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3 Reasons Amazon's Investing in Podcasts

Motley Fool - Fri Jan 28, 9:28AM CST

Amazon(NASDAQ: AMZN) is adding My Favorite Murder to its lineup of podcasts. The tech giant signed a deal for exclusive advertising and distribution rights for the popular podcast, one similar to the deal it made for SmartLess last summer.

Amazon's been investing heavily in podcasts over the last 15 months, ever since it started hosting them on Amazon Music, taking on Spotify(NYSE: SPOT) for listeners' attention. The latest deal for My Favorite Murder appears to validate Amazon's efforts in the area, but what can these podcast deals do for investors? Here are three things to consider.

A home podcast studio with mic, mixer, and laptop.

Image source: Getty Images.

1. New audio advertising inventory

Amazon's biggest focus with podcasting appears to be advertising. Unlike Spotify, it's still distributing SmartLess, My Favorite Murder, and its Wondery podcasts through all other podcast players. Doing so allows it to maximize the listening audience and generate more ad revenue for each show.

Amazon ought to be able to monetize audiences on its own platform better than on others. That's because users have to log into Amazon Music with their Amazon accounts. That can provide much more valuable targeting data for dynamically inserted advertisements. It's one reason Spotify prefers to keep all its podcasts distributed on its own platform.

For distribution outside the Amazon ecosystem, Amazon could lean on its Art19 acquisition from last summer. Art19 offers advertising, targeting, and measurement tools for podcasts.

Importantly for Amazon, it adds another channel for advertising on top of its retail media and connected-TV advertising. While it might be small relative to the other two -- global podcast advertising sales are expected to reach $2.2 billion next year -- it could bring in new advertisers to its other channels or help expand its relationship with existing advertisers. For example, Amazon is reportedly interested in expanding its ad sales pitch to companies like movie studios or insurance companies, which are a good fit for podcast advertisements.

2. It prevents Spotify from taking valuable content exclusive

Spotify has been very aggressive at buying up the rights to popular podcasts. It's taking the approach of taking content off other platforms and forcing fans to use Spotify to keep listening to their favorites. If you want to listen to Joe Rogan, Armchair Expert, Call Her Daddy, Heavyweight, or many other popular podcasts, you have to listen on Spotify.

While that's good for Spotify's listener count, it's not so great for its competitors like Amazon Music. So, acquiring distribution rights to shows like My Favorite Murder or SmartLess is a kind of preemptive strike to keep valuable content on Amazon's platform.

While it's not as if Spotify has an infinite budget, it is spending heavily to procure popular podcasts. It's spent over $1 billion on podcast-related acquisitions and licenses over the past few years. That's a lot of money for Spotify, and it's quite substantial for Amazon too. But Amazon also spent $11 billion on content for its video and audio streaming platforms in 2020 and likely will spend more in 2021. So, Amazon can certainly afford to compete for valuable content.

3. Potential Amazon Prime retention

Amazon is windowing the podcasts for which it owns distribution rights. They'll have a one-week exclusivity to Amazon Music and Wondery Plus. And, as mentioned, it's protecting itself from losing content to Spotify. As such, podcasts could help increase engagement with its Prime digital benefits like Amazon Music Prime.

Prime members that engage with digital benefits historically renew at a higher rate than those that don't. So if more podcast content can get customers to try Amazon Music -- including its 2 million ad-free songs for Prime members -- it could lead to greater retention for Prime members. (Keep in mind that the Prime renewal rate is already extremely high.)

Management describes Prime as a pillar of its business. It's been shown that Prime members spend more on Amazon, and Amazon makes more than enough on sales to Prime members to offset the heightened cost of free expedited shipping and its billions in content spending. So if a few podcast deals increase Prime retention, it's a net benefit for the overall business.

Investors should be encouraged that Amazon is making more podcast deals, like the recent distribution agreement for My Favorite Murder. It's a sign these investments are paying off, and Amazon thinks it can add more value with scale.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Adam Levy owns Amazon. The Motley Fool owns and recommends Amazon and Spotify Technology. The Motley Fool has a disclosure policy.