entry so high, though, one has to begin to wonder if there’s not another way of doing things?

The Podcast Back Door

While Amazon dominates most markets they enter with their outsized leverage across various verticals, Spotify further dominates in their one specific space: music. It’s this leverage that set the groundwork for their podcast expansion. In essence, attracting users with their more costly music offering all these years, and now attempting to shift that acquired audience towards less costly, owned media verticals, in the form of podcasts. This goes back to the bold list of acquisitions and exclusivity deals of the past couple years, from production studios, to Joe Rogan, to the DC superhero universe, to Kim Kardashian West, to Michelle Obama.

Similarly, this groundwork in the form of podcasts can serve Spotify as their point of most leverage in developing their audiobook offering.

It’s easier than ever before to create books and ebooks at costs lower than ever before. Self-publishing has been on the rise for years.

As such, the majority of ebook and audiobook authors turn to Amazon as the only reasonable destination to sell. While Amazon has long adopted a focus on attracting book-led authors, Spotify is in a position to disrupt the equation by, instead, adopting a focus on attracting passion economy-led creators. In lockstep with the growth of the podcast format on the platform, audiobooks are poised to benefit from the rising tide to float all boats.

The market, today, is undeniably smaller. For authors, adding an audiobook format is a relatively simple process within the entire publishing process. For podcasters, audiobooks represent an entirely new format, but one they’re familiar with from another angle. Where authors look at audiobooks as an extension of their writing format, podcasters look at audiobooks as an extension of the range of products they offer to build a personal (or corporate) brand.

Spotify is already well underway in a mission to attract new podcasters and exclusivize their distribution, in return for more direct monetization opportunities on-platform than they would receive elsewhere. Spotify is in a position to offer a 1-2 combo of affiliate revenue for attracting new paid subscribers to Spotify Premium in order to access audiobooks of creators they already listen to, and the advertising/play revenue already in place for artists on the platform. For podcasters, these audiobooks would less resemble an actual book-style story, but a higher-quality, higher value, story-driven extension of their tried and true podcast format.

Imagine, for example, that the first chapter of a given creator’s ebook was available for listening under the free Spotify plan, just as their podcast already is. For a creator you already listen to and are actively engaged with, you’re rarely not going to at least try that first free chapter. Building off an already warm prospect, the allure of the rest of the audiobook behind only a $10/mo paywall, also granting access to all Premium features already established on the platform, is a strong one. Moreover, it sounds a much more affordable option relative to an Audible subscription, at a 50% higher price point, with extra costs behind that.

For traditional authors, the gravitational pull of the Amazon ecosystem does undeniably remain strong. The revenue gleaned from Spotify on actual plays would be marginal relative to Amazon/Audible — rather, here, using Premium affiliate revenue as a proxy for incremental audiobook releases. As such, an audiobook strategy for Spotify has lower barriers to entry by targeting podcasters and digital creators, compared to those possible in building a fully-fledged Audible competitor, targeting the author and publisher market more broadly. This, while further simplifying the audiobook creation process relative to Amazon, making audiobook publishing more accessible to creators.

Spotify Kids

I mentioned higher up that this recent job posting isn’t the first mention of audiobooks by Spotify. One of the earliest mentions I could find of the format with regards to the streaming company is in the context of Spotify Kids.

In a similar fashion to the popular YouTube Kids app, Spotify Kids is a protected, standalone platform with restricted access and child-oriented content. In the announcement post for Spotify Kids late 2019, they made an initial indication of exploration of the audiobook format in the context of this Kids offering:

As we evolve the Spotify Kids experience over time, we plan to enhance parental control features to allow for even more customization. We’ll also bring our audio expertise to the table with listening experiences that go beyond music—like more stories and audiobooks and eventually podcasts.

The Spotify Kids offering looks to develop their content offering in the opposite way to the standard platform, focusing efforts on story-driven content before moving towards podcasts, but the exploration of the format remains just as interesting.

In 2017, audiobooks for children represented 10% of audiobooks sold in the US, 25% in France, and more than 40% in China. The market opportunity for kid-focused audiobooks is significant. It’s worth noting, in the US, the seemingly low penetration of youth content in the market is likely less an indication of low interest by children, but rather an outsized interest in audiobooks by adults, relative to other markets. In France and China, audiobooks are a much less ubiquitous type of content for adults, largely due to Audible’s aggressive advertising efforts heavily concentrated in the US these last years.

Spotify dipping their toes in the water of audiobook content in the kids space is a strong indication of the ambitions the company has in the audiobook space as a whole. On the kids-end, the opportunity to develop a holistic educational and story-driven content offering is massive, and the existing omnipresence of Spotify in American households would empower its growth in millennial families with young children significantly.

The Ambient Battle

Moreover, the progressive move towards long-form content like podcasting and audiobooks reflects an ongoing shift in the overall Spotify strategy. The production of high-margin original content is a means to an end. Rather than trying to be the lions’ share of audio time, they want to lower the distinction between audio time and time itself — representing a shift towards an ambient media company, filling the silence in the day with something entertaining or informative.

Brett Bivens wrote a great piece specifically about this shift over at Venture Desktop, stating the situation succinctly: 

The real winner in audio over the next 10 years will also need to own an outsize share of something much larger — the consumer’s ambient hours.

To democratize ambient media content, beyond just offering audiobooks, building them into an integral part of your day, a critical factor remains the physical device via which the ambient content is consumed. Spotify’s ambient future wouldn’t have been possible without the rise of the smart speaker and voice assistant services in the last years.

Today, a whopping 25% of households in the US have at least one smart speaker or voice assistant physical device. This is perfect groundwork upon which Spotify can build their ambient media empire. The outsized success of AirPods, also, has heavily contributed to this groundwork also, pushing the “eyes-up” ambient media opportunity years ahead, with over 70% of worldwide wireless headphone unit sales.

If indeed, the real winner in audio will be the one to own the consumer’s ambient hours, Spotify is setting itself up masterfully for victory. Making use of the groundwork laid by audio hardware companies, and developing their offer to expand to long-form, owned media content, Spotify is already underway in expanding their audio empire.

Music was the launching pad for their dominance, podcasts are shaping up to be the second. To take over the fierce battleground of audio streaming services, though, audiobooks will be the next frontier, and Spotify is leading the charge.

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