Spotify tunes up its ad tech as it looks to attract even more ad dollars

By building its own exchange, Spotify aims to capture more revenue from small and medium-sized businesses to allow existing clients to spend more efficiently, making it more competitive with platforms like Meta and Google, with The Trade Desk operating as its beta demand-side platform partner. As part of the tie-up, Spotify will also sign up for The Trade Desk’s Universal ID 2.0, the DSP’s gambit in helping to usher the ad tech ecosystem into becoming a cookie-less ad-targeting system.

SAX connects advertisers directly to Spotify’s inventory by integrating with DSPs, and marks a departure from its earlier ad tech offering in which it partnered with third-party SSPs.  

Initial testing focuses on video ads in North America, with an audio ad offering expected to follow. 

Spotify’s move comes amid a trend of streaming service providers taking greater hold of the reins when it comes to their ad tech, posing media buyers with the task of navigating an increasing number of ‘mini walled gardens.’ Examples include Netflix issuing an RFP for vendors to help build its own ad tech (after its initial partnership with Microsoft to launch its ad-funded offering) with Amazon’s Prime Video and Google’s YouTube as market leaders.

Spotify’s ad tech evolution

Spotify began monetizing its ad inventory via direct sales when it launched to the public in 2008, but this changed in 2015 as the music streaming service started to embrace programmatic media trading with the introduction of a private marketplace offering the same year. 

The early stages of this process involved working with the IAB Tech Lab to help update the open RTB protocol to support audio ad formats, plus other integrations. Sources at the time described the earliest version of Spotify’s ad tech offering as plugging audience demand into third-party SSPs, with The Trade Desk named as one of Spotify’s earliest demand-side partners.

The music streaming service later partnered with outfits such as Google to launch a programmatic guaranteed offering. In early 2021, Spotify debuted the Spotify Audience Network, an audio spot marketplace that lets advertisers reach listeners with its original and exclusive licensed podcasts, as well as those hosted on Spotify-owned Megaphone and Anchor. More recently, it rebranded Spotify Ads Studio to Spotify Ads Manager, a move to reflect the evolution of its services, such as its self-serve platform.

What buyers want

Lindsey Freed, svp of investment and buying services at Basis Technologies, told Digiday that Spotify’s SSP gives it more control over the supply chain and may help operationally by managing placements and buyers more holistically. “Spotify can still integrate with other exchanges, so it’s questionable how much more incremental video ad growth this generates,” she added. 

One buyer speaking with Digiday on background as they were not cleared to speak with press said they expect the development to attract further spend, as “being able to buy biddable audio inventory at scale is important for us and our clients, and has been somewhat challenging up to this point.”

They added, “Because The Trade Desk is a widely utilized platform by advertisers of all sizes, there should be a relative ease to testing this inventory and I suspect that will help bring new advertisers to Spotify. This move also opens up additional measurement and audience insights, which will be attractive for new advertisers and should also help existing brands feel more comfortable in growing their investment.”

Separately, Alex Block, evp of programmatic at Jellyfish, observed how the latest experiments from Spotify would lower the bar to entry, and could entice brands to experiment with ad placements on the platform, as it would likely reduce minimum spend requirements. 

“It’ll be interesting to see the details around how they structure deals — whether it’s PG or PMPs, how they structure their data and audiences, what the formats are, is it desktop or mobile or both,” Block added. “All of those things are important for brands and agencies to know in the planning process, but the simple fact that they’re opening up their inventory programmatically is very attractive. Depending on how flexible access is, brands and agencies can easily optimize more dollars into Spotify based on performance.”

Meanwhile, Josh Rosen, president at Hotspex Media, observed how Spotify’s latest moves are likely to mirror those in the TV-streaming category, i.e., courting ad spend from SME marketers, the backbone of the success of market leaders such as Amazon, Google, and Meta. 

“Small and medium-sized businesses look for and need streamlined ways of advertising to target their audience. Spotify’s SSP broadens the appeal by offering automated, scalable ad solutions that SMBs can access via demand-side platforms like The Trade Desk,” added Rosen. “Beyond that, it opens the door to advertisers who in the past may have found direct programmatic deals with Spotify too cumbersome or expensive to deal with. I am a fan of the inclusion of UID 2.0, since it adds a layer of privacy to its targeting.”

Dominic Johnson, associate director of brand media at Collective Measures, believes the likelihood of SAX proving a hit on Madison Avenue will depend on several factors, such as how seamlessly buyers can integrate it into their existing media plans, and the granularity of ad placement. 

“The ability to target by podcast genre with precision is an area where programmatic is still in a growing phase, where it lags behind other ad types like banners and the contextual category targeting available there,” explained Johnson.

“This is because podcast advertising is still in its relative youth compared to other ad types that are more established from being available longer. For example, not every podcast impression in the bidstream is accurately declaring the show’s category, and when it doesn’t include that info (or does so incorrectly), the DSP isn’t able to properly identify it, categorize it, and let a brand bid on it.”  

What Spotify is trying to show Wall St. 

The development emerged ahead of Spotify’s scheduled Nov. 12 Q3 earnings call, when executives are likely to emphasize how offerings such as SAX can contribute to its bottom line, especially when enhancing its profitability. 

According to Spotify’s earlier financial disclosures, the streaming service reached this milestone for the first time in 2024. In Q2, it reported that advertising revenue accounted for 12% of its revenue, totaling €456 million (approximately $478.8 million). 

“This increase was due primarily to growth in music impressions sold and CPM, which increased revenue in our direct and programmatic channels by €29 million [approximately $30.45 million]. Ad sales from podcasts, supported by growth in podcast impressions sold, and our self-serve platform, also increased revenue by €16 million [approximately $16.8 million] during the three months ended June 30, 2024,” read the filing. 

Tellingly, the filing also noted how the cost of its ad-supported revenue dipped below total contributions of ad revenue during the first six months of 2024, as compared to 12 months beforehand, with execs there likely to emphasize how developments such as its self-serve platform and SPAX’s appeal to more advertisers will continue this trend. 

In an August note, eMarketer’s Jeremy Goldman noted the analyst house’s prediction that Spotify’s ad revenue would generate 21.45% of its total income next year but that it would have to address challenges in order to remain on course for reducing its reliance on revenues from premium subscribers; a challenge SPAX could tackle. “Since nearly 40% of its users subscribe to ad-free premium accounts, that limits Spotify’s ad reach,” he wrote.