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Spotify says podcasts will generate more profit than music. But for now, they are losing money.

Spotify doesn’t make money on podcasts.

At least not yet.

At his Investor Day 2022 event, the streamer said that last year the podcast side of his business had a negative gross margin of -57%, meaning he spent 57% more on podcasts than he never fired.

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And so far, those margins are not improving. By VarietyCFO Paul Vogel said Spotify believes podcasts will lose even more money this year.

However, Spotify added, it doesn’t expect to be stuck in the negatives any longer. He thinks that in the next five years, podcasts will generate gross margins between 40% and 50%.

By comparison, Spotify’s music half generated a gross margin of 28.3% in 2021, and Spotify aims to increase that to 30-35% over the next five years.

So why are profits from podcasts so dramatically lower, and why does Spotify expect them to exceed those from music?

CEO Daniel Eck told investors that the difference between breaking into music streaming and breaking into podcast streaming was significant. “[W]We had to lift a lot more heavy loads,” he explained.

By “the heavy lifting,” he means spending over a billion dollars on exclusive content deals (ahem, Joe Rogan) and on the takeover of companies such as Spin and Anchortherefore Spotify could do the production and distribution of podcasts in-house.

Ek said in February that the $200 million acquisition of Rogan’s podcast (although it’s populated by dodgy guests spouting dodgy information) was what gave Spotify’s podcast ambitions a foothold — and he gave it a chance to compete with other giants looking to enter the space, like Amazon and Google.

This initial investment amount contributes to the negative gross margin. Also at stake is the fact that, as Spotify revealed this week, it only monetizes 14% of the more than 3 million podcasts on its platform via in-app ads.

Considering that just that 14% of shows have ever helped push Spotify to record ad sales, it makes sense that the streamer is betting big on podcasts as a major part of its future revenue.