Spotify just bought podcast hosting company Megaphone

Spotify is yet again shelling out a mountain of money for a podcasting company. The company confirmed to The Verge today that it's buying podcast hosting company Megaphone for $235 million. The reason Spotify decided to buy Megaphone is so that it can expand access to the latter's dynamic ad insertion technology called Streaming Ad Insertion (SAI).

Facebook ads for audio — Dynamic ad insertion allows podcast publishers to slot advertisements into their shows upon download, targeted to each specific listener using data like location and listening history. That means publishers can keep selling ads against their back catalog of episodes long after hitting publish, and advertisers have confidence they're reaching the audiences they want. It's the podcast equivalent of the targeted advertisements you see on Facebook... though hopefully less prone to delivering you ads for things you just bought.

Spotify's buying dominance — Megaphone's platform allows publishers to distribute their podcasts to various platforms, like Spotify and Google Podcasts, and insert these dynamic ads. The difference is that Megaphone inserts ads upon download, whereas SAI can insert advertisements during playback, further enhancing targeting abilities and ensuring ads are fresh. By acquiring Megaphone, Spotify will be able offer SAI to more paying customers.

Some consumers might be wary of podcasts now being able to track them, and some apps like Overcast have responded by warning listeners when a particular podcast is using services that collect data. When you download a show your IP address is revealed, which is how they can glean information on your digital habits that enable ad targeting.

Maturing ecosystem — Dynamic ad insertion represents just how much the podcasting ecosystem has matured in recent years. Podcast advertising used to be primitive — podcasts sold ad spots in their episodes to brands directly, and the same ad was heard by every listener, everywhere, and no matter how long after airing the podcast was downloaded (Mailchip, anyone?). This model wasn't sustainable because podcast hosts didn't have much data on their listeners or reach.

Now that popular shows like The Joe Rogan Experience easily garner over 200 million downloads per month, publishers stand to earn a lot of money if they can provide better targeting to advertisers and allow them to bid only for the specific listeners they want to reach.

The Netflix model — Spotify has been aggressive in trying to dethrone Apple in podcasting because it can earn money from advertising there without having to pay the same high licensing fees to record labels for music. The company has previous spent $200 million buying Gimlet Media, $56 million on Parcast, $196 million for The Ringer, and $140 million for Anchor. Eventually, Spotify will want to recoup this investment — hence a stronger push into advertising.

By creating a dynamic advertising network for podcasts, Spotify could become something like the Google of audio. Advertisers bid for slots on shows, and Spotify just takes a cut of the sale — it doesn't pay the publisher anything to offer their show. That's a far better road to riches than charging people $10 a month to stream music the company has to license at a fixed cost of $7. But it may get the company into similar data privacy quandaries as Google.