The Industry

Big Audio Dynamite

Why is Spotify buying the podcasting startup Gimlet? Because it knows it can’t win with just music.

Spotify CEO Daniel Ek
Spotify CEO Daniel Ek Toru Yamanaka/AFP/Getty Images

Spotify entered 2019 as a company primarily known for music, but that’s not how it wants to end it. On Wednesday morning, the Swedish music-streaming company announced it would purchase New York–based podcast company Gimlet Media, as well as the podcast-making platform Anchor. What does a major technology platform with more than 200 million users need from a podcast studio? And why would Gimlet, an apparently healthy podcast startup, cash out at a time when podcasts appear to be in their golden age? The answer to those questions is that both of those companies face a tougher landscape than is immediately apparent.

Right now, Spotify’s user base is three times bigger than that of its chief rival, Apple Music, but it has struggled with achieving profitability for all of the company’s existence. Spotify made a couple of moves last year that underscored its challenges and hinted at a path forward: It introduced a beta program to allow artists to directly upload music onto the service and, much to the chagrin of major labels, began offering artists direct deals to stream on the platform. Both could shake the position of record labels, but neither is a real threat to the traditional music industry’s actual power over Spotify, Apple Music, Amazon Music, and others: labels’ vast catalogs. Even if a megastar like Taylor Swift, who split from Universal Music Group last year, dealt directly with Spotify, major labels would continue to hold onto a near-century of cataloged music that no amount of direct deals could rival. All of which means that Spotify will never have an advantage over record labels when it comes to streaming music.

But podcasts are a far younger industry, one not yet dominated by a few key players the way recorded music is. That clearly strikes Spotify as an opportunity. The purchase of Anchor and Gimlet instantly makes Spotify a significant podcast player—and offers a glimpse of one possible future for the medium.

Gimlet Media was founded in 2014 by Matthew Lieber, a former WNYC producer, and Alex Blumberg, formerly of This American Life and Planet Money. The company’s first podcasts, Start-Up and Reply All, were immediate hits; by the end of the 2017, with $27 million in investment, Lieber mused that the company could be the “HBO of audio.” In addition to the ads it sells against its original podcasts, the company makes branded podcasts for companies like Tinder and licenses its intellectual property, as with the short-lived ABC series Alex, Inc. that was based on Start-Up and the Amazon Prime Video drama Homecoming, based on a podcast of the same name. Gimlet was an early standout, but ever since Serial became a massive hit the field has become a lot more crowded.

Spotify is paying around $230 million for Gimlet, Recode reports, which would be substantially more than the $70 million valuation from Gimlet’s last round of investment. That would likely be a huge return for the company, which appears to be growing steadily but not exponentially. Why wouldn’t Gimlet sell for such a premium?

The deal is a bit more of a shot in the dark for Spotify. The Gimlet takeover is the first outright content purchase of Spotify’s 12-year history. The company previously dabbled in video and podcast production, but with middling results. But it still makes sense that podcasts would be Spotify’s target for aggressive expansion. With music, any move that could be seen as encroaching on the territory of major labels risks retaliation. Last year, when Spotify began offering direct artist deals, Music Business Worldwide reported that the major labels were considering holding back licensing their music to Spotify in India, which would deny it content in an important market for future growth. Right now, Spotify is sending most of the money it earns through ads and subscriptions back to the labels, and the current dynamic limits its ability to change that. However, those limits don’t exist with nonmusical audio.

Spotify’s current narrative for investors is one of growth and expansion; it most recently debuted in the Middle East and northern African countries. These latest purchases offer a new story for the company to tell if its growth slows down. With Anchor, in particular, Spotify will have creation tools for a new wave of podcasters on their platform.

So what type of company would this create? The most favorable comparison for Spotify has long been Netflix, which has become not just a platform for watching studio-made movies and network-produced television, but now boatloads of original content.

One has to imagine there’s a limit to how podcasts could play a similar role for Spotify. The Wall Street Journal reported last year that less than 1 percent of Spotify’s overall listening was podcasts. Spotify could limit Gimlet shows to its own service, but more likely it will continue to distribute them on platforms like iTunes and Stitcher without hampering their potential audience or trapping them behind a subscription paywall. It’s Anchor—with its potential to turn anyone into a podcaster—that Spotify will be really banking on. Spotify wants to be less dependent on major labels; a vast generation of podcasts being birthed on its platform is a step in that direction.

Spotify faces the real problem that massive companies like Apple, Amazon, and Google, who are all in the music streaming space, can compete with them for users while feeling less pressure to immediately profit. Spotify lacks such financial freedom. It better hope all those Drake listeners can get into Crimetown and other podcasts—and then try to make their own.