Spotify's plan to dominate audio ads

Spotify's enormous investment in the podcast space over the past two years has left the streamer poised to become a leader in audio advertising.

Why it matters: Having watched how companies like Facebook and Google built up the digital ad ecosystem, Spotify's Jay Richman, who heads the company's ads business and platform, says the streamer is determined not to focus on scale over quality.

• "The creator community has been left out of the value creation," Richman said in an interview with Axios. "That's something we have an opportunity to write with this approach. It's a big part of how we think about our mission as a company."
• "We want to learn from those two platforms and develop a truly healthy ecosystem that works for all of the constituents," he said.
• "It's really important that given where we're at, with the space being so nascent, that we have an opportunity to build it in a healthy, sustainable way."

The big picture: Spotify has invested hundreds of millions in buying up lots of smaller podcast companies to help create an end-to-end podcast ecosystem.

• It's also invested in several big-name exclusive podcast deals with people like Michelle Obama, Kim Kardashian, Joe Rogan, Prince Harry and Meghan Markle. It bought podcast sports company "The Ringer" earlier this year.
• The idea is to focus on quality, both in ads and content, while also providing a platform for smaller independent podcasters to grow.
• The idea is if Spotify can create an ecosystem in which advertisers feel they can reach more people effectively, Spotify, and the podcasting industry writ large, will grow in a sustainable way.

Beginning in 2019, the company bought Gimlet, an audio production company that Richman has likened to the "HBO" of audio, and Parcast, a long-form podcast production studio. It also bought Anchor, a free podcasting platform that allows independent creators to make and monetize their own podcasts.

• The idea behind the those deals was to own podcast production arms that could help steer quality and grow Spotify's audience, while also owning a platform that could onboard independent creators, and give them the tools to produce quality audio.
• Earlier this year, Spotify launched "streaming ad insertion" which allows the company to place quality, host and voice talent-read ads within different podcasts, as opposed to radio-style commercials.
• Spotify acquired podcast monetization company Megaphone last month for $235 million in hopes of being able to place more of those ads alongside podcasts that aren't exclusively on its platform. Megaphone places ads for thousands of publishers across the audio ecosystem.

Be smart: The podcast ad market is growing faster than any other type of ad medium. A flurry of podcast acquisitions this year show that several companies, like iHeartMedia and SiriusXM, are trying to capitalize on that growth.

• Richman says Spotify's efforts are different in that the goal is to create an entirely new medium in digital audio, not to recreate radio online.
• "I think the space is starting to bifurcate between our approach with streaming ad insertion versus what I see in rest of industry doing, which is flooding podcasts with radio style and programatic style ads," said Richman.

What's next: A more interactive ad platform within its app, which it hopes will also improve podcast measurement.

• Measurement of podcast ads has historically been pretty bad, because podcasts were created to be decentralized. Platforms have not been incentivized to share data on podcast performance.
• It's testing redeemable coupon codes, so that Spotify listeners can redeem discount codes read by hosts in podcast ads within the Spotify app. This will also help the company measure ad effectiveness in a new way.