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Spotify’s Acquisition of Gimlet & Anchor Does to Podcasts What It Can’t Afford to Do to Music

Now Spotify can finally bring its vision of becoming a "two-sided marketplace" to life -- just not for music first.

Over the past several months, Spotify’s relationship with record labels and distributors has been murky at best, combative at worst.

In June 2018, after voicing ambitions to become “the R&D department for the entire music industry,” Spotify began offering select managers six-figure advances to license their artists’ music directly to the platform without any third-party help. Shortly thereafter, the publicly-traded streaming company launched a beta version of its direct-upload tool for a wider base of unsigned artists in the U.S. — then announced a “passive minority investment” in DistroKid that would allow artists to use Spotify’s upload functionality to release their music on other streaming services as well.

Analysts even speculated about whether Spotify could potentially buy Universal Music, which Deutsche Bank recently valued at $33 billion. “Licensing content doesn’t make us a label, nor do we have any interest in becoming a label,” Spotify CEO Daniel Ek rebutted during his company’s Q2 2018 earnings call. “We don’t own any rights to any music and we’re not acting like a record label.”


Yet Spotify’s burgeoning role in the podcast industry paints a vastly different, if not somewhat alarming, picture.

On Wednesday, Spotify announced its strategic acquisitions of Gimlet Media and Anchor, two of the podcast industry’s largest production houses and distribution tools, respectively. Gimlet — home to popular shows such as Reply All, StartUp and Spotify exclusives Crimetown and Mogul — previously called itself the “HBO of audio,” and will be sold to Spotify for a reported price of around $230 million. Anchor claims that it powers 40 percent of new podcasts entering the market and accounted for 15 billion hours of audio content on Spotify in Q4 2018.

This two-pronged acquisition is arguably the equivalent of Spotify buying a major label like Universal and a distribution company like DistroKid, all in one swoop.

In fact, Spotify’s new dual status as an owner of competitive IP who also services outside clients through an “independent” distribution tool — and, subsequently, gets their data — directly parallels major-label business models. Universal services outside labels through wholly-owned indie distribution company Caroline; Sony Music does the same with The Orchard; Warner Music not only owns indie services company ADA Worldwide, but also launched a free distribution tool aimed at DIY artists called Level Music in May 2018, to compete with the likes of CD Baby, TuneCore and DistroKid.

One key difference: none of these major labels also operate their own streaming platforms.


Overall, music still dwarfs podcasts on revenue, both inside and outside of Spotify. According to the RIAA, the U.S. recorded-music sector generated $4.6 billion in the first half of 2018; the national podcast market didn’t make even 4 percent of that figure over the same time period.

Hence analysts aren’t expecting podcasts to be Spotify’s financial saving grace in the near term. Even though the company did report its first-ever operating profit of €94 million ($107 million) in Q4 2018, its annual revenue growth is slowing, and its latest financial report projects up to €360 million ($408 million) in losses this year. The news sent the streaming service’s stock down nearly 7 percent in early trading on Wednesday.

Nonetheless, Spotify has become an undeniable competitor in an ecosystem historically understood to be monopolized by one behemoth — namely, Apple.

According to a Recode interview with Gimlet’s founders on Thursday (Feb. 7), Spotify now accounts for nearly 20 percent all podcast listening, a significant jump from the 7-percent share reported just half a year ago. The company’s Q4 shareholder letter reveals that over 10,000 podcasters are currently using the Spotify for Podcasters analytics tool, which is still in beta.

In addition, thanks to the podcast industry’s relatively low valuations, Spotify has learned the hard way that vertically integrating podcasts is much easier and cheaper than doing the same for music.

Ever since 2017, Spotify has been trying to own a stake in all parts of the music value chain beyond digital consumption alone — including acquiring cloud-based recording studio Soundtrap and launching live tours for flagship playlist brands like RapCaviar and Who We Be, in addition to signing direct licensing and distribution deals with unsigned acts.


Yet incumbent music corporations already have such a stranglehold over their respective spheres that Spotify’s disruptive ambitions have been all but tamed. For instance, Spotify’s agreements with major labels explicitly prevent the company from acquiring musical catalogs, because doing so would compete with the labels’ core business; this inevitably influenced Spotify’s decision to invest in and partner with a third-party distributor like DistroKid, rather than buy one out altogether. Similarly, Live Nation and Ticketmaster dominate so much of the live sector that Spotify had to partner with the promoter to organize its tours at the appropriate scale.

In contrast, no one company previously had a stranglehold on podcast content or financing. In fact, up to this point, distribution and hosting tools like Anchor were more innovative than end-user platforms like Spotify with respect to creator-level monetization for podcasts. Anchor was the first to launch a sponsorship feature that allows any podcaster to monetize their episodes through advertising, as well as a listener-support feature that enables direct-to-host micropayments from listeners.

Now that Spotify owns Anchor, it can finally bring its vision of becoming a “two-sided marketplace” to life — just not for music first.

According to its latest earnings report, Spotify made €175 million ($199 million) in advertising revenue in Q4, more than the entire podcast industry combined. At that scale, and with Anchor in tow, the streaming company can actually grow into a model quite similar to what music distributor UnitedMasters is trying to build: a marketplace of independent producers on one end, and brands and advertisers on the other.

Brands typically pay higher CPMs for podcast placements compared to other digital ad formats; as MIDiA Research analyst Georgia Meyer notes, “podcast sponsorship is the new Instagram influencer marketing,” as it caters to niche, highly-engaged audiences. Notably, Spotify will be a direct beneficiary of these sponsorship dollars — particularly in the case of Gimlet’s high-production slate of shows — whereas Instagram influencers’ sponsorship transactions happen off-platform.


Moreover, because of podcasts’ primarily ad-supported economics, more podcast streams on Spotify lead directly to more revenue for the company — a relationship that does not exist for music licensing, which remains a variable cost. In the words of tech analyst Ben Thompson, this potentially creates a situation where “podcasts will drive a relatively small percentage of revenue and a much larger percentage of profit.”

Spotify also didn’t accidentally pay Gimlet over three times the latter’s internal valuation of $75 million: the streaming service is still on its lofty mission to cannibalize listening time, and ad dollars, from terrestrial radio.

“People still spend over two hours a day listening to radio — and we want to bring that radio listening to Spotify, where we can deepen engagement and create value in new ways,” Ek wrote in a statement on the company’s website. A triple threat may arrive when Spotify integrates music and podcasts into its upcoming voice-controlled hardware device, potentially giving the company a concrete advantage in music streaming services’ ongoing battle for the car and the home.

The music industry’s immediate reaction? Invest more in podcasts. Atlantic Records already has its own podcast production team and studio, which launched nearly a year ago and will likely leverage the totality of Spotify’s new media ecosystem to drive streams for the label’s artists.

Beyond the major-label realm, hundreds of independent artists also host or are thinking of launching their own podcasts, often treating the format as their own alternative media outlet. An ecosystem of independent podcast networks and labels, including Osiris Media, Signal Co. Nº1 and Jabberjaw Media, is emerging to provide production and monetization resources tailored for music communities. Spotify plans to spend up to $500 million on acquiring new podcast properties in 2019; one should not be surprised to see artists and music companies included in that mix.

Meanwhile, third-party music distributors are racing to differentiate themselves beyond just delivery and accounting tools, to avoid the same fate as an adjacent peer like Anchor. But if Spotify can prove to Wall Street that vertically integrating the podcast industry is a smart business move, they might build up the nerve to do the same for music, with much less hesitation.