Morris Esformes on why Spotify acquired of Gimlet Media and Anchor FM

In early 2019, music streaming service Spotify announced the acquisition of two podcasting companies, Gimlet Media Inc. and Anchor FM Inc. Financials of the deal were not disclosed, though reports speculate Gimlet alone could have cost somewhere in the $200 million range; regardless, Spotify has announced its plans to spend $400 to $500 million on podcast services this year alone.

Podcasts Enter the Mainstream with Advertising Success

According to Morris Esformes, podcasts, which were first started as a niche platform and storytelling device, have since exploded onto the mainstream. In 2014, the release of the crime series podcast titled “Serial” drew massive attention from listeners and major advertisers alike. The success of the podcast ultimately initiated a mainstream trend. Now, with Spotify’s recent acquisitions, the legitimacy of podcasts as a business has been taken one step further.

Just as SVODs such as Netflix, facilitates both streaming and content creation, Spotify has made it clear that it wants to be a producer of podcast content, as well as a platform for distribution. The acquisition is an insightful look into the booming value of podcasts as a medium, and the future of its revenue driving potential.

However, the biggest question surrounding the news of the acquisition has been: Why?

One reason, according to Morris Esformes, why Spotify might be willing to take such a massive risk is that podcasts have their strongest reach in the 18–34 year old market, which is, historically, the most coveted and difficult group for advertisers to engage. As the most sought after age group, advertisers are interested in keying into social trends to easily transition them to lifelong customers.

Another reason could be due to Spotify’s struggles to draw a profit from their current music streaming service. Currently, the company employs a subscription based model, but royalties and other fees from artists, labels, and studios have caused issues with streaming services in the past.

As most media and advertising companies place primary focus on video platforms for advertising efforts, it’s worth closely following how Spotify continues to invest in the audio market. Yes, they control a massive stake in the sector, but Apple controls the vast majority of podcast distribution. Podcast ad spend only accounts for $314 million (or less than 1% of the U.S. digital ad market), but it seems Spotify is betting a huge stake on the future potential of podcasts and their revenue generating ability.

Spotify is focusing on what they believe is the massive growth potential of podcasts and the podcast medium’s possible market share of ad revenue. Spotify CEO, Daniel Ek, has made statements which demonstrate his belief that audio advertising is undervalued and video advertising isn’t worth the huge (10x) value it has over the audio market. Ek has also been vocal about his intention to transition Spotify from a music streaming service to the global leader in audio platforms.

Implementing Services Across the Platform

What could work in Spotify’s favor is that it operates on a different payment model than traditional radio or podcast outlets. Instead of relying solely on advertising revenue, Spotify also has a huge base of paying subscribers. While this reliable operating capital is critical to Spotify’s success, the company still needs to focus on its core content principles. A valid concern in this new strategy is the worry that Spotify then overextends into unprofitable markets that the core consumer does not enjoy.

There are competitors in the music streaming marketplace, like Apple Music, but Spotify’s 96 million monthly subscribers nearly doubles Apple’s share, giving them a firm grasp on their standing in the industry.

A whopping 88% of subscribers to any given podcast listen to most or all of its episodes, leading to the fact that Spotify may not be too far off target for investing.

Overall, Spotify has set the precedent for what it aims to do in the future and has shown its cards in terms of financial investments to come. The only question left is: will other streaming services follow suit?