Advertising Is Spotify’s Achilles’ Heel. Here’s Why.

Spotify’s ad business is floundering.

“We have simply been moving too slowly,” CEO Daniel Ek said on the company’s latest earnings call.

Spotify has said it wants advertising to make up 20% of its overall revenue. As of June, that figure stood at 11% — a share that has barely budged over time. Second-quarter ad revenue was down 0.7% versus the prior year, and media industry analyst Brian Wieser pondered in a recent note to clients whether it had plateaued.

Chris Camacho, CEO of the ad agency Cheil UK, said cracks in Spotify’s ad business have been visible for some time. That contrasts with the rest of the company’s relatively strong performance, with healthy growth in user numbers and overall revenue, and a stock price that’s up over 100% in the last year.

“In a world demanding seamless media execution and measurable impact, Spotify has struggled to connect ambition with action,” Camacho said of the company’s ad efforts.

“It needs to give brands access to cultural moments, not just audio slots,” he continued. “That means better content partnerships, richer storytelling formats, and measurement that proves value beyond listens.”

Industry insiders say Spotify’s ad efforts have been hampered by the company’s focus on its subscription business, which is much more lucrative. Two ad buyers told Business Insider that Spotify’s customer service has slipped recently, while podcast industry insiders said its ad rates remain low.

Spotify seems to recognize the need for change. Longtime ad head Lee Brown left last month, and the company confirmed that a search is underway for a new leader. Ek appeared to blame Brown for Spotify’s ad struggles, saying on the earnings call that “execution” and not strategy led to the poor performance.

“We felt it was the right time for a leadership change,” Ek added. Brown, who recently became the chief revenue officer at DoorDash, didn’t respond to requests for comment.

Spotify’s executives said on the recent earnings call that they want advertising to contribute more to the company’s revenue.

Podcasts offer advertisers access to Spotify’s Premium users — but the strategy has been messy

In some ways, Spotify has a business model that eats its own tail.

If Spotify converts too many free users into Premium subscribers, the audience for advertisers shrinks. If it makes the free offering too attractive, users won’t be tempted to upgrade. Spotify’s ad-supported tier serves as an important on-ramp for its Premium business — plus the $1.9 billion in ad sales it brought in last year helps toward paying its substantial royalties to music labels and other content creators. However, Premium is the sacred cash cow: Enders Analysis estimates that gross profits for Premium are around 15 to 20 times those of the advertising tier.

The company’s big push into podcasts — which have ads for those on the Premium tier — offered a way to bridge that gap. It also gave advertisers the chance to reach more affluent audiences. Spotify spent more than $1 billion to acquire companies like Gimlet Media and Anchor, and signed exclusive deals with Joe Rogan and the Obamas.

Podcast executives and ad buyers told Business Insider that the podcast advertising strategy has been messy, with several pivots in its few years of operation. Spotify ended some of its original and exclusive programming, cut staff, flip-flopped its stance on areas like measurement and ad pricing floors, and made a pivot to video that is still in the early stages and has yet to prove itself as a guaranteed moneymaker.

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Spotify acquired the podcast hosting and adtech company Megaphone in 2020 in a $235 million deal that was designed to help podcast publishers make more money through its advertising marketplace.

There were hiccups from the start. A former Spotify ad sales exec said there was an irony in the company attempting to sell Megaphone to podcasters as a best-in-class adtech solution while Spotify itself uses Google as its ad server.

One podcast publisher said they were getting around $8 or $9 CPMs — the cost of 1,000 impressions for a digital ad — on average through Megaphone, versus the $20 to $40 CPMs they would achieve for host-read ads. However, they acknowledged that directly sold ads usually fetch higher prices than those sold via third-party adtech, such as Spotify’s. The average CPM price advertisers paid for digital audio ads in the second quarter of this year was $16.51, according to the analytics company Measured — though the final fee a podcast publisher would receive after platforms and other third parties take their cut would be smaller.

A Spotify spokesperson said the average CPM on Spotify is “far above” $9, though they declined to provide additional specifics. They said that ad revenue is influenced by macroeconomic and seasonal shifts that may impact overall CPMs. Publisher revenue generated through the Spotify Audience Network had seen double-digit growth year-over-year, the spokesperson said.

A pivot to video

Spotify has been introducing other money-making opportunities to offset volatile ad prices.

This year, as part of a big video push, it launched the Spotify Partner Program, offering creators a 50% share of the ad revenue their videos generate. It has encouraged some publishers and creators to get on board by giving them minimum revenue guarantees, though it’s unclear how long those will last.

The Spotify Partner Program has been a “big win” for YMH Studios, producer of podcasts including “Your Mom’s House” and “2 Bears, 1 Cave,” according to the company’s head of ad revenue, Alan Abdine. He said the company had seen a consistent 20% to 30% revenue lift.

Several ad buyers told Business Insider that Spotify must prove it can be a meaningful player in video.

“Video here feels like an add-on,” Cheil’s Camacho said. “If Spotify wants to be bold, brave, and first, it needs to reinvent what video within an audio experience could be.”

A Spotify spokesperson said video podcast consumption is up 54% this year, with users who watch a podcast consuming 1.5 times as much as those who just listen. The spokesperson said it is building ways to improve the creative options available for creators, fans, and advertisers, such as audio-to-video playback, built-in community tools, better on-platform analytics, and new monetization models like the Spotify Partner Program.

Customer service takes a slide

Some advertisers have been put off by Spotify’s increasing focus on automated ad buying and by high turnover in the company’s ad sales staff.

Spotify cut 2,300 jobs through three rounds of layoffs in 2023. Last year, it axed 40 positions and 17 open roles in its ad and campaign management teams.

Dan Granger, CEO of the audio ad agency Oxford Road, said getting a response from the Spotify team could take days versus a matter of hours from other partners, and that many of its accounts were handled offshore.

The Spotify spokesperson said the company prides itself on its customer service and aims to respond to advertisers within three to six hours, with the goal of resolving any issues or queries within 48 hours. They added that Spotify has dedicated customer service managers and client partners for every direct sales account.

Granger said his agency had experienced consistency issues when Spotify inserted ads into podcast streams. Sometimes, ads are clustered in a short burst instead of being paced evenly, eroding a campaign’s performance. Ad prices had recently jumped without a commensurate increase in the value they delivered, Granger said, adding that Spotify’s measurement offering was “inhospitable” for brands.

In an August note to clients, analysts from Arete Research said they questioned whether Spotify “has the DNA of an ads company, or whether ads are simply a way to spur users into paying for Premium.”

This dynamic isn’t lost on the ad community.

“Spotify just doesn’t prioritize the needs of the advertising community the way it does that of its subscriber business,” Granger said.

Spotify is pinning its hopes on 2026 being a better year for the ad business

Some in the ad industry think Spotify can turn its fortunes around.

Spotify has made a raft of announcements in the last year. Among them, it launched the Spotify Ad Exchange, which lets customers buy ads using demand-side platforms, an in-house creative lab, and a generative AI tool to help advertisers create audio ads. It hopes these rollouts will help turn the dial for its ads business by 2026.

Will Doherty, senior vice president of inventory partnerships at The Trade Desk, said Spotify’s decision to partner with adtech companies gives ad buyers more choice and control versus rival “walled garden” Big Tech platforms from whom they can only buy directly. The Trade Desk is a Spotify Ad Exchange partner.

Doherty said moves like these put Spotify’s ad business in a position to grow.

“From a technical standpoint, Spotify is pretty sophisticated,” Doherty said. “It takes time for any business to consolidate and unify an ad stack on a global scale, while managing the various partnerships needed to grow and be successful.”