Spotify's Land Grab

Spotify’s plans of greater audio differentiation are starting to coming into focus and it’s not just about podcasts.

The calls are out right now.

Spotify is making their move and they’re making it quick before the audio industry wakes up to what’s really happening.

This week, Spotify struck quick with surprising but smart acquisitions of Gimlet and Anchor and the podcast industry wasn’t ready. Now, they’ll have to guess where will Spotify strike next. What we do know is that Gimlet was acquired for $230 million and while Anchor’s price is still unknown, it’s hard not to wonder who’s next on Spotify’s $500 million shopping list?

Given the announcement of Spotify’s acquisitions and Daniel Ek’s desire to make more “audio-first” moves, the set is stage for Spotify to change the podcast industry “overnight,” while laying the foundation to potentially change how audio is created and distributed.

WHY SPOTIFY IS MAKING THESE MOVES

For years, the bear case for Spotify has been pretty straightforward. Spotify has the same music content as Apple Music, YouTube Music, Amazon Music since the record labels license their music to all of the platforms. Because of the fee structure with the labels, Spotify loses money each quarter because streaming music has been their only business and they pay out a significant percentage of their revenue to labels and that won’t change anytime soon. Meanwhile, Apple, Google, and Amazon are able to subsidize the costs of their streaming music platforms with iPhones, search revenue and Prime/AWS respectively.

More worrisome to Spotify’s future is that they aren’t the default option on any platform of significant size.

Alexa? Nope.

iOS? Nope.

Android? Nope.

And yet they have 200 million users—many of which are paid subscribers. So if you’re a Spotify subscriber today, you’re essentially paying for better playlists, a better user experience and better sharing amongst friends.

But say Apple made Apple Music free or bundled it with other Apple services for $5/month instead of Spotify’s $10/month as Matthew Ball has written, how much would Spotify’s advantages matter? Not so much!

So Spotify needs to differentiate their offerings from their competitors who can pay the record labels fees in perpetuity without regards to their own music service’s profitability. In addition, due to the terms of their IPO, Spotify can’t become a label, so creating new IP and content worthy of the value of their subscription that other platforms don’t have is the obvious path.

In the search for differentiation and maximizing their offerings for their 200 million users, exclusive can’t miss content and user-generated content are two ways for Spotify to own audio in a way that their competitors likely won’t focus on.

Focus is key.

Remember: Audio is everything to Spotify, but audio to Apple or Google is just another thing.

ENTER GIMLET

Spotify has had podcasts on their platform for a few years but bringing on Gimlet, who are among the best in audio storytelling sends a message to everyone in the podcast space that Spotify is serious.  

(Side note: If you haven’t listened to season one of Startup, what are you doing!? It’s incredible! That company just got sold for $230 million! Awesome!!)

Does Gimlet add value, prestige, high quality and expertise in storytelling to Spotify podcasting? Absolutely! But will Gimlet alone drive significant subscription growth? Doubtful.

Over the past year, Spotify has signed great talent with big, and more importantly passionate audiences like Joe Budden and Jemele Hill to lucrative exclusive deals and I’d expect them to continue signing more of these deals. But adding Gimlet gives Spotify a loftier voice and prestige in their portfolio, similar to HBO being part of the WarnerMedia. It also gives them a bigger expertise in the business of podcasting and the art of storytelling. When I think about the benefits of Gimlet’s “magic” for Spotify, I keep coming back to Disney’s acquisition of Pixar. Because of the storytelling frameworks that Pixar built, they were able to almost instantly improve Disney’s floundering animation studio, while keeping their own culture in tact. Will more studios join? I’d bet on it.

Would buying additional podcast studios/creators like The Ringer add more value and differentiation? Absolutely. If the content is great and has an audience that will do anything for it, they’ll pay for the service. Another option that would instantly add valuable content that Spotify doesn’t have is Qello, the live music and music documentary service. Both are certainly compelling, but I’m just playing the M&A guessing game.

Last year, the entire podcast advertising market booked $314 million in revenues, so why would we expect Spotify spending $500 million going “all-in” on podcasts to change their fortunes?

I’m not sure. Is the world hankering for podcasts like Serial in the same way they are for the next ‘Game of Thrones’? I don’t think so. But that $314 million was on the back of 86% YoY growth, in spite of a huge barrier to entry for podcasting monetization. I certainly think the existing podcast market can be much bigger but more importantly these moves by Spotify aren’t just about podcasts.

ANCHOR = SPOTIFY CREATOR TOOLS

What if you were to give everyone the tools to make high quality podcasts on their phones and distribute their work easily and for free to 200 million people inside the Spotify ecosystem?

What if Spotify had those tools and optimized them for creators similar to how GarageBand was optimized for musicians and podcasters in the early 2000s?

What if Spotify could monetize your work free of charge so that you can create amazing audio without having to deal with third party advertisers?

Well, Anchor is that service.

Anchor is a robust yet user-friendly app that changes the podcast creation game by allowing anyone to create podcasts and share them with the world using just their phone.  

Imagining what an Anchor experience integrated with Spotify looks like isn’t hard and yet this acquisition isn’t getting nearly the same amount of talk as Gimlet’s, but I think it’s more significant to Spotify’s future.

This is about creating tools and giving creators aka anyone the ability to post audio to Spotify and be compensated accordingly.

This isn’t really about professionals, it’s about kids who vlog and easily upload to YouTube. What if it were that easy on Spotify? Yes, you can do this today already but growing your audience isn’t easy and trust me, hosting and recording podcasts isn’t the most elegant process. Anchor’s existing podcast production process feels like magic and strapping their magical app to Spotify’s network will feel like a rocket ship.

It’s a game changer.

With their acquisition of Anchor, Spotify now has the ability to evolve Anchor into “Spotify Creator Tools.” This means they can leverage Spotify’s audience to make not just podcasts easier, quicker, and better but also potentially music.

Anchor gives Spotify and the mobile world their GarageBand.

It’s far easier to make podcasts on Anchor’s iPhone app than most “pro” setups that require laptops and the key is that distribution is already built into Anchor. Additionally, they host the podcast and make it super easy for users to publish their content across all podcasting platforms. It’s hard to overstate how great Anchor’s product is.

According to Anchor, they’re already “powering more than 40% of all new podcasts,” this deal will only accelerate this. Looking forward, this opens the opportunity for any creators to potentially create and upload music to the service! Upload to Spotify and make money. Sounds like Soundcloud 2.0 but better!

Spotify’s already signing indie artists (it’s not dissimilar from a how a label works but in this case, the artists maintain ownership of their music and it’s not exclusive to Spotify) and helping them distribute their music with a better fee structure for the artist than labels give them, but this has the potential to really elevate that arrangement to new heights and change music distribution.

Audio from Anchor differentiates Spotify from Apple, Google, and Amazon.

Imagine creating a podcast in Anchor aka “Spotify Creator Tools” and having the option to distribute it across all music platforms but having to insert your own ads.

OR

Using Anchor to upload audio like a podcast or music you made to Spotify exclusively and allowing Spotify to help you monetize your audio hassle free.

Dreaming up about this futuristic experience is compelling. It’s compelling enough that I can imagine a world where Spotify capturing more podcasting streams could even alter the dynamics of podcast advertising. By changing how podcasts are measured from downloads to streams and having more accurate data, advertisement quality, pricing and placement would make sense to improve. Anything that improves on podcasting advertising’s status quo would be an improvement and also serve as a key differentiator against podcasts on other platforms. Reducing friction in the advertising experience for creators is key in growing the market. Spotify can put better ads in podcasts based on their data and engineering talent—one’s that don’t require podcasters promote every DTC product under the sun, but also potentially bigger advertisers that don’t see the much value in podcasts today because of the analytics (lack of real tracking) and a considerably smaller ad market than television, Facebook and Google.

Moreover, the data Spotify gets from podcasts and uploaded user-generated Anchor content will inevitably lead to Spotify investing more in unsigned artists/podcasters. If this sounds similar to how the record labels have used SoundCloud as a way to see how “hot” unsigned hip-hop artists are getting before signing them and paying them huge advances, it is…except Spotify’s data will be better and more importantly, proprietary.

In announcing the acquisitions, Spotify CEO, Daniel Ek said:

“To really understand, take the current value of the video industry. Consumers spend roughly the same amount of time on video as they do on audio. Video is about a trillion dollar market. And the music and radio industry is worth around a hundred billion dollars. I always come back to the same question: Are our eyes really worth 10 times more than our ears? I firmly believe this is not the case. For example, 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. With the world focused on trying to reduce screen time, it opens up a massive audio opportunity.”

This isn’t a short-term play. It’s not going to succeed or fail overnight. It’s going to take a while and I wouldn’t expect big results in terms of growth and taking market share away from competitors for years but if they pull it off…

Years from now, whether Spotify succeeds or fails, this will be the moment that we remember that they decided to create their future and try to be not just the best music platform or the best podcasting platform but the audio platform.

p.s. Congrats to both the Gimlet and Anchor teams. This is really awesome! I’ve been rooting on both of y’all for quite some time and it’s good to see hard working teams get the results they deserve.


Special thanks to David Perell for his help editing this piece, asking fantastic questions, and pushing me to just. press. publish!

If you don’t read David’s writing or subscribe to his North Star Podcast or newsletter, you should. They’re great!

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