The $WWE / $SPOT tag team, part 1 (Spotify)

Last week, the WWE and Spotify announced a deal where Spotify’s The Ringer will team up with the WWE to launch “an exclusive audio network.” I’d guess eventually this includes Spotify exclusive podcasts, but right now the partnership includes new (non-exclusive) podcasts and after PPV live reaction shows (done through Spotify Greenroom, which is like Twitter Spaces. BTW, speaking of Twitter Spaces, I’ll be doing a Disney / MCU themed space tonight at 8 PM EST. That space will be a little different as we’ll split time talking about the media space in general and nerding out about the MCU; it should be a bunch of fun so we’d love for you to join!).

SPOT / WWE are two of my favorite companies / stocks, and I have a position in both (a small position in SPOT on the thesis the largest and only pure play streaming audio company in the world is worth more than a ~$40B market cap / the early day Netflix comparisons just continue to stack up; and a nice sized position in WWE because they’re reasonably valued despite tons of optionality and being one of the few companies that can reliably deliver a passionate and engaged fan base live week after week). I don’t think either company is going to have some buzzy event that causes the stock to pop 30% in a day or anything (short of an acquisition; unlikely for either though I suspect the premium either would get in a sale would be mammoth); rather, I just think these companies are set to compound value at an aggressive rate for years.

Anyway, I thought the two companies “teaming up” was interesting and, if you analyzed the team up, I think it highlights all of the reasons I’m bullish on both companies, so I wanted to take some time to write a blog post discussing the two companies through the lens of the team up. (PS here are some industry articles / PR articles on the deal; the Sportico one is by far the most interesting: Deadline on WWE / SPOT. Sportico on deal (Paywall). Hollywood report on WWE / Ringer / Spotify.)

Today I’m going to start by discussing why the deal is so interesting to me from the Spotify side, because some of the pieces of that analysis are building blocks for thinking about the WWE side. (Update: part 2 on the WWE is available here)

The first thing that strikes me about the deal is it shows the benefits of both Spotify’s scale and their platform neutrality, and how the two make a powerful combination.

Scale benefits are simple: if your platform has 100 users, and mine has 10 users, then you can bid $100 for a new piece of content and it will cost you $1/sub. If I bid for it, the same content would cost me $10/sub. So your scale lets you bid on more properties at higher prices and amortize that cost over more users…. which then means you have more content on your platform, which attracts more users, which lets you bid on more content, etc. It’s a real virtuous cycle. Plus, producers would rather work with you because their content being seen by more people (which is more likely to happen on a bigger platform) is good for their egos and for their monetization potential on their future works.

But scale benefits can be more than just that simple virtuous cycle. Consider Netflix and Manifest. The show got cancelled from NBC, but when reruns started airing on Netflix it broke streaming records. It’s not the first time Netflix’s incredible distribution has turned a show that flopped on another network into a breakout hit; Cobra Kai, Lucifer, Designated Survivor, and more were cancelled by their original networks but found huge success on Netflix. It’s true synergy; Netflix’s scale and data means they can buy shows tha fail on every other network and turn them into the buzziest shows on the planet.

Now, Spotify’s not quite to that virtuous cycle yet (their user advantage over others isn’t at Netflix’s level), but they’re slowly approaching that level and I think they’ll get there. And, once they get there, the side effects of that moat will create different opportunities than someone like Netflix gets. Making a show is an expensive and time consuming endeavor; Netflix’s distribution and data lets them take advantage of good shows that get cancelled from other networks because those networks don’t have Netflix’s data and distribution. Podcasts are different; they’re pretty cheap and not very time consuming, and it’s not hard to get them released on every podcast platform in the world. So I doubt good podcasts are getting cancelled due to lack of distribution. But I do think there are people who would make great podcasts but don’t do it because the monetization is so awful. Spotify’s scale and data will change that; they’ll be able to bring some of the “lost” podcast creators in, and they’ll be able to strike deals (like the WWE one) that no other podcast platform would be able to sign.

That covers Spotify’s scale advantage; their platform neutrality advantage is a little more nebulous. The way I’ve been thinking about this is to think about what a content owner wants in a platform / partner. Consider the WWE: sure, the check they’re getting from Spotify is nice…. but the money from this deal is secondary for them; deals like these are really about expanding their reach and fan engagement. The WWE wants as many people as possible to listen to these shows, because that will result in fans doing more of the stuff that makes the real money for WWE (watching the TV shows, buying merch, going to live events, etc). Could the WWE have done this deal with, say, Apple? I mean, maybe- but the WWE would be leaving any of their fans who had Android phones out in the lurch. So yeah, WWE would have maximized “podcast monetization money” if they went with another player…. but they would have hurt their monetization in every other place, and monetization in those other places is much, much more valuable to the WWE.

Put it together: if Apple and Spotify both offered to write the same sized check to WWE, WWE would go with Spotify every time because of their increased reach. And Apple has less users than Spotify, so even if they were writing a check that was the same size, Apple’s per user cost would be higher than Spotify’s for the same content (and remember: Apple needs to write a bigger check to win the same content, so their per user cost would be significantly higher if they really wanted to win these deals…. and, again, even if Apple was willing to write a bigger check, I’m not sure the WWE would even want to go with them because WWE makes more from the increased fan engagement and viewership that come with being ubiquitously available (like Spotify’s distribution offers them) than they do from their podcast deal.

Maybe the WWE deal seems small for Spotify. But once you’ve established that framework, you can see how it works for a host of other partnerships:

• I’ve mentioned many times how much I love Peloton; if you’ve ever used one, you know they’re partnered with Spotify and every time the song changes you have the chance to add it to your Spotify playlist. Peloton’s all about having the most positive user experience; that partnership almost certainly means nothing to them financially…. but they definitely couldn’t have done that partnership with Apple. How frustrated would users be if every time they wanted to add a new song they heard from their Peloton playlist onto a music app, they only had the opportunity to do it with Apple, which dramatically less people have than Spotify and which is effectively unavailable for Android users?

• I absolutely love Marvel movies and Game of Thrones, but things like Binge Mode took my love and appreciation for them to the next level. Binge Mode is owned by the Ringer / Spotify, but I don’t want you to focus on them specifically too much. What I do think is important is Spotify’s data advantage and reach that come with having the most users; they can use that to identify shows and topics that are undercovered for that type of dive / fanatical following, or podcasts that are driving tons of engagement but maybe not getting noticed yet.

  • How does this relate to partnerships? Well, listening to Binge Mode inspired me to go back and rewatch a heck of a lot of of Marvel movies. At some point, would some up and coming Marvel Universe contender pay Spotify to identify a host that has tons of engagement to dive deep into their universe and produce a podcast that drove extra engagement / helped them launch a universe? Why not? How much is the MCU worth to Disney? If you’re Lionsgate and you’re trying to expand the John Wick universe or the Power shows, wouldn’t it be worth paying for that to drive some extra buzz and the chance that you create a really iconic IP? Or what about the D.C. universe? There’s lots there with all of their attempted reboots, the Arrowverse, and whatever they’re doing with Titans / Doom Patrol on HBO Max. Or if you have a videogame IP that you’re trying to turn into a universe (like Netflix / the witcher), something similar could work. Or for Amazon as they try to drive buzz for their new Lord of the Rings shows.

  • Maybe that’s too crazy. But what about something like the Rewatchables podcast, where they go and rewatch old movies and discuss them. Movie studios are always talking about how valuable their movie library is; would sponsoring a Rewatchables podcast to drive extra interest / downloads / streams of a movie be worth it? Consider something like The Fugitive or Terminator; if you’re the streaming service with the rights to them, why not sponsor a Rewatchables and right at the start say “we’re reviewing Movie X; it’s available for free to stream on Streaming service Y right now”. The largest streaming services are valued at something like $1k/sub, it doesn’t take too many subs to coming into your service to justify the cost of sponsoring one of those podcasts!

    • Note I choose the Terminator because you could get real crazy with that IP; they’re always trying to reboot that franchise / turn it into a universe, so you could imagine a hybrid sponsorship deal where you sponsor a rewatchables to drive interest in the franchise and downloads, and then if the data comes back good expand that deal to cover a new show or movie set in that universe

    • Or think about all of those 90s shows they’re trying to reboot. Wouldn’t hiring Spotify to do a couple of episodes recapping the original show and having them use their date to market it to your target audience be a great and cheap way to simultaneously see if people are still interested in the show while giving newcomers a quick way to catch up on all of the lore if you do decide to launch? An example might show this best: I would have loved to get into the Twin Peaks reboot, but I watched the first ~6 episodes of the original and found it a little too slow / meandering by the standards of today’s show. But if there had been some type of deep dive podcast that came out right before that reboot launched, maybe I listen to the podcast to catch up and then watch the new series.

  • I don’t want to get too tied up in specific podcasts here; the point I’m trying to drive is that Spotify’s user data and distribution gives them tons of optionality. And, again, Spotify’s independent / available to anyone who wants it nature is helpful here; if you’re someone looking to do a similar deal, doing it with Apple isn’t quite as useful since you’re cutting out the whole Android community.

    • Maybe you’re wondering: why do companies need Spotify to do this? Couldn’t they just do it themselves? Sure! But partnering with Spotify is going to be much better. Remember, making podcasts isn’t these companies jobs; their jobs are to make great movies / TV shows. Spotify will have mountains of data that will help them determine who would make the best host of the podcast, what shows could be best for this type of treatment, etc. The WWE could have made a bunch of podcasts and put them up on their own (in fact, they were), but partnering with Spotify is going to help their core business more. I suspect the optionality is there for all sorts of people with content to do something similar.

I’m getting pretty creative / out there with some of that stuff, but that’s OK! The fact is Spotify is the largest audio platform at there with the most data and complete platform neutrality, and that combination gives them all sorts of unique call options and partnership potential that no one else has.

I mentioned the Ringer a few times above, and there’s a reason for that (aside from the fact that I’m a fan). The ringer is the offshoot of Grantland, which ESPN shut down back in 2015. Simmons launched the Ringer the next year using basically the Grantland business model, and it sold to Spotify in early 2020 for ~$200m. Honestly, that was probably a steal; based on the prices single shows like Call Her Daddy are getting; I would guess The Ringer is worth at least 5x if it was on the open market today.

Again, ESPN shut down that project in 2015; here we are <7 years later and I think the project would be worth $1B on the open market (and it sold for hundreds of millions, so even if you don’t agree with me there’s no doubt there’s massive value that ESPN destroyed by shutting it down).

Why did ESPN shut Grantland down? Grantland drove massive engagement and had a huge podcasting network, but the monetization wasn’t quite there yet. Simmons made a simple bet with The Ringer: engagement would eventually drive monetization. He was right…. but I still think we’re early days in that bet. I spend ~4-5 hours a day listening to background music on Spotify, and probably another 1-3 hours listening to podcasts (depending on if I listen at the gym, how long of walks I take my dog on, etc.). Right now, the monetization of that time is awful; Spotify gets my monthly fee (with a lot of that going to the music labels) and some small advertising money from the podcasts. But, over time, the opportunities for increased monetization are going to be endless. The simplest here is just more effective podcasting advertising; I’ve mentioned this story several times, but last year I was listening to a podcast and the host did a live read for an online gambling company that was available in ~10 states. I did not live in one of those 10 states, nor had I been to any of those 10 states in well over a year. So the company was paying for 50 states worth of consumers to reach consumers in 10 states (which covered maybe 10-15% of America’s population). That’s a lot of deadweight expense there; over time, Spotify will be able to dynamically insert ads so that ad goes only to consumers in those ten states and consumers in the other 40 states get a different ad. That alone would cause podcasting rates to go up, to say nothing of when they start targeting consumers in other ways (i.e. this user is a 50 year old woman; maybe we don’t need to give her the “Sign up to join the army” ads, while this 13 year old boy probably doesn’t need all of these ads for squarespace).

The other area that I think is interesting for Spotify is live. Sports fans still flock in drove to watch / listen to post-game analysis on their local TV or radio station. That’s slowly drifting to other places, but I still see plenty of engagement in those “legacy” broadcasts (in part driven by habit, and in part driven by the fact those are the only places to watch the game). This is the type of thing Twitter Spaces / Clubhouse are trying to attack, but I wouldn’t be surprised if Spotify is the ultimate winner here.

Why? I’ve done a ton of Twitter Spaces and really enjoyed them all (another reminder I’ll be doing a Disney / MCU one tonight!). The interest chart for spinning up a Twitter space is fantastic; just about everyone I follow I follow for #fintwit reasons, and I’d guess most people who follow me do so for #fintwit reasons as well. So if there’s breaking news in finance, I can quickly hop into a space or spin one up and there’s a decent chance we can get a reasonable conversation together. But I can’t tell you how many times I hear from people they wish Spaces were recorded and the could listen to it as a podcast the next day. Spotify’s Greenroom (their spaces competitor) lets you do exactly that: talk live, and then release it as a podcast. Now, that’s just a feature, eventually Twitter could copy that, and Twitter’s interest chart for spinning up and attracting spaces is probably much better for random / niche spaces…. but the most popular spaces / Greenrooms are going to be by big personalities who likely already have their own podcasts and are responding to big events that are already scheduled (like football Sundays, Presidential debates, or the latest Marvel movie premier) in real time or right after the event. Pretty easy to send anyone who follows, say, Bill Simmons’ podcast a notification saying he’s starting a live Greenroom; why don’t you pop in and ask questions (and if not, you can listen to it as a podcast later)? Nothing’s guaranteed, and that space (pun unintentional) is rapidly evolving, but it seems like Spotify has a really good chance at winning it. And, if they do, it would be insanely valuable; them fully “winning” this space would basically be them owning the local sports franchises for every radio station in the 90s. The engagement and monetization potential would be off the charts.

BTW- this is another place that starts to show you the network effect of Spotify buying into podcasts / owning content. A podcaster like Bill Simmons goes exclusive on Spotify. When he does that, he’s incentivized to use green room. That drives more engagement on Spotify, more live users, etc…. which gives Spotify more money and users to buy more content, which drives more engagement and users, etc. And, eventually, this all loops back to that point on at the beginning: there are tons of really famous people who would be great podcast hosts, but they don’t currently because the opportunity cost of their time isn’t worth it. As Spotify’s monetization improves, that equation changes, and Spotify can bring on top notch names that no one else can dream of getting.

Anyway, there’s lots of other angles to Spotify, but these are just the ones I wanted to focus on / that the WWE spurred my interest on. And the funny thing with Spotify is that none of those opportunities have to hit for the company / stock to work from here; there are plenty of other interesting options that come with being the largest globally scaled audio platform lead by a visionary founder. My bet is that paying ~$40B for that company / optionality is way too cheap. You know who else agrees with me? Spotify. The company recently announced a (small) stock buyback, and back in 2019 Daniel Ek paid ~$16m for warrants that expire in July 2022 and have a breakeven right around today’s share price.

The company' and the founder are betting on themselves at this levels, and so am I.

I hope you enjoyed part 1 of this tag team, and I hope to see you tonight for the Twitter / MCU space and later this week for part 2 (which will talk about the WWE). See you then!