Spotify Finds A Way into Audiobooks
Making sense of Spotify’s acquisition & entrance to the Audiobook Market
In 2019, Spotify announced it was changing its strategy from being a music streaming company to an audio platform. In a letter, CEO and Founder Daniel Ek said:
“What I didn’t know when we launched to consumers in 2008 was that audio — not just music — would be the future of Spotify. This opportunity starts with the next phase of growth in audio — podcasting… all with the goal of becoming the world’s number one audio platform.”
That same announcement included the acquisition of Gimlet and Anchor. Since then, Spotify has acquired multiple studios (The Ringer, Parcast), signed big names to exclusive licensing deals (Joe Rogan, Dax Shepard), acquired a podcast ad-tech and Machine Learning recommendation startup (Megaphone, Podz), and made an entry into Live Audio (Locker Room, now Greenroom1). During that time, Spotify became the #1 Podcast Player in the US and 61 other countries.
Last week, Spotify announced the acquisition of Findaway, an audiobook distributor. This is notable because it gives Spotify an entry into the fast growing audiobook industry, and is a natural next step after podcasts. It’s become clear that the company is taking seriously their mission of going after all the major audio verticals to capture the most ear-share and becoming the audio browser of the world.
To understand the acquisition and strategy, we need to look into the Audiobook ecosystem. Audiobooks share some similarities with podcasts and surprisingly some with music too. They also have unique characteristics which may give the company a bigger toolkit and framework of how to push forward with their Audio First strategy and help creators grow and monetize their audiences.
Audiobooks – Part Podcast, Part Music?
500 million people listen to Audiobooks, a market that is expected to grow from $3.3 billion in 2020 to $15 billion in 2027 – a 24% CAGR2. Audiobooks make up ~10% of the total spoken-word audio share, with podcasts over twice that amount and radio still dominating at 50%, yet at a declining rate.
Aren’t Audiobooks Just a Type of Podcast?
An audiobook is simply a recording of the reading of a book. On the surface, it’s easy to assume that audiobooks are in a sense a long-form narrated story similar to storytelling podcasts, but the similarities basically end right there. Audiobooks are a derivative of a book, which was intended to be consumed in written form natively. This means that the author needs to find a way to make the finished product appropriate to be consumed in a different medium, which means finding the perfect voice and sound.
Importantly, an Audiobook typically takes years to make, and logically longer than just a book. This is very different than a podcast which has a pre-set consistent release schedule, for example on a weekly basis. Many authors spend years working on one book and that’s the only one they’ll ever write. It is indeed a very high production product, and the best books can carry a lot of value in them (educational or entertainment) which can be digested in a handful of hours, not to mention extremely long shelf-life. This is an important distinction when it comes to monetization (more on this later).
Creating an audiobook is not an easy task. Rarely does the author become the narrator of their own book, the voice and storytelling aspect is hugely important, so typically the author will hire a narrator that fits the style of the book. This person is a professional – reading something for seven hours straight with a consistent rhythm, energy and tone is hard! – and for that they typically charge a couple thousand dollars. After various recording takes, the audio needs to be edited and mastered for optimal sound to finally get distributed to all the retail platforms monetize. The finished product has to be perfect, because once it’s published it’s inherently difficult to make any changes (a lot of people download audiobooks instead of streaming them). And on top of that think of the process of translating them to other languages.
The Audiobook Industry – We’ve Seen This Elsewhere
The book and consequently the audiobook industry, also share some similarities with the music industry: The author (artist) needs a publisher (label) to help with editing (recording), marketing, manufacturing, distribution etc. which then gets released as physical books (CDs, vinyls) and eBook platforms like Kindle or Apple Books (Spotify, Apple Music).
The similarities don’t end there.
Just like in music, a handful of gate-keepers (publishers and labels) dominate the industry, especially for the big titles (think NYT Best Sellers). This is very different to podcasting, where no single creator or publisher controls a large enough part of the market to have outsized power and demand their own terms.
Like music, the legacy book industry business model suffered greatly from the mass adoption of the internet in the late 90’s and early 2000’s. Piracy wasn’t as common as it was in music, but new ways of distributing (Amazon and eBooks) forced publishers to shift their business models.
Given how fast and aggressively Amazon moved into the space (and the decline of the physical book store), the eCommerce retailer was able to capture a very large part of the entire market, first in physical and later in eBooks. This left publishers in a difficult spot dealing with Amazon, which basically had most of the leverage and called the terms. For authors, it was an even worse situation because they faced an industry dynamic where the middle-man was powerful and the retailer even more, controlling the majority of the market. As a result authors had to stick to whatever terms were set for them, and this meant watching each intermediary take an outsized bite before they got any little money that was left. Self-publishing was the only alternative option, either by going directly to the retailers or hiring an aggregator that would distribute books on your behalf, but this also meant a lower chance of success.
Another problem was that there wasn’t an option to self-publish an Audiobook, unless you went straight to Amazon which owns Audible. That was until Findaway came along.
Enter Findaway
Findaway was founded in 2004 originally as a developer of audiobook hardware (competing with CDs) and later on offering an alternative to Audible for audiobook distribution (which is exclusive to Amazon). Today it is the largest audiobook distributor in the world. As an audiobook distribution platform, it works with publishers, authors, and retailers, helping them through the entire process from audiobook creation to distributing and monetizing. Its catalog spans 325,000 titles from large publishers to self-published authors. It also offers creator tools, such as a marketplace to find narrators.
Its role is similar to a distributor in music (CDBaby, Believe) and a hosting platform in podcasts (Anchor, Megaphone, Podbean). Because there are so many platforms for consuming content, it doesn’t make sense for creators to upload their content individually to each one and then manage them separately, so distributors help fill this administrative gap. Generally speaking, creators (musicians, podcasters, authors) want maximum exposure to capture as much audience as possible.
Findaway makes money by taking a 20% share of all the royalties they collect from the retail platforms on behalf of customers. So for example, if Audible pays out a 25% royalty to authors for every sale of an audiobook, Findaway keeps 5% and pays the remaining 20% to authors and/or publishers. Because of their size, they are also able to negotiate higher rates than independent authors would otherwise get on their own if they were to negotiate directly.
The Elephan-zon in the Room
It will come as no surprise that Amazon is the largest bookseller in the world by an order of magnitude. This includes physical books through Amazon.com, eBooks in Kindle and audiobooks with Audible. Some reports suggest Audible has a 90% market share in some verticals3 and more than ⅔ in the eBook and online physical books market.
What’s different between the Amazon strategy and Findaway, is that Amazon is a closed-end platform while Findaway is open-ended and platform neutral. If you publish your audiobook using Amazon’s tools (known as ACX) you’ll get distributed to Amazon and Apple and then need to find another distributor for other platforms. Authors can also opt for ‘exclusive distribution rights’ where they will only be available in Amazon but get a higher royalty in return. They are also only available in four countries, which limit the potential number of authors that can distribute with them.
Findaway offers a more creator friendly alternative, essentially competing with Amazon ACX (although they distribute to Amazon platforms), sitting between the authors/publishers and the retailer platforms who they partner with and giving authors the tools to create and distribute their audiobooks.
Findaway’s offerings are differentiated, but even now under the Spotify umbrella, it will have a steep hill to climb given the industry dynamics. They will have a few advantages now being a part of Spotify though.
Spotify’s Angle
It’s no coincidence that Spotify entered the audiobook market by buying a distributor instead of buying content, as opposed to podcasting which included both. Given the market dynamics just discussed, it would have been almost impossible to compete head-to-head with Amazon4 or trying to bring in exclusives. Instead, Findaway will give Spotify a very large funnel to fill their audiobook content, while still distributing them to all other platforms, just like Anchor did with podcasts.
From a consumer standpoint, it will give users the convenience of having all of their audio needs in one place, making it easy to search for content and get personalized recommendations. Now that listeners are consuming podcasts on Spotify (and understand it’s an audio-first platform), it will be easy to lead them into audiobooks.
Spotify will offer authors and publishers a more creator-friendly alternative versus the closed Amazon model, while providing the benefit of its massive reach and scale, now approaching 400mm MAUs. This is a big deal, because no company of Spotify’s size has tried to go after the Audiobook market that’s been dominated by Amazon for so long5. My guess is terms with Spotify will also be superior to other platforms (e.g. higher author royalties vs. Audible), which will make authors and publishers more likely to work with Spotify and drive more listeners to the platform.
This more creator friendly approach, from a company with large enough scale, will be a major advantage. We’ve seen some hints of this in the way they’ve approached podcasts such as the Open Access Platform which offers podcasters ways to monetize both on Spotify as well as other platforms, and in their push into advertising which monetizes at a higher rate and is shared with creators. This will mean giving authors the flexibility to monetize in different places, not have them locked into an ecosystem, pay them more and offer free tools .
To be clear, I’m not suggesting Spotify will necessarily directly steal a lot of market share (i.e. listeners) from Amazon. It’s possible, but I think the more likely scenario is that they grow the Audiobook pie all together by introducing millions of people to the concept of audiobooks, much like they have done in podcasting.
Buy My Book or Subscribe to My Book?
Audiobook monetization is unique compared to music and podcasts, which are monetized primarily through subscriptions and advertising (the access model). Consumers demand to have all of the content in the same place and pay for the right to consume it on a recurring basis.
Audiobooks (just like books) are usually a one-time purchase. This makes sense because listeners only listen to a book once and readers recognize the amount of work that goes behind writing and publishing a book, the shelf-life, as well as the value it provides6. This makes people more willing to pay for it on a per unit basis.
Similar to podcasts, it’s likely that we’ll see different monetization models being tested out in audiobooks, but I would expect the traditional one-time purchase/rent to remain the most common. Audible offers a subscription offering based off credits, where the listener gets a certain amount per month that can be used to purchase audiobooks on its catalog, it’s possible Spotify tries a similar model. Offering an unlimited subscription would be somewhat complicated and would have to be priced accordingly7, and most people don’t listen to that many audiobooks per month as opposed to music and podcasts. I would also bet Spotify tries to work with authors to develop podcasts and Live Audio content (such as Q&A) to help them connect more with their audience.
What’s interesting is that this will be the first time we’ll see one-time purchases on Spotify, up until now revenues have only been through subscription and advertising. In the future, this may be something that starts to get tested for music and podcasts, creating new revenue streams. Imagine for example a one time payment to listen to Taylor Swift’s new album one week before its release, or being able to pay your favorite artist directly to support them8.
Lessons for The Music Playbook
I’ve long argued that Spotify’s strategy in music should be focused mainly around the independent market (which makes up ~30%) and working together with the labels to grow the total pie. Just like they’ve done in podcasting and now in audiobooks, acquiring an independent music distributor would make sense for Spotify. This would be a smart way to go after the independent market without stepping directly into the labels toes9, while helping independent artists get discovered and giving them the tools to grow and monetize their fan base. Maybe these acquisitions in the podcasting and audiobook space give us a hint of how they are thinking about music in the future.
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According to Deloitte and Grand View Research
That is offering a similar close-ended platform like Audible, which would be foolish
There’s actually some precedent here: back in the days before music streaming, the labels had to deal solely with Apple for iTunes (and hated it). Spotify helped them diversify away and provide a better business model.
Some will argue the same can be said for music, as certain records take years to make. I don’t disagree, but this is a topic for another time.
To my knowledge Audible offers something like this but the catalog is quite limited. Getting publishers on board for this would be hard, and it could also result in lower royalty payments for authors.
There are some iOS App Store Guideline obstacles to be dealt with here; interestingly Tidal is trying something similar with new plans