By Vinay Naik (Warwick), Amarins Laanstra-Corn, Roshni Padhi, Winston Shum (Stanford)
Overview of the deal
Acquirer: Spotify
Target: Megaphone
Total Transaction Size: $235 million
Date Announced: Nov. 9th, 2020
Spotify’s acquisition of Megaphone marks the start of a new shift in the digital streaming industry, placing greater importance on dynamic podcast advertising within the wider audio ecosystem. Podcast advertising is projected to surpass $1 billion in 2021, according to the IAB. As one of the world’s leading podcast advertising and publishing platforms, Megaphone’s unique offering will enable Spotify to target ads to its 320 million monthly listeners. This acquisition follows the launch of Spotify’s proprietary Streaming Ad Insertion (SAI) technology, the company’s first step to delivering engaging and precise ads to podcast listeners globally, in real-time. Megaphone gives Spotify the possibility to extend this technology to third-party podcast publishers for the first time, positioning them as a leader within the industry.
“We believe that Megaphone and Spotify’s shared value in innovation will drive the podcast ecosystem forward around the world.” -- Brendan Monaghan, CEO of Megaphone
Company Details: Acquirer – Spotify
Spotify is currently one of the largest audio-streaming platforms on the market. It is a freemium service as the basic models are offered at no cost but additional premium services are available for purchase. They currently provide access to over 60 million songs and have recently branched into other forms of audio media. As of 2017, Spotify was not yet a profitable company. Revenues in Q1 2020 were approximately $1.7 billion.
Founded in 2006, headquartered in Stockholm, Sweden
CEO: Daniel Ek
Number of employees: 2,960
Market Cap: $49.49B (as of dd/mm/yyyy)
EV: $50.8B
LTM Revenue: $7.57B
LTM EBITDA: -$546M
LTM EV/Revenue: 6.71
LTM EV/EBITDA: -92.19
Company Details: Target - Megaphone
Megaphone is one of the leading providers of podcasting technologies for both publishers and advertisers. Their technology enables advertisers to connect to over 60,000 unique audience segments. It also assists content creators in developing profitable business models.
Founded in 2015, headquartered in Washington D.C., United States
CEO: Brendan Monaghan
Number of employees: 75
Valuation: $235
Projections and Assumptions
Short-term consequences
With Spotify’s recent push to enter and revolutionize the podcasting sector, spending upwards of $500 million on acquiring various companies since 2019, their share price has risen by more than 80% this year, implying this is seen as a favorable strategy by investors. This accretion to EPS will also be accompanied by a boost in Spotify’s revenue following the acquisition, due to greater monetization benefits from targeted podcast advertising. Spotify has already seen the benefits from investing in this area - in their third-quarter earnings of 2020, 22% of their monthly users engaged with podcasts offered on the platform, with podcast advertising revenue up 100% from 2019 figures. In the short term, there are many revenue synergies to be realized upon completion of the acquisition. Through owning a hosting service, Spotify will gain unprecedented access to data from other hosting shows, allowing them to cross-sell their podcasting product to various networks whilst improving upon their SAI technology with an abundance of podcast insights outside of their own ecosystem.
However, market competition is fierce and will necessitate a push in Spotify’s marketing strategy. Spotify has to make its SAI technology, now strengthened by Megaphone, appealing to podcasters on different hosting networks. With Apple holding the top listening position in the US Podcasting market, Spotify will need to keep its eye out on potential content creators to poach.
Long-term Upsides
Making its SAI technology available to all podcast producers and publishers will allow content creators to develop a more profitable business model when it comes to advertising in podcasts. Currently, the podcast advertising market is expected to grow at a rate of 14.7% to almost $1 billion this year. Giving all of the 20,000 publishers and advertisers on Megaphone’s platform access to Spotify’s SAI algorithms will likely increase this number even more in the coming years.
The deal is also emblematic of Spotify’s new position in the industry. Spotify entered the podcast scene two years ago, and since then, it has spent more than $800 million on acquiring podcast content and companies (including Gimlet Media, Parcast, and Anchor). This transaction is the latest step in Spotify’s desire to reposition itself as the leader of the podcast ecosystem. Going forward, we can expect deals like this to continue, especially content-based deals similar to Spotify’s decision to exclusively host The Michelle Obama Podcast and The Joe Rogan Experience.
Risks and Uncertainties
Spotify generates revenues mostly from advertisements and subscriptions, with 93% of Spotify’s revenue being generated by premium subscribers in 2Q2020. However, due to the increasing popularity of Spotify’s competitors such as Apple Music, Spotify’s premium subscriber growth has been decreasing over time while the average revenue per premium user (ARPU) has declined by 9% YoY in 2Q2020. With decreased revenue from premium users and advertisements constituting such a small portion of Spotify’s revenue, it is hard to say whether the acquisition of Megaphone may make as much of an impact on revenue growth.
On the other side, Megaphone was operating at a loss before the announcement of this acquisition. Despite stating that “revenue increased significantly in the first nine months of 2020,” Megaphone was running an operating loss in the third quarter of 2020. After being acquired by Spotify, Megaphone now plans to help Spotify distribute it’s Streaming Ad Insertion (SAI) technology to other podcasters. But this distribution of SAI technology may not go as planned: Spotify’s ability to convince other podcasters to change their hosting networks for more specific ad tech is uncertain, especially when there are other competitors like Apple. In the end, whether or not Megaphone will actually make an impact on Spotify will depend on how Spotify utilizes and collaborates with Megaphone and other recent podcast-related acquisitions.
“We look forward to Megaphone joining Spotify on our mission to accelerate smarter podcast monetization for advertisers and podcast publishers powered by a scaled audience and state-of-the-art technology.” -- Dawn Ostroff, Chief Content & Advertising Business Officer at Spotify