Unlocking The Investment Opportunity In Podcast Advertising

Unlocking The Investment Opportunity In Podcast Advertising
Image source: YouTube Video Screenshot

JDP Capital Management’s interview with with Matthew Drengler of Podsights Inc., disucssing the opportunities in podcast advertising.

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Dear Partner,

The Hedge Fund Manager Who Broke Even When Most Other Funds Got Killed

Moez Kassam of Anson FundsWhen investors are looking for a hedge fund to invest their money with, they usually look at returns. Of course, the larger the positive return, the better, but what about during major market selloffs? It may be easy to discount a hedge fund's negative return when everyone else lost a lot of money. However, hedge Read More

JDP's strategy is to make investments in a handful of businesses that we believe have years of runway to compound earning power faster than the S&P. Much of our time is spent researching and thinking about where our investments are on their lifetime value-creation journey versus the price we paid.

An important part of our research process is talking to entrepreneurs within the ecosystem of our portfolio companies; Podsights Inc. is one such example company.

Before taking questions for the 1Q Q&A video, we decided to first set the tone by featuring an interview that Seth and I did recently with Matthew Drengler of Podsights Inc, which is related to our investment in Spotify.

Podsights is a small, privately-owned data science company that provides third-party attribution analysis on podcast advertising results for companies like Spotify.

Q&A With JDP

Please respond to this email with questions about whatever is on your mind by Friday April 23rd and we will respond in a written interview format. Our hope is that the featured Podsights interview will trigger questions about our excitement for Spotify or how our thesis has evolved over the last two years.

Unlocking The Opportunity In Podcast Advertising

Historically, one of the biggest challenges in scaling podcast advertising has been technological limitations around attribution or identifying "who heard the ad" in a podcast. Podsights is an example of a company on the cutting edge of helping large podcast platforms like Spotify solve.

We discovered Podsights Inc. and Matt while watching a webinar hosted by the Internet Advertising Bureau earlier this year. Matt's unique perch from the attribution side of podcast advertising helped us gain insight into why podcast advertising spend has dramatically lagged podcast listening so far, and the resulting opportunity being unlocked for large-scale players like Spotify.

Spotify And The Creator Economy

In late 2018 we invested in Spotify based on a favorable probability of earning a 10X return from our $113 basis, driven by a series of business outcomes that we think are likely to happen in stages over 3, 5 and 10 years. Two years in, the stock is up ~150% based on the achievement of strategic milestones that are improving gross margin, strengthening Spotify's advantage over the Major Music Labels, and a re-birth of the audio "creator economy".

Spotify's future earning power is often mistaken as a derivative of the old-fashioned music industry, this is incorrect. Spotify is an enabler of the creator economy a critical tool used by artists to remove traditional barriers of music industry that previously limited discoverability of fans and valuable "super fans" globally. The enablement of a direct relationship with fans then opens new avenues for musicians and podcast creators to have more control over their work and monetize the lifetime value of fan relationships.

One of the legs to our broader Spotify thesis is the opportunity for podcast advertising growth to expand Spotify's gross margin profile. Spotify's acquisition of Megaphone enables the insertion and selling of ads across multiple platforms including Apple and Amazon.

For podcast creators, Spotify's Megaphone division is progressing towards listener attribution capabilities that will unlock programmatic ad spend based on listener profile, not just the popularity of the podcast. The ideal flywheel happens when podcasts of all sizes need to be on Megaphone to maximize ad revenue, which attracts more advertisers.

We think the market is underestimating the potential of podcast advertising as a category and the incremental impact of ad revenue growth to Spotify's gross margin profile.

0.3% Of Total US Ad Spend (Only?!)

Podcasts have evolved to a standard entertainment medium in many parts of the world, yet ad budgets have not caught up.

In 2020, the value of podcast advertising was worth only $1 billion or 0.3% of US ad spend while radio ad spend was almost $15 billion. As with all other new advertising mediums, spending ultimately follows the consumer:

Edison Research highlights on the podcast sector (2021):

  • 78% of US adults are familiar with podcasts
  • 68% of US adults or 193 million people listen to streaming audio, of which 86% are 12 to 34 years old
  • 1/3 of the US adult population listens to podcasts weekly for an average of 8 hours per week...
  • Podcast listening averaged 2.5 hours per day among frequent users
  • Spotify Technology SA (NYSE:SPOT) has become the largest single-source for audio streaming and is the most listened to brand, 2x more than Amazon or Youtube

Major Themes From The Interview

Podcasting ad market set to grow +10x as transient infrastructure roadblocks unlock...The conversion of linear advertising dollars is NOT "push button". There are two major bottlenecks that are holding back market share:

1) Attribution - how to track and give credit for consumer influences. Advertisers are reluctant to spend large chunks of their budgets on marketing activities that they can’t be measured precisely. New technologies such as pixel-based targeting from Podsights and strategies such as audience and contextual targeting are improving this.

2) Frictions of purchasing – podcasting ad inventory does not currently have a major exchange where buyers and sellers can digitally exchange inventory…yet. This infrastructure to purchase programmatically is still being built. Spotify’s purchase of Megaphone is a step in the right direction as it allows for the buying and selling of podcast inventory in a similar way to digital media ads. Programmatic exchanges now comprise nearly 90% of US digital ad spending.

Programmatic Exchanges are the Potential Tipping Point

Traditional advertising agencies are struggling to understand how to leverage programmatic podcasting. Programmatic marketplaces require ubiquitous participation from buyers (advertisers) and sellers (publishers). Podcasting exchanges, such as Spotify’s Megaphone Targeted Marketplace are still building out use cases that will bring in a critical mass of buyers and sellers. Unlocking programmatic exchanges will require an understanding of the right mix of ads between programmatic (higher volumes, lower priced, more disruptive to listener) and host read (low inventory, higher priced, less disruptive to listener). Programmatic only comprises 6% of the total podcast advertising market but is forecast to rapidly take market share.

How Will Privacy Laws Shift the Balance of Power in Podcasting?

Apple is removing its IDFA tags and Google is set to shut down cookies next year. This means that having a return on Ad Spend for ad platforms that rely on third parties is likely to decrease, while Walled Gardens with their own unique identifier, such as an email address, are likely to increase in importance.

Podcast Advertising Landscape Set for Consolidation

Innovation of the podcast format has created nearly 500 niche companies. However, as the podcasting matures, the largest players will likely consolidate the industry. Digital media advertising is now dominated by the largest players as the top eight companies control over 80% of the spending. Consolidation is likely to be more concentrated in podcasting given that the format fits better on an app network like SPOT and Apple than the open web.

Highlights by minute

0:00 – 6:00: Introduction to the Massive Podcast Opportunity – 78% of US adults are familiar with podcasts, while over 1/3 listen to podcasts weekly. Despite this level of engagement, podcast advertising comprises only $1bn or 0.3% of US advertising spending.

6:00 – 7:55: Money in Motion

Where is the podcast market today and why is the opportunity in podcasting so large?

7:55 – 10:30: Solving the Attribution Bottleneck

Attribution is complicated, but technologies such as pixel-based attribution are helping to decipher the podcast value chain.

10:30 – 12:55: Digitizing Frictions to Buy Will Accelerate Podcast Ads

Ad sales are currently executed by people with spreadsheets, but sales are converting to programmatic which should dramatically increase volume as it did in display/digital media advertising.

12:55 – 16:18: How Do Creators Utilize Platforms Such as Megaphone to Sell Ads?

Platforms such as Megaphone help digitize advertising inventory. Digitalization of inventory facilitates the automatic sale of large chunks of inventory that publishers cannot fill on their own. It also creates audience-based targeting that can be solid direct to marketers.

16:18 – 20:15: How Does Targeting Work in Podcasting?

Podcasting uses unique identifiers such as IP addresses to know general approximations such as household income and male/female. Companies that can aggregate, scale and sell large audiences have huge advantages.

20:15: – 25:17: How Fast Can Money Flow into Podcast Advertising and What is the Tipping Point?

The likely tipping point is building out programmatic advertising exchanges. Enabling a digital inventory exchange by a “click of a button” will accelerate conversion of dollars just as it did in display/digital media.

25:17: – 26:50: What Exactly is “Programmatic Exchange”

A real-time ad bidding platform that aggregates inventory from multiple publishers to meet the demand of ad buyers.

26:50: – 27:48: When Will the Podcast Programmatic Exchange Be Built?

Likely in three or fewer years. Publishers still have some diverging views on if their inventory is fit for programmatic, but this could change as programmatic exchanges are built out.

27:48: – 32:47: Who are the Biggest Podcast Players and What Advantages Do They Have in Programmatic?

Spotify, iHeartMedia, SiriusXM and NPR are the top current podcast platforms. The platforms that can acquire content and technology have large advantages in scale. In addition to scale, platforms that can manage around new privacy regimes will be critical. As large tech players such as Apple and Google re-draw how advertisers use their platforms, having a direct customer relationship becomes key. The “Walled Gardens” win because their unique audience identifiers increase in relative value to those platforms that must rely on Google or Apple to identify audiences.

32:47: – 39:07: What Happens After the Programmatic Infrastructure is Built?

Many of the same targeting methods that are well established for digital media will work in podcasting. Some new forms of targeting may also emerge such as “contextual-based” targeting. The net effect of these changes will bring down pricing of podcast ads, however, volumes will increase by orders of magnitude. Podcasting will differ slightly from digital media in that “embedded ads” or “host read” ads will also likely scale. The overall mix of programmatic and these embedded ads is still in flux.

39:07: – 43:54: How Big Can Podcasting Advertising Market Get?

Podcast media will likely win market share from linear radio, but also other media channels as measurability improves. Long-term, the industry can potentially grow to 10x its current size over the next 5-10 years.


Jeremy Deal

Managing Partner


Updated on

Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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