Spotify’s Big Bet on Audiobooks

When two of the traditional “big five” publishing houses—Penguin Random House (itself the result of a merger between Penguin and Random House) and Simon & Schuster—attempted to merge earlier this year, the Department of Justice sued them over antitrust concerns about two of the world's largest publishers joining forces. The DOJ’s ultimately winning argument was that the combined entity would reduce the options available to authors seeking book deals and control the market for book rights.

Buried within the DOJ's case was a reference to audiobooks: “Similarly, audio rights used to be negotiated separately but the Big Five publishers now generally demand that authors bundle audio rights with print and electronic rights.”

Audio rights—the legal (and generally exclusive) right to publish the audiobook of a particular book—used to be an afterthought. Print mattered most, ebooks were the future, and audiobooks were the weird half-brother. But now, audiobooks are all the rage, with the audiobook market having grown by double digits every year for the past decade.

I launched audiobook publisher Upfront Books in 2019 at what may have been the tail end of the period during which it was possible to acquire audio rights from larger publishers and authors as a bootstrapped upstart. I spent a lot of time developing relationships with authors in an effort to be their audiobook publisher. But I was always reluctant to bring up the realities of the audiobook industry, which is dominated by Amazon-owned Audible. When an Audible subscriber downloads an audiobook, the publisher may only get a few dollars, depending on its deal with Audible and the list price of the audiobook. Of that amount, authors normally receive 25% as a royalty.

You may be asking yourself how that’s possible in a zero-marginal-cost digital world. Or you may be nodding your head, having already considered the power that Audible has as the strongest aggregator (by far) in this market.

Three months ago, Spotify launched its audiobook product with a catalog of 300,000 to 400,000 audiobooks. (These are not included with a Spotify subscription. Each audiobook costs, on average, $20 or $25.) Audible’s stronghold on the market is one reason that Spotify’s entry into audiobooks is a big deal for book publishers: the company has between a 40% and 90% share of the audiobook market, depending on who you ask. Until now, there hasn’t been a viable challenger to Audible, unless you consider Apple Books and Google Books. But they haven’t made a strong push, as ebooks and audiobooks have always been just another offering for them. Publishers are surely cheering on another competitor entering the market. 

To better understand Spotify’s strategy, it’s important to understand the audiobook market and how it’s changed.

It all starts with content: books written by authors who either have a book deal with a publishing house like Penguin or Simon & Schuster, or they venture off on their own and publish independently. There are three key categories of book rights:

1. Print (paperback and hardcover) 
2. Ebook 
3. Audiobook 

Producing an ebook is mostly a matter of putting a book into the correct file format, so publishing houses and independent authors have almost always held onto ebook rights. When the Kindle came out in 2007, everyone thought that ebooks were the future, yet its share of book sales has topped out at 10 to 15%, and even COVID couldn’t permanently change consumer behavior.

Audiobooks are different. In 2010, they made up only about 2% of the book market. Today, with five times as many smartphone users as a decade ago and in our Airpods-always-in world, audiobook sales make up nearly 10% of the book market. Sales have been growing at around 20% every year for the past few years and are projected to grow even more quickly through the rest of this decade. At the same time, production costs have come down significantly: every voice actor has their own website or advertises themselves on one of a number of voice marketplaces, and many have home studios that can produce high-quality sound.

What does this all mean? Audiobook rights used to be an afterthought for most authors and publishers. Even the largest publishers normally sold off their audiobook rights to audiobook-specific publishers. Today, audiobooks are hot and publishing houses are maintaining the audio rights to their highest potential new releases, knowing that they can derive long-term equity value from audio, especially if the market grows as expected. They’re taking this market seriously, as is Spotify.

Spotify wants to own your ears. As Evan Armstrong wrote, “[Spotify’s] goal is to leverage the giant ocean of attention commanded by its app into a giant improvement in gross margins.” In other words:

1. Spotify conquered the music streaming market.
2. The company leveraged its pre-existing massive audience and some smart acquisitions to become number one in podcast distribution.
3. Spotify is going after the remaining large category of audio: it wants to go up against Audible and become number one in audiobooks.

From personal experience switching from Apple Podcasts to Spotify, I have to admit that it’s nice to have a single place for music and podcasts. And it would be ideal to have my audiobooks in the same app as well. From a consumer’s perspective, how does Spotify’s current audiobook product compare to Audible?

Content. Consumers care about the quality of the content available. While there is a subset who love $1 book deals, a majority of people about to set out on a 10-hour listening conquest want to listen to… what they want to listen to. Spotify is starting off with a strong and expansive catalog, including 18 of the top 20 current bestsellers on Audible. The company was able to onboard all of this content through Findaway, the world’s largest audiobook distributor, which it purchased for $122 million in 2019. (There are over 40 audiobook retailers making up the long tail of the remaining market that Audible doesn’t control. Findaway has licensing agreements and infrastructure connecting to all of these retailers, which enables publishers to distribute their audiobooks more widely and earn more revenue.)

Price. The audiobook prices on Spotify are high. The challenge that Spotify faces is that a majority of sales on Audible take place through the latter’s subscription service: get any audiobook of your choice for $14.95 per month, or get any two audiobooks of your choice for $22.95 per month. As a consumer, you can pay only $14.95 even for theoretically high-priced audiobooks, like A Game of Thrones, which costs $36.90 on Spotify.

User experience. It’s meh. Spotify launched its audiobooks product with a mediocre user experience (which it also initially did with podcasts). I don’t fault the company for it, but the audiobooks section launched buried in its app with practically zero discovery mechanism. Also, there is no way to download an audiobook from the app itself, almost certainly due to Apple’s App Store fees.

 It is easy to look at Spotify’s success in podcasting and think it’s poised to take over the audiobook market, but audiobooks are a more challenging category to tackle than podcasts for a number of reasons.

Beating Amazon is notoriously difficult

The podcasting market previously had no major players (or money flowing through it, for that matter). Apple was the winner by default via its Apple Podcasts product that came installed on every iPhone, but podcasts were Apple’s lowest priority and could never make a difference to shareholders. So the company never seemed to work hard to build awareness of podcasting, improve the product, or build an advertising business on its back. Spotify was the obvious favorite to win the podcasting market and took the right strategic steps. It added podcasting into the product, spread the word to its huge subscriber base, bought major podcast technology companies like Anchor and Megaphone, and started creating exclusive content or buying it up (Gimlet, Joe Rogan, etc).

By contrast, Amazon-owned Audible spends heavily on marketing, licenses content for production by its Audible-exclusive publishing arm called Audible Studios, and creates Audible-exclusive original content with great authors. The division also has an unbelievable built-in marketing funnel from Amazon.com. If you search for a book and you’re not an Audible subscriber, any book that has an audiobook available makes an intriguing offer:

Amazon has a clear preference of consumer behavior among these three choices: 

(1) Buy the Kindle version for $9.99, so that it grosses $3; 

(2) Buy the paperback for $17.99, so that it probably grosses $5 after shipping; 

(3) Sign up for a free trial to Audible and hopefully start paying $14.95 a month, which grosses it about $10 per month (with publishers getting the remainder).

Amazon has a heavy incentive to market the Audible product. Consumers associate Audible with audiobooks in the same way that they do Uber with getting a ride from a stranger. Furthermore, because Amazon has captured the online book market, most book readers have bought a book on Amazon and are therefore consciously or subconsciously aware of Audible.

There are also switching costs in moving from Audible to Spotify. Audible subscribers who have hand-selected their own library of audiobooks over the years have lock-in through their emotional attachment to their Bookshelf in the Audible app, as well as actual costs from the complexity of having audiobooks in two locations.

Owners of exclusive, beloved IP are powerful

The other large challenge in this market, which is also potentially the biggest opportunity for Spotify, is working with rights holders to create a business model that works for Spotify, rights holders, and consumers.

Spotify’s origin story goes something like this: songs were $0.99 (or $1.99) on iTunes. Napster made all music in the world streamable for free illegally and adapted consumers to the idea of free unlimited listening before being shut down. Spotify entered the market with a much better UX for consumers: fast streaming speeds, eye-pleasing UI, high-quality audio, and all of the world’s music available through it. The company also made music publishers happy, for three reasons:.

1. No downloads (streaming only).
2. It gave 20% of the company to the major music publishers.
3. It began with a limited, low-risk test in a subset of the smaller European market, which allowed publishers to see if Spotify’s model could increase their revenue.

Spotify has an opportunity to execute on a similar playbook for audiobooks: work closely with the major publishers to create business models that will help further expand the audiobook market. Help them go up against Audible and increase their margins in the process. Find ways to test hypotheses that do not put the publishers’ core business in harm’s way.

So what’s next for audiobooks on Spotify?

There’s an obvious question of whether Spotify would be able to move toward an all-you-can-eat subscription model for audiobooks in the same way that it does for music and podcasts. Spotify has already partnered with Storytel, a global audiobook retailer that operates with this model and has prices ranging from $3.50 per month in India to $13 per month in Singapore. To date, publishers have been open to providing content to these unlimited subscription model retailers but only in smaller international markets. In the lucrative U.S. market they have largely shied away, as they’re protective over the traditional pay-per-copy business model.

A small group of readers and listeners makes up most of book sales, and not everyone in the world reads books—whereas most people listen to music. If book readers have access to an unlimited model, revenue per user will decline and would need to be made up by bringing in new users. Publishers have already expressed major concerns with digital lending programs through libraries. Especially during COVID, when digital library platforms became more popular as people realized they could get free ebooks and audiobooks through their local libraries, publishers started to see how the ease of using a library app to access books could hurt their retail business. A few publishers have stopped selling digital content to libraries until the works have been out for more than two or three months, and publishers are already charging libraries between three and 10 times the consumer price for ebooks and audiobooks—which, despite their technology, can only be used by one borrower at a time.

Audio is still the smallest revenue stream across the three major formats. Making all audiobooks available for, say, $10 per month while ebooks and audiobooks remain at a price point of $10 to $30 per copy, could cannibalize the other two formats.

Spotify is strategic and capable of moving quickly enough to innovate in the audiobook business, but it does not need to. Its bet on audiobooks is not that large. The company has a $16 billion market cap, spent only $122 million on Findaway, and appears to have a team of only about 50 people working on audiobooks. It can leverage its massive audience to create a solid incremental revenue stream through a business model already accepted by publishers: either a straightforward pay-per-download audiobook business model, or a subscription model like Audible’s.

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Tyler Finklestein is the founder of Upfront Books, which was acquired by RBmedia. He is a Prehype entrepreneur-in-residence and a member of the Datavant founding team.