Key Takeaways:

● Podcast advertising is growing. Revenues are projected to reach $659 million by 2020, compared with $169 million in 2016.
● Measurement difficulties have slowed industry growth — but analytics are improving.
● The audio advertising market will transform from a startup-friendly market to one characterized by high barriers to entry and fewer — but larger — funding rounds.
● The utility of data for advertising has prompted consolidation across content creation, production, and distribution.
● Larger companies, including Apple and Spotify, are poised to make a serious entrance into podcasting and audio advertising.
● Listener engagement may be diluted as advertising increases.


The Big Picture

After almost two decades of dismissing podcasts as a fad, advertisers are finally catching on. Podcast advertising is surging, with revenue in the United States projected to reach $659 million in 2020, almost four times what it was in 2016, PricewaterhouseCoopers estimates. [readmore]

That prediction may underestimate the market’s potential. After all, television advertising hit $70 billion in 2017, while radio ad spending was $16.4 billion.

The podcast marketplace is evolving rapidly.

New podcasts are launched daily by corporate brands, investment firms, media companies, and individuals. Existing platforms, including Spotify, and Apple Podcasts; producers such as National Public Radio and the New York Times; and podcast networks and advertising agencies are competing to define what roles they will play.

As new ways to track listeners are being developed and venture capital investment is increasing, all these players are in fierce competition for advertising dollars.

The Competitive Landscape

There is good reason to believe that the market will continue on its path of evolution and growth.

Some businesses have launched their own podcast series, most recently LinkedIn unveiled its own podcast series. Marriott as well produces a travel podcast and Bank of America has a personal finance one. Talent agencies are monitoringpodcasts to discover new stars and find opportunities for existing talent. William Morris Endeavor even started an audio-focused branch in September 2018.

Big technology platforms are getting involved as well. Spotify, which traditionally focused on music, is emphasizing its role as a podcast provider. It’s putting serious money behind efforts to produce and exclusively own podcasts. In May 2018, Spotify signed comedian Amy Schumer to a $1 million deal to host a podcast exclusively through Spotify. Spotify also has exclusive distribution deals with Vice News and rapper Joe Budden.

Apple began providing expanded analytics in December 2017 that enable publishers to better understand listener activity. This data gives advertisers an increased degree of certainty regarding impression delivery, but it’s only a small amount of the information that Apple owns. The company has controlled the majority of podcast listens for over a decade, which puts it in an enviable position should it enter the audio advertising market.

Google also has set the stage for a potential entry into audio advertising. The tech giant’s DoubleClick platform allows marketers to access audio inventories through its platform.

As the podcast advertising industry is becoming more organized and streamlined, it lays the groundwork for a substantial growth in advertising revenues.

Podcast Listeners: Young, Tech-Savvy Spenders

Podcast consumers are attractive to advertisers because they are young, tech savvy and high spending. And there are more of them each year. Regular consumption of podcasts is growing, as is consumer awareness of podcasts. Moreover, neither looks likely to peak anytime soon.

Podcast listeners also are an engaged demographic, because they opt in to specific podcasts. That’s a stark contrast to consumers of broadcast television and radio, who often happen upon content and frequently switch to other options Typical podcast listeners consume 80-90% of each podcast they start and consume an average of six hours of content per week.

Because they are an engaged audience, listeners find podcast advertising considerably less intrusive than television or digital advertising, according to a comScore study commissioned by Wondery. Host-read advertisements function as endorsements and fit naturally within a recorded show, unlike a pop-up digital ad or a video ad.

Also, podcast advertising provides an entry point into the $70 billion mobile advertising market. As of 2018, 76% of monthly listeners most often consumed podcasts through a smartphone or another portable device, per Edison Research and Triton Digital’s report “The Podcast Consumer 2018.”

Measuring Success

Compared to internet or television advertising, podcast advertising is a relatively unsophisticated market.

Marketers have difficulty demonstrating the efficacy of podcast advertising to skeptical businesses because of a lack of engagement data. Podcast advertising agencies and networks have been forced to cite anecdotally high engagement rates and past examples of successful direct-to-consumer podcast ad campaigns.

Also, buying advertising can be difficult. Some podcasts operate independently and others route their advertising operations through a network. Advertising opportunities are not standard across networks or even across major audio delivery platforms.

Even podcast networks, which represent groups of podcasts, rarely control sufficient reach to allow large advertisers to efficiently buy in the same way that is possible in television or internet advertising.

The advertisements themselves are fairly basic, too. While host-read scripts are appealing to some advertisers, large companies worried about protecting their brand image shy away from them because they don’t have time to vet individual scripts.

Most importantly, though, measurement analytics are lacking. Podcasts are downloaded through RSS feeds that limit the amount of data that advertisers can access. Advertisers cannot know if a listener fast-forwarded through their ad or whether a podcast file including their advertisement was listened to or merely downloaded.

Moreover, even simple download counts are unreliable. For instance, Apple relays podcasts in short segments, which increases the download count. Spotify, on the other hand, caches podcasts, sometimes serving a single download to several listeners.

Also, some podcast publishers report a new request after a five-minute delay as an independent download, while others count only requests as new after two hours or an entire day.

Until podcast analytics and advertising becomes standardized enough that they can function as a line item in a general media plan, large brands’ advertising dollars will not enter the industry.

Recent innovations have led to some progress. In December 2017, the New York-based Interactive Advertising Bureau created industry measurement guidelines that the industry slowly has since adopted. And in December 2018, NPR launched Remote Audio Data protocols intended to standardize analytics across listening applications.

The general movement toward standardization is clear.

The Financial Landscape

We can expect two key financial trends to deepen.

1. Small startup opportunities will grow more limited.

The increase in exclusively-distributed content will restrict opportunities for smaller startups to test new technologies, analytics, and advertising systems. A new podcast delivery platform, for example, may have much more difficulty acquiring popular content to distribute in 2019 than it would have had in 2016.

Restrictions on publicly available content are not the only thing that will limit startup opportunities.

Until now it has been possible to create, in isolation, a better podcast network, a better targeting system for audio advertising, or a better advertising marketplace for podcasts.

New networks and delivery systems have cropped up since the mid-2000s. These relatively small and independent podcast producers and networks were in the market for new monetization and representation opportunities.

As the industry consolidates, new business opportunities will shift away from the creation of new platforms and toward platform improvement and service provision. In that way, the financial landscape for audio content and advertising will become similar to that for video content and advertising.

New entrants will need to be well-capitalized and extensively experienced to succeed, making it hard for a small startup to survive.

2. Industry consolidation will continue and will be characterized by larger deal sizes.

Now that large platforms such as Spotify are producing exclusive content and offering a full range of podcasting services, smaller firms will find it more difficult to gain traction.

Industry players acting solely as hosting networks or solely as monetization platforms risk being caught flat-footed.

In an effort to become a dominant player in a growing industry, more audio businesses may choose to spend large amounts to acquire exclusive content or related podcasting companies to expand their service offerings. Audio advertising technology providers and audio content creation platforms may prove to be attractive acquisition targets for listening platforms, or vice-versa.

This dynamic will push the podcast advertising industry toward larger deals and more private equity involvement.

Risks

Claims by some industry analysts that now is “the optimal time to invest in podcast advertising” should be viewed with caution.

A maturing market such as podcast advertising is subject to more disruption, coordination problems, and high barriers to entry.

Interested entrepreneurs and investors must be aware of three risks:

1. High Barriers to Entry

In order to create a compelling podcast advertising product, entrepreneurs must work within and between creative agencies, brand representatives, podcast producers, and hosting networks. That balancing act is difficult.

To match advertisers and podcasts, businesses need highly developed analytics. Those don’t come cheap. Large consumer data sets can be prohibitively expensive.

Another costly barrier is scale. A hosting network, advertising marketplace, or advertising technology firm needs a strong number of participating podcasts in order to appeal to advertisers, develop accurate analytics, and grow a reputation in the industry. Acquiring content, though, is expensive and difficult.

Accordingly, the era of small-scale venture-funded audio advertising startups may be closing, opening a new era of corporate and private-equity sponsored consolidation.

Larger advertising networks can better cater to large brand needs. While Casper, SquareSpace, and other early entrants to podcast advertising were content to advertise to an imprecisely defined demographic through an uncertain medium, the same cannot be said for larger brands such as Ford, IBM, and McDonalds.

Smaller podcasts simply don’t have the reach to attract large brands and new networks are unlikely to have sufficient offerings to allow high-quality demographic targeting.

Also, some podcast hosts, concerned about protecting their own images, don’t want to accept certain advertisements; agencies have had trouble placing tobacco advertisements, for example. This added layer of complexity puts the squeeze on small and medium podcast networks, where host reluctance can cut a network’s advertising reach.

Accordingly, new entrants to podcast advertisement may have serious difficulty establishing a minimum viable product.

This dynamic shouldn’t worry just potential new entrants; established audio advertising firms have reason to fret as well. Few industry firms have better distribution scale, better technical ability, or more capital than Apple or Spotify, two players that may soon establish themselves as full-service destinations for audio advertising.

If they enter the market, less-sophisticated actors will have great difficulty matching their data and analytics capabilities. Apple Podcasts, which commands over half of podcast listens, will be a perennial business threat. Spotify has already begun to sell ads on its new exclusive podcasts. With new data and experience, Spotify could construct analytics and audience targeting products that would transform the audio advertising marketplace.

2. A Coming CPM Crunch

Podcast advertising is characterized by high engagement and high CPMs. Though this may seem to create a perfect environment for investment, new businesses that rely on continued high CPMs for viability will be unpleasantly surprised.

The characteristics of podcast advertising that have kept CPMs high will evaporate as brand dollars enter the marketplace. Podcast advertising developed under a unique set of conditions.

Host-selected advertisements served as a built-in targeting mechanism and host-read ads functioned – for free – as effective endorsements. If corporate advertisers, motivated by brand image concerns, insist on avoiding risky host-read ads in favor of programmed ones, CPMs will drop as engagement sinks.

Likewise, more ads will cause podcast listeners to lose enthusiasm. Listeners may fast-forward through advertisements or install audio ad-blocking software. A premium advertisement-free audio content subscription service is possible as well.

Ad effectiveness dropping as podcasting matures as should come as no shock to advertising veterans. The click-through rate for the first digital ads was almost 40%, a rate that has plummeted by a factor of more than 100. Whether or not engagement rates of podcast advertising sink by 90% or by 99% may make all the difference.

3. Technological Risk

With the rise of 5G, mobile connectivity, and urban wi-fi availability, the technological infrastructure of podcast delivery may be reshaped in the medium to long term. This would profoundly reshape the market, closing many current opportunities and opening new ones.