The Future of Podcasting is Subscription - Lessons from the History of Media

Last week, Luminary Media officially launched its subscription podcasting platform to the public, and was quickly dismissed and even attacked by some in the media and on Twitter. Luminary, which raised nearly $100 million from investors prior to launch, offers a free podcast player, along with a catalog of 40+ exclusive ad-free original podcasts locked behind a $7.99 monthly subscription. To some, introducing a new business model was an affront to the relatively new medium, as demonstrated in the Fast Company article titled "Why podcast fans will always reject a "Netflix for podcasts," in which the author deftly states "First, it's annoying." What these critics fail to understand is that this story has been told before - and in almost every case, the quality of content has increased, the consumer experience has improved, and creators have been more appropriately compensated for their talent.

Advertising, which to date has been the primary revenue channel for podcasts (bringing in a paltry $314 million in 2017), also initially supported nearly every new media format in their formative years. This was true for newspapers, radio, television, and early digital video platforms. Historically, it was unclear (and unlikely) that consumers would pay directly for new types of content enabled by new technologies and means of distribution, leaving sponsorships & advertising as the only potential for monetizing mediums. In order to drive the value of an advertisement up, media companies needed wide distribution to drive circulation (which is even why you may still get The Yellow Pages delivered to your home every year…) Wide distribution = more consumers = more advertising revenue. In this model, in order to invest more capital into quality content, content producers must either (A) reach a wider audience, or (B) insert more ads into the content.
However as more consumers adopt the new distribution channels (radios, television sets, smart phones) and incorporate the content into their daily lives, things evolve. Often, new consumer propositions emerge, promising a better experience or higher quality content for a premium price.

Radio had been primarily free and ad-supported since its inception in the early 20th century, until Satellite radio (a whole new and expensive distribution system) launched in 2001. Subscription satellite radio still had a slow start without any standout content, until it secured the exclusive distribution rights for The Howard Stern Show in 2006, putting the previously free program behind its subscription paywall, and landing over 180,000 subscribers over night. Today, Sirius XM has about 33 million subscribers.

Television programming was also born as sponsored content broadcast for free over the airwaves (ABC, CBS, and NBC), before pay-cable channels like Home Box Office (HBO) began to emerge in the 1970's. HBO launched by transmitting popular films straight into subscribers homes, before evolving into producing HBO Original Films and eventually, HBO Original Series such as The Sopranos, The Wire, and Game of Thrones. This iconic content, which draws 140 million+ global subscribers to HBO, would not be possible on a purely advertising-supported channel.

While the podcast industry is still in its infancy, it has seen tremendous growth in both consumption and production volume over the past decade. In 2008, less than 10% of the U.S. population listened to podcasts on a monthly basis, while nearly 1/3rd of the country does today - about 90 million monthly listeners. Further, there are an estimated 700,000 podcasts and 29 million podcast episodes as of April 2019. Surely, some portion of those 90 million monthly U.S. listeners would be willing to pay for a premium ad-free podcast experience in which creators have the resources to create and event high-quality content.

The objection that some are raising in regards to Luminary's paywall is that just because you can charge for content doesn't mean that you should. The ignorance in this protest is that the pressure to create content that people are willing to pay for often drives up the quality of said content and the resources that producers can devote to it. The expense and investment in subscription based HBO's Game of Thrones dwarfs the budget of any show on (primarily) ad-supported CBS. HBO viewers are willing to pay a monthly fee for access to this premium content, which in turn allows the network and talent to invest more heavily in quality content.

Further, talent is the backbone of any creative industry, and deserves to be well compensated for the value that they create. While some podcast creators are able to reach a sizeable enough audience to court advertisers, others must turn to platforms like Patreon to ask listeners to donate on a recurring basis in order to fund their favorite shows. Even A-List talent and seasoned podcast professionals with hundreds of thousands of fans must rely on inserting advertisements for Casper into their content, which still leaves little room for investment into high production value, longterm projects, or dabbling with innovative formats. Subscription business models allow the upfront investment directly in talent and content - such as Netflix's astonishing overall deals for television creators Ryan Murphy ($300M) and Shonda Rhimes ($100M), who left Twentieth Century Fox TV and ABC Studios respectively, studios which were primarily focused on advertising-supported broadcast television.

We also know from other media platforms that consumers are generally pretty amenable to pay higher fees for ad-free experiences. Spotify and Hulu, for instance, both have ~50% of users paying for ad-free tiers of the same content.
Spotify has also made its ambitions in podcasting rather clear, spending $400 million to acquire Gimlet Media (a podcast studio with a significant catalog), Parcast (another podcast studio) and Anchor (tools for podcast creators). Spotify's interest in podcasts is less about creating better content, a better listener experience, or rewarding creators - but instead about making the company's basic economics work. Despite having 100 million paying subscribers and 217 million total monthly active users, the company's deals with music publishers means it is still unprofitable due to the share of subscription and advertising revenue that Spotify must send to publishers based on users' listening habits. If Spotify can get users to listen to more podcasts and less music, it can shift some of that revenue to its own pocket.
For its part, Luminary has the advantage of a maniacal focus on a very specific type of content - just as Netflix has had and maintained for the better part of a decade. Despite its success with on-demand video, Netflix has resisted the urge to move into sports, news, live TV, gaming / eSports, or ad-supported content - which has provided the clarity and focus to build a dominant media company and beloved consumer brand in record time. Luminary has the opportunity to execute a similar playbook for the podcasting community.

To be clear - there will always be free, ad-supported podcasts in the world, just as there is terrestrial radio and broadcast television. Although some are upset at the potential disruption (and disaggregation) that Luminary will likely ignite in the podcast community, both creators and listeners are likely to be beneficiaries: creators will have the opportunity to experiment and invest in high-quality content they want to create and be more fairly compensated for their talent, while consumers will benefit from a better podcasting experience, with ad-free, high-quality content. This is a story that has been told before - and the podcast community should be excited.