He runs Tiny (www.tinycapital.com)
Marketers, content creators, and podcast prognosticators were abuzz last week about this editorial by Tiny Capital Founder, Andrew Wilkinson. Is podcast under-monetized due to the industry’s overreliance on ad revenue? The author makes a strong case. For those of us who rely heavily on the podcast industry’s present revenue model, it is for us to decide how close to the truth he might be and what we’re going to do about it. It should be noted that this thought-provoking thesis doubles as a platform for launching his new company, Supercast. Which, not coincidentally, exists to help content creators generate subscription revenue from their podcast. This is a must-read that should also be taken with a grain of salt as you read it—at least twice. Share your thoughts with us. But be warned, anything you send will be printed next week if it’s interesting. Thank you Andrew for allowing us to share your article.
In 2005, Howard Stern shocked the world by leaving terrestrial radio and accepting a $500 million dollar deal to move his show to Sirius satellite radio. In 2015, he renewed with a 5-year deal for $90 million per year.
People were blown away by the numbers. He was making out like a bandit! Had he been a CEO receiving the same pay, he would have qualified as the third highest paid CEO in America in 2014.
As of today, Howard is getting seriously ripped off.
Last year I helped a few friends grow their podcasts. They had decided to forgo advertising and instead fund their shows using a membership model. Basically: a small percent of their audience would pay around $5-$10 a month to receive extra content like extended and Ask Me Anything episodes.
As I dug into their listener, download, and revenue numbers, my eyes started to bulge out of my head. They were sitting on one of the best business models I’d ever seen. What had started as a way to avoid reading soul sucking underwear ads had inadvertently created an amazing recurring revenue machine.
While their revenues were still small, it didn’t take me long to realize that subscription podcasting has many of the same characteristics of a SaaS software business (recurring revenue, predictable growth rate, predictable customer lifetime value, predictable churn) with none of the downsides (expensive R&D, expensive marketing, ruthless competition).
Every tech blog gushes about the podcasting industry because of big acquisitions by Spotify and Luminary, but nobody is talking about what seems obvious to me:
The transition from advertising to a subscription model is going to make podcasters billions of dollars and mint a ton of millionaires. Maybe even billionaires.
In fact, it may have already minted a billionaire, but more on that later…
The $228-million-dollar man
Historically, while big radio and TV personalities get paid very well, the lion’s share of the profits go the broadcaster (CNN, ABC, iHeartRadio, Virgin, Sirius, etc). For example, while Anderson Cooper gets paid around $11 million per year, CNN makes significantly more than that from his show.
As they should. CNN does most of the work and takes on all of the risk. They sell the ads, provide an expensive studio and a team to run it, promote the show, provide global distribution (satellites, antennas, and cable networks), plus a laundry list of other expensive and difficult stuff. These requirements are complex and not easily met without a ton of money and a huge team.
So, Anderson Cooper can’t easily go independent and cut out the middleman in cable news (quite yet). He would need tens of millions of dollars worth of equipment, a huge team of people, a studio, ad sales people, and distribution. He’d either need a deep pocketed company like Amazon or Netflix to back him, or to go out and raise a ton of money, which would be risky. It’s still extremely complex and expensive to produce high end video.
But what blows my mind is that someone like Howard Stern can reproduce his show as a paid subscription podcast anytime at almost zero cost, cutting out the middleman (SiriusXM) and reaping all of the profits himself.
Like newspapers, the cost of podcast audio production — especially talk formats — has been reduced to near zero. Antennas, cable networks, and satellites are now obsolete. His only cost as it scales from one to one million listeners? Hosting.
Here’s a made up but probably directionally accurate breakdown of costs in two scenarios:
SiriusXM’s 2018 subscription revenue was $4.6 billion. Let’s assume — and I think this is conservative — that just 5% of those subscribers come for Howard.
*Rough numbers based on expense percentages listed in Sirius’ financial statements. This is a best guess.
Howard’s contract expires in December 2020. He’d have to be insane to renew it.
With a small amount of upfront cost and some insanely simple tech (more on that later), he could be making an extra $138 million a year and have complete control over his content, business, and creative output.
Podcasting’s first billionaire?
Take a look at Joe Rogan, who currently has the most popular talk show podcast with over 200 million downloads per month. This number comes from Joe himself¹, but let’s assume he was exaggerating and it’s only 100 million downloads per month.
Assuming he sells ads at a low $18 CPM (cost per thousand listeners) and sells out his ad spots, he’s making approximately $64mm in annual revenue. If he’s on the higher end, at $50 CPM, he could be making as much as $240mm per year². The only factor that would change this is how many free ads Joe gives to companies that he has a personal equity stake in (like Onnit, the supplement brand he co-owns).
That means that Joe makes somewhere between $64-$240 million per year in revenue from his podcast advertising alone—and that’s handicapping his audience by half what he claims to have. That number also doesn’t include any additional revenue generated from his wildly popular YouTube channel, which has over 6 million subscribers.
Estimated per episode listener numbers for Joe Rogan vs. Howard Stern
Now imagine how insane those numbers could get if he converted to a premium subscription model like Howard Stern. Even if he kept the show free and offered ad-free streams, or an extra episode per week for $5-$10/mo, the numbers would boggle the mind.
Based on existing advertising revenues alone, Joe Rogan could easily be worth over a billion dollars, even if he doesn’t realize it. If estimates are correct, he owns a business that produces somewhere in the neighborhood of $60-$235 million/year in profit and is likely growing at 30–50% annually (assuming his audience is growing alongside the podcast ecosystem)³. If it were publicly traded, his podcasting business could easily fetch a valuation in the billions.
This comes as no surprise to the Chinese
China has pulled ahead of us in podcasting. Where the North American podcast industry was a measly $479 million in 2018, China’s clocked in at over $7 billion (23x!).
What accounts for the huge difference? Chinese podcasters have moved to the subscription model. They get their most loyal listeners to pay for member-only content instead of monetizing using ads.
That’s after 250 million downloads per episode!
The world’s greatest business model
“A good business is like a strong castle with a deep moat around it. I want sharks in the moat. I want it untouchable” –Warren Buffett
Warren Buffett talks about how competitive moats and pricing power are the keys to a great business.
By moat, he means that the business has something that protects it from competitors. Competitive moats can come in many shapes and sizes, but one of the most powerful moats is a strong brand. There’s a reason why you buy Coke and not RC Cola, despite the fact that it’s roughly similar and a quarter of the price. People have a deep connection to the Coke brand and they are willing to pay a premium to get it.
In podcasting, the host is the brand. If you love Howard Stern, you can’t replace him with a cheaper alternative. This is why Sirius pays him so much: people are committed to listening to Howard Stern, and they can’t listen to him anywhere else, so listeners are willing to pay for an expensive monthly subscription. What’s more, they can charge a high price and continue to raise prices every year. This is what’s called pricing power.
Joe Rogan and Howard Stern are like Coke, except with even higher profit margins. There’s literally no substitute for them. The only risk to the “moat” is them getting hit by a bus. As long as that doesn’t happen, they have one of the world’s greatest businesses, practically immune to disruption.
But what about Luminary and Spotify?
Let’s talk about the elephants in the room: Luminary and Spotify.
Won’t paid podcasting just go the way of Netflix, where someone like Luminary just pays podcasters huge Sirius-esque deals to be on their platform?
I don’t think so. Here’s the #1 place where podcasting differs from film and TV: cost of production and distribution.
Here’s the pitch Netflix gives to top TV and film producers:
“Come to Netflix. We’ll give you the tens of millions of dollars that you absolutely need to make your show. Unlike the big studios, we won’t make you go through a frustrating approval process, and we’ll mostly leave you alone to make it how you see fit. Oh, and by the way, your potential audience will be larger than traditional network television.”
It’s a pretty good pitch, right?
You need somebody to put up the cash and distribution to make your movie no matter what, and your only alternative (dealing with studios) is a bureaucratic nightmare. Netflix makes it easier, providing the cash (or maybe even more cash) to make your show upfront, and leaves you alone to get it done. Plus, you have a larger audience and make similar or slightly more money.
No brainer. Now onto Luminary…
Here’s the pitch Luminary gives to podcasters:
“Hey I’ll give you…distribution? No wait you already have that for free via iTunes. I’ll give you…the money you need to produce your show? No wait you can do that with $2,000 worth of equipment. I’ll give you….some money upfront? Yeah. That sounds good. Not as much as you’d earn if you just monetized it yourself though. Oh, and by the way, your audience will be 1000x smaller than if you listed your podcast on iTunes and your audience will hate you for forcing them to subscribe to a service they’ve never heard of.”
A lot less attractive.
Spotify, on the other hand, could potentially do some Howard Stern/Sirius-esque deals. It at least has a significant audience of existing subscribers and ways to drive even more revenue per customer outside of podcasting (music).
That said, for an already at scale podcaster like Joe Rogan it’s far less attractive…
Here’s the pitch Spotify would make to Joe Rogan:
“Hey Joe, I know you’re already making more money than you know what to do with, but how about we give you an extra $75 million upfront in order for an exclusive on your show. It won’t be available anywhere except to paid Spotify subscribers, so that cuts out most of your fans, and they will be pissed off because they have to subscribe to Spotify, but you will make more money. Oh yeah, and by the way, your audience will probably be at least 10x smaller, in the short-term.”
Not super attractive for somebody like Joe Rogan with an existing audience and the ability to monetize it themselves. I can see Spotify being successful with podcasters who haven’t gotten to scale or haven’t monetized well, but it’s a no brainer for most to stay independent if they know what they are doing.
In summary, I think Luminary is in a tough spot, Spotify will certainly be able to sign some exclusives if they want them (with small and up-and-coming podcasters), but that the big personalities who monetize correctly can stay independent and make an absolute killing on their own.
An accidental business for accidental businesses people
Back to the friends I was helping…
As I dug into my podcaster friends’ tech setups, it was a mess. They had set up their membership systems strewn together using a ramshackle bunch of software. WordPress hacked together with plug-ins funneling into a PayPal account, with some MailChimp sprinkled in for good measure. Nothing worked together, and they were leaving a ton of money on the table.
Payments would bounce and nothing would happen. The software wouldn’t retry the card or send them an email. Listeners would share out their subscriber RSS feed and thousands of people would pirate it, racking up massive hosting bills. There was no way to track how many subscribers were sticking around, or even figure out what a subscriber was worth so we could advertise.
But the most important thing was that it was a huge pain to configure and took months of manual developer work to set up. As we worked with more and more podcasters, we realized that there had to be a better way.
So we fixed it.
In trying to solve this problem for our podcaster friends with their accidental amazing businesses, we built an accidental amazing business of our own.
We’re excited to finally share it with you. It’s called Supercast, and it makes it easy for any podcaster to switch to a subscription model.
In a nutshell, it’s everything a podcaster needs to go from having to read deodorant ads to sweet, sweet recurring revenue and true independence. Podcasters can use it to fully move to a subscriber supported model, or just offer an ad-free stream or extended episodes as a special benefit for listeners who want to pay for it.
A few of the coolest features:
- Your listeners don’t need to install a special app or anything. They just click a link in your show notes, pay in 10 seconds with Apple/Google Pay, then subscribe to their new subscriber feed with one click.
- Supercast gives you in-depth analytics that show your monthly recurring revenue, average revenue per listener, listener lifetime value, and more valuable stats. These terms might sound nerdy, but they will let you accurately predict your growth and even buy ads to help you grow faster.
- It also automatically busts feed fraud. If someone shares out their subscriber feed, Supercast warns you, and sends them an email telling them to knock it off (instead of racking up a $10,000 hosting bill).
I won’t bore you with all the other features, but if you think I’m onto something with this subscription podcast stuff, you can check it out here.
Now go use it to become the next secret billionaire podcaster 😉
You should follow him on Twitter 🐤
¹ On a recent interview with Jordan Peterson, Joe said that he gets over 200 million podcast downloads per month.
² With 18 episodes per month, that means each episode gets approximately 11mm downloads per episode. Midroll estimates that podcast ad CPM (cost per thousand listens) rates range from $18-$50. On average, Joe Rogan reads 3 to 4 ads per episode.
³Podcast listenership grew 51% in 2019, and has averaged 37% annual growth since 2013. Numbers from Andreesen Horowitz.