Is Apple's embrace of Podcasting a threat to Audible? (ADBL)

Includes: AAPL, ADBL
by: David Jackson

Randall Stross' article in the NY Times, The Battle for Eardrums Begins With Podcasts (free subscription required), raises questions about Audible's (ticker: ADBL) competitive position. Summary and analysis:

Randall Stross' well-written article provides a good overview of podcasting (if you don't know what this is and you're an investor in either Apple, or any radio stocks, read the article now). He then goes on to examine the implications of Apple's inclusion of podcasts in the iTunes Music Store. He writes:

"I was surprised to see how prominent podcasting was," Gene Munster, senior research analyst at Piper Jaffray, told me last week, after he saw the new iTunes store. Mr. Munster explained his hypothesis: the podcasting phenomenon had simply become too large for Apple to ignore - it had to embrace it or resist it. By opting to embrace, the company regains the aura of revolutionary; by introducing many people to podcasts, he added, Apple "will reinvigorate conversation about the iPod."

Mr Stross then points out that Apple's promotion of podcasts poses a threat to Audible. Audible is currently the exclusive supplier to Apple of over 17,000 audio books, which Apple offers for paid download on its  iTunes music store. But Apple is now enabling podcast producers, including professional radio stations, to offer their free podcasts on the iTunes Music Store. This poses a threat to Audible, he implies, because it challenges Audible's position as exclusive provider of spoken-word material to Apple.

The bottom line for Audible is then summarized by this paragraph:

Mr. Munster of Piper Jaffray is bullish about Audible's prospects and predicts that Apple's support of podcasting will ultimately help Audible because it will increase awareness of spoken-word programming. Ultimately, awareness will lead back to Audible's core business, audio books, which account for 90 percent of its revenue. He also points out that Audible's exclusive agreement with Apple runs through September 2007; under that agreement, Apple cannot charge for spoken-word programming other than Audible's.


Apple's adoption of podcasts is much more bullish for Apple than the article suggests.
Piper Jaffray analyst Gene Munster underestimates Apple's opportunity and motivation for promoting podcasts:

  • Music and audio books are currently produced and distributed by professional recording companies and music distributors. Podcasting challenges that business model. Cheap software and recording equipment now enable individuals and small companies to produce audio at low cost, and Apple's growing dominance of the (legal) music download market provides them with a centralized distribution platform (the iTunes Music Store) that obviates the need for distributors as intermediaries. (Bad news for the record companies.)
  • Apple could profit from this in two ways. First, it can optimize its software (such as GarageBand) for upload of digital files to the iTunes Music Store, boosting sales of its software and hardware. Second, once users start to pay for podcasts, Apple will take a cut of all podcast revenues on the iTunes Music Store, just as it takes a cut of music revenues now.
  • The podcast opportunity is arguably large. Podcasting will open the market for audio (and later video) production to millions of people. Since the material is digital, Apple's inventory and distribution costs for offering that material for sale on the iTunes Music Store will be negligible - just the costs of storage. But its revenues could be substantial. (Note: ie. Apple will be in a position to monetize the Long Tail of audio and video production.)

Where will that leave Audible?

  • Apple is strongly incentivized to dis-intermediate Audible. There's just too much money in this for Apple in the long term to give the market to Audible.
  • But Audible holds two strong cards: first, its current library of spoken-word audio and its ability to work with other (non-Apple) online music stores. And second, its exclusive agreement with Apple for paid spoken-word downloads until 2007.
  • The key question for Audible is therefore how fast the market for paid podcasting will develop. If it develops significantly before 2007, Apple will be unable to charge directly for podcasts without using Audible as the aggregator and provider of paid podcasts. That could allow Audible to build an entrenched positon in the business of distributing paid podcasts. But if the market for paid podcasts develops gradually, reaching critical mass in 2007 or later, Apple will circumvent Audible, by enabling producers to upload podcasts directly to the iTunes Music Store and taking all the distribution fees for itself.
  • Podcasting will ultimately undermine the current market for spoken-word material. It's far easier to record spoken-word than music, so audio books and other voice programming will rapidly move to the podcast model, away from the use of professional recording studios and large music distributors.

Note: ADBL CEO Donald Katz discussed podcasting on his one of his company's conference calls, and that is S&P analyst Scott Kessler's top pick.

ADBL chart below.