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The podcast may elect whether or not to include it, but it's definitely Spotify performing the legwork. That is unless you think it's a coincidence that I (with my Spotify home address set to Iowa) got an ad from the Iowa HHS on a podcast by a British podcaster.
It's called dynamic ad insertion, and it's the podcast hosts choosing to insert ads into their podcasts. I know this because I have a podcast with no ads.
Spotify is giving them that choice. It should say that it won't run ads for premium users - only free ones.
It's not Spotify that's "giving them that choice." It's the podcast distributor. For example, I use Red Circle, and I can choose to insert ads through them. Podcasts have the same ads regardless of the platform they are on. It's not Spotify, it's the podcasts. I don't like ads either...
How does it give me location specific ads if Spotify isn't inserting the ad for them?
both things are true. The decision to include an ad is made by the podcast producer, but the dynamic ad is facilitated through Spotify's dynamic ad platform. Podcast producers have been including paid sponsorships in podcasts in addition to inserting ads in their podcasts. For the inserted ads, they will work with the podcast platforms to insert dynamic ads if the platform supports it (like spotify) or generic baked-in ads if the platform doesn't support it. Either way, inclusion of these ads is controlled by the producer, not the platform, so paying to remove platform-controlled ads won't remove these ads. If you want your podcast with no ads at all, you may need to see if the producer offers an ad-free version (possibly through a proprietary paid platform like patreon).
Unless they're talking about ads that the podcasters themselves at to the recording. They're not all inserted by whatever platform you get them from. This is what they're referring to.