Quickly Unpacking Spotify’s Acquisition Of Gimlet Media

I’ve been traveling all week, digging out of email, and closing two deals and — hence — have been pretty quiet online. As I was scrolling through Twitter today and saw the rumors around Gimlet, the podcast media company, being acquired by Spotify for $200M in cash, I knew I had to stop, write this post, and share some thoughts on what’s going on. So, here goes…

Well, actually, before I begin, this post needs a few disclaimers. One, I am a huge podcast nut and listen to podcasts more than I watch TV or movies, and some weeks, even music. Two, despite my love for podcasts, I did not invest in podcast apps or companies (aside from Vsporto, which I was drawn to for different reasons related to app constellations) for reasons I’ll share below — including Gimlet. To underscore here, I hope I am proven wrong on these matters. And three, I was an early employee of Swell Radio, a “Pandora for podcast” app which personalized spoken-word audio streams for users — Swell was ultimately acquired by a “large consumer technology company” and eventually retired as an app.

So, with those disclaimers, here are my takeaways from this alleged transaction:

1/ Engagement Minutes Are Hot
We typically think of “engagement” as clicks and views in the consumer world of Instagram and Snap, or more recently with the rise of prosumer enterprise applications like Slack and Airtable — but as Spotify has shown, for instance, engagement minutes of audio can be monetized. For Spotify’s core business, which charges consumer subscriptions for the ability to have unlimited mobile access to an enormous music library, music as the audio source converts high engagement minutes into recurring revenue via subscriptions. [Spotify will also get into commerce like its social network peers, but that’s a subject for another post.] However, podcasts are not songs, of course, and therefore not subject ot the same licensing, restrictions, or scarcity. A company like Spotify has a broader vision to capture more listening engagement, and they’ve already begun offering podcasts (which are free) inside the app to capture more engagement minutes.

2/ Big Consumer Tech Cares About Audio
Artists will launch new songs on YouTube, or Instagram, or Snap, or SoundCloud. Speaking of SoundCloud, remember Twitter tried to buy them? Remember Amazon bought Audible, for audiobooks? Remember Spotify got its big break in the U.S. market by launching in connection with Facebook viral invites? Remember Stitcher? Remember Pandora? Well, Pandora Christmas is pretty good. YouTube empowers its premium subscribers to experience YouTube Red or Premium, which allows users to play the audio of any YouTube video as background audio — much like a podcast. (This premium tier also allows users to download content to their device for offline viewing.) For the large consumer tech companies, they want to dominate your total available engagement minutes — at home, in the shower, on the walk to the grocery store, on that long drive or flight. This all represents a huge market for engagement minutes as audio as a medium, while not inherently viral, is likely more accessible to more people in terms of literacy and in many cases faster and more efficient than reading (though not in all cases). Apple is ultimately the 800-pound gorilla in the audio minutes space as it relates to podcasts, with their woefully outdated native Podcast app being the most dominant podcast app (and having native distribution at scale), despite years of mobile app innovation in podcasts.

3/ Audio As A Feature Of Streaming Services
Many folks think of podcasts as its own category. I do not. I came to that conclusion the hard way, after working in the field. Ultimately, I think of podcasts and audio more generally as a feature of multimedia streaming services. For instance, if I subscribe to Amazon Prime, I expect to get Prime Video but also Prime Music — naturally, Amazon tried to charge for that separately and that’s a tougher sell in a world of Spotify. In the future, I can imagine a world where Spotify has video content (like Netflix), or I can imagine a world where Netflix offers audio stories (like Spotify). I guess my main point here is — podcasts are (to me) just a feature of audio, and audio is an important feature of multimedia overall, and best in breed multimedia services which charge subscriptions for our attention are in a race to keep stuffing the services bundle.

4/ Audio Connectivity Points Increasing
CarPlay, Bluetooth, Airpods, Apple’s native podcast app being preloaded, global smartphone penetration — these all are contributing to the increase in podcasts. I also believe personally podcasts are increasing because social networks have proven to have adverse effects on many users and can feel cold or ironically isolating, whereas hearing the voices of others is almost as intimate as seeing a moving photograph or video. On top of this, it’s impossible to click on a news link from Twitter and not open up a bloated web page bogged down in banner ads, video interstitials, and just crappy layouts — it’s simply cleaner and a better experience to listen to most media company’s podcasts versus opening up their crappy websites. So in this world, if you see Bluetooth getting better, if terrestrial radio hasn’t innovated (it can’t, really), and now wireless headphones make it easier to tune out and tune in on the subway, these trends all converge to the point where we have the explosion of podcasts today.

5/ Underlying RSS Technology Not Optimal For 21st Century Media
I have fielded many startup pitches for podcast-related startups and basically said “no” to each one. Again, I hope to be proven wrong — I could’ve invested in Gimlet and today I wish I had. That said, the $200M price tag is likely tied to another feature of the company and team, which I’ll talk about below. In one of the podcast company pitches I said “no” to, the founder (who was very gracious) and I got into a great conversation about why podcasts are so good but also stuck — and he convinced me that the underlying RSS distribution for them is outdated and needs to be built from the ground up. I’d love to hear more opinions on this. And, this issue which then leads us to the next point around captivity…

6/ Video Is Captive, Audio Often Isn’t
It used to be if you wanted to watch Game Of Thrones, you had to subscribe to HBO. Howard Stern signed a huge deal decades ago to leave terrestrial radio for Sirius Satellite radio, so if you wanted your daily Stern fix, you had to pay Sirius every month for the benefit. MasterClass is an example of a company doing this well in the age of mobile, only issuing videos via its mobile application and therefore forcing would-be consumers to download its own app and charge them directly for that restricted content. Gimlet isn’t just a podcast company — they created their own content, and that’s likely why Spotify wanted this company. While it’s very hard to create a hit audio series like Serial, I think we will see more of the Netflix studio model applied to audio — now, while that sounds awesome, I think audio will simply never rival the engagement and emotion of a video series. Audio done well will capture those consumer engagement minutes, but it’s a different type of engagement and one that is likely to be a great feature of a paid service rather than the premium offering the bundle.

Endnote… The radio ad market was historically small and unattractive, too small for a company like Apple (which dominates audio clients) to care about — but it will be interesting to see if global smartphone penetration and all these new connection and listening points will have a 10x or even 100x effect on the market opportunity, and if more captive content (like Gimlet can create) is a part of that future. I do hope that’s the case — I personally listen to all the 5-7 big Sunday politics week-in-review shows, which are published freely every Sunday. I never watch the video. I may pay something small to listen to those or to hear really amazing interviews. Education is one area I think these content players can start adding real value — basically, take the MasterClass model to the long tail of topics. Maybe one of the new hot podcast companies will figure it out, like Breaker or Anchor or some other one I haven’ t yet heard of. I would be really excited to see something like that, both as an investor and a citizen of the world.