The business rationale that led to Spotify’s moderation scandal

Differentiating beyond music will boost the streaming giant’s margins, but brings its own problems.

You’ve probably heard the news.

Last week, rock legend Neil Young gave Spotify an ultimatum: He would take his music off the platform if it continued to host the Joe Rogan podcast.

Ultimately, Young and other notable artists — Joni Mitchel and Nils Lofgren (Bruce Springsteen’s guitarist) — pulled their catalogs from Spotify and its 380m+ users.

Why?

Rogan’s long-form podcast — which Spotify acquired for $100m — has been accused of spreading covid misinformation.

This isn’t the first Rogan x Spotify controversy: Company employees previously tried to have the comedian removed from the platform over comments about transgender people.

So far, the streaming service has backed its big-dollar talent and — in light of the latest scandal — will now add “content advisories” to podcasts that potentially have covid misinformation.

Spotify has spent huge on podcasts

In addition to Rogan, the company is buying up the entire industry:

  • Tools like podcast publisher Anchor ($150m) and ad platform Megaphone ($235m)
  • Content like Gimlet Media ($230m), The Ringer (~$200m), Call Her Daddy ($60m), Prince Harry and Meghan Markle ($25m)

Spotify is going all in on podcasts because it’s a different business model than its music offering, which pays out huge sums to artists and record labels.

Per Motley Fool, Spotify’s gross margin has plateaued at ~25% because artist royalties are “variable costs [that] scale every time” more people use the product (AKA listen to music).

By creating a podcast platform…

… and building a dynamic audio ad marketplace, Spotify’s gross margins can get up 40%. Netflix famously executed a similar strategy by making its own content instead of licensing from studios.

But — as we’ve seen over the past week — owning content can create a moderation headache.

In response, Rogan apologized to Spotify for the fiasco and said he’s a fan of Young and Mitchell. He also offered a potential change: “If there’s anything that I’ve done that I could do better, it’s having more experts with differing opinions right after I have the controversial ones.”

We have a feeling this story isn’t over just yet.

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