The Commercial Experience 21.02: Spotify grows ads; Klarna, Afterpay, Square and new advertising platforms; & the challenges vaccine passports bring to the private sector.
Journeys into the intersection of media, technology and commerce.
Hi everyone, can I just say a big thanks to every reader of the first TCE that went out last week. The response was great and I appreciate everyone’s feedback. If you’re back this week for a second read - then I hope it’s an interesting few minutes of your day.
This week - Spotify and advertising sales; Afterpay + Square, Klarna and building a new data led retail marketing offering; and vaccine passports and how the private sector communicate and manage these.
Intersection 1: Spotify results demonstrate big revenue potential in ramping up ad sales
Spotify’s Q2 results came out a few weeks back, and the big surprise was the year on year improvement of its advertising business. Q2 advertising revenue was up 110% year on year, dwarfing the growth of premium subscriptions, which was up 20%.
The devil is in the detail, and a big part of why advertising revenue increased so significantly was that it was coming from a relatively low base. In Q2 of 2020, advertising revenue only accounted for 6.9% of Spotify’s revenue. In the same period of 2021, it had grown to account for 11.7%.
The challenge and opportunity from Spotify is in the quantum between the revenue it makes from its premium subscribers, and the revenue it makes from its ad supported ones. For each of its 165 million premium subscribers, Spotify makes $12.46 USD per quarter. For its ad supported ones, all 210 million, it makes $1.30 a quarter.
This average revenue per user for the ad supported business is incredibly low when compared with the average ad supported digital media business.
Spotify has focused heavily on premium subscriber acquisition over the past few years, but as this growth begins to slow it’s going to need to focus more on monetising the majority of users who do not pay.
One way of doing this is via improved advertising products - better targeting, better segments, more programmatic supply, and more custom integration and content creation. The ARPU at present would suggest Spotify has plenty of supply going unsold. This would also suggest marketers and advertisers are probably underestimating the audience Spotify can provide.
The second way is via podcasts and not just distributing them, but owning them. Podcasts provide even more advertising inventory, and ways to monetise this not just on Spotify … but across all podcasts platforms. Think about Spotify buying The Ringer, Call Her Daddy, Gimlet Media, Joe Rogan. Spotify Q2 financials outlined that podcast revenue was up 627% year on year. And revenue is, according to CEO Daniel Ek, “currently limited only by the availability of our inventory, which is something we are actively solving for.”
Solving for likely means snapping up more podcasts and commissioning more in key markets. Spotify released 100 new podcasts across Q2 alone.
To put the advertising opportunity in perspective, if Spotify could move quarterly ARPU on ad supported from 76 cents a quarter, to close to $3 … it would bring in an additional annualised $1.4 billion dollars. Not bad. And very achievable.
Intersection 2: Afterpay + Square - What Next?
Square buying Afterpay has gotten a load of attention for good reason - it’s a wonderful outcome for a business that captured the hearts and minds of its customers and investors in a way not many businesses ever have.
Klarna and Afterpay are the two BNPL providers that are leading the pack. Afterpay was inspired by Klarna, which launched more than a decade beforehand in offering pay in 4 installments across Europe, and exploded the payment concept across Australia.
My view with Afterpay and Klarna is that they’re much more like Google and Facebook than they are like the banks they’re disrupting. Their major role is linking merchants and customers, and they also play a discrete role for both.
For customers they provide a payment mechanism sure, but they also provide discovery and access to new styles and drops. For merchants they are a customer acquisition mechanism, with the ability to bring new qualified customers to a merchant through data, insight and intelligence.
Co-founded Anthony Eisen has described Afterpay as more of a customer marketing acquisition channel than anything else. And he’s right. And for Afterpay and Klarna it opens up the potential of what the business could look like going forward.
Afterpay and Klarna globally have huge insight and data on where their customers shop, when they spend, where, how, how responsive they are to price, categories, freshness, imagery, advertising, weather, cultural events, pop culture. It’s an incredibly rich tapestry of data that is valuable to their merchant partners.
And these merchant partners are responsible for hundreds of billions of dollars in ad spend globally. What if Afterpay, and Klarna, decided to get in on this market?
It’s not really a question of if, but when. Especially as Afterpay is now partnered with another payment platform with a huge trove of insight into merchants and customers in Square.
An Afterpay/Square media newco - I’d bet on it.
Intersection 3: A prickly comms challenge - what happens when/if private businesses have to enforce vaccine passports?
I was talking to a friend about the concept of vaccine passports and the categories where being vaccinated could become mandatory for being able to enter. Think of areas such as live sports, restaurants, bars, cinemas, theatre, pubs, bars and casinos.
He raised a good point around the responsibility for enforcement, and the likely pressure this will place on the operators of these businesses to be checking vaccination status. His concern was for many, this is a sensitive topic and one that could result in an inflamed situation on behalf of the customer. And that this could put frontline staff in a vulnerable situation.
It got me thinking about the communications challenge for a business who wants to communicate to their customers that frequenting their venue/establishment will be vaccine dependent. And once this is communicated, how practical it is to expect these private businesses to shoulder the load on checking compliance.
It’s a complex area with many elements to consider, and one that is fast approaching. As vaccination rates move forward at pace (check my analysis here - Post | Feed | LinkedIn), it’s possible that in two months this issue of communication and compliance will be front and centre for many Australian businesses. And it’s an area with no local precedent to refer back to.
To finish ...
Watch - Watch The Sound with Mark Ronson, episode 2 Sampling - Link here - worth it to see DJ Premier demonstrating in the studio how he makes beats, how he discovers samples (slowly and methodically) and seeing Ronson giddy with enthusiasm. I was lucky enough to meet with Ronson through some friends who played on the same bill as him back on his first Australian visit (17 years ago!) and he is just as I remember.
Listen to 30 for 30: The King of Crenshaw. ESPN and 30 for 30 take a 4 part look into the life and untimely death of Nipsey Hussle, and how his endeavours and art influenced both the sports and cultural worlds.
Read this series of Tweets from Grattan Institute CEO Danielle Wood on the economic impacts of closing child care access to single parent families. An issue where the already vulnerable are placed in a further situation of vulnerability. Danielle Wood - Twitter
Donate to The Asylum Seeker Resource Centre. They have a lot of people they’re trying to help right now. They need assistance. Donate here