Issue 194,  published February 5, 2019

Gimlet/Spotify, or The End (of an Era)

Quiet weekend, huh? In case you missed it, Spotify is reported to be in “advanced talks” to acquire Gimlet Media. Recode and the Wall Street Journal both broke the news late Friday. And let me tell ya: my inbox hasn’t seen as much action as it did over the past seventy-two hours or so than it has in a long time.

If you didn’t catch the emergency newsletter I sent out on Friday, here are the beats:

  • A source familiar with the matter told me that the specific price was $230 million. If the deal goes through, it would mark the biggest podcast industry acquisition to date by a long mile.
  • Only two deals can serve as comparable markers: Scripps’ 2015 acquisition of Midroll Media for $50 million plus another $10 million based on milestone achievements, and iHeartMedia’s 2018 acquisition of Stuff Media for $55 million.
  • Gimlet Media would be Spotify’s first content company acquisition. Also, unless I’m mistaken, this would also be Spotify’s largest acquisition ever. The largest prior was the 2014 acquisition of Echo Nest, the music intelligence technology company, for around $66 million.
  • When the news broke on Friday, the deal was thought to be in its final stages, though not officially completed. However, for the purposes of grammar, we’ll proceed with today’s newsletter expecting it to close.
  • Since launching in 2014, Gimlet has raised around $28.5 million in total funding from an eclectic pool of investors. The pool includes: the advertising giant WPP; Laurene Powell Jobs’ Emerson Collective; the New York City “startup studio” Betaworks; Panoply parent company Graham Holdings; Troy Carter’s Cross Culture Ventures; the Chris Sacca-founded Lowercase Capital; the private equity and venture capital firm Stripes Group; and Marco Arment. The latest raise took place the fall of 2017, on a speculated $70 million valuation, according to a Recode report from that time.

I laid out some initial analysis in Friday’s newsletter, and today, we’re going to dive deeper into a bunch of things. Given the constraints of a newsletter, I won’t be able to tackle everything in this issue, but I assure you, we’re going to talking about every implication of this for a long time.

***

In Friday’s emergency missive, I noted that there was a certain inevitability to Gimlet’s exit. By that I meant, having taken substantial amounts of venture capital, the company was always going to have to operate under the assumption that its investors would want an exit in some form or another. Going public was probably never a realistic option, given that content-oriented companies aren’t exactly the most listable entities in public markets, and founders Blumberg and Lieber generally opted to eschew any kind of technology play fairly early on (as documented in Startup’s first season).

One could argue that Gimlet had long set itself down this road after committing to a growth plan that required what must be a blinding burn rate. The company’s headcount now numbers at around 120 people, and it had also committed to a ten-year lease in downtown Brooklyn in 2017, where it proceeded to invest heavily in building out studio infrastructure.

All this, it should be noted, off the strength of a three-pronged revenue stream: podcast advertising sold on its slate of 24 owned and operated shows; branded podcast campaign revenues through Gimlet Creative; and IP-slingin’ through Gimlet Pictures (which I’m guessing doesn’t produce that much up-front money and may well be a comparatively unreliable revenue stream at the moment, but is growing nonetheless). Gimlet doesn’t make its revenues public, but there are enough clues scattered about. We know that they made at least $7 million in 2016, back when they were more outwardly transparent about its inner workings. In mid-2017, a Recode piece reported that the company was on track to bring in $15 million that year. (The same number, by the way, that The Ringer hit in 2018.)

We can probably assume that its revenue levels have grown since. Maybe the company had figured out a growth rate that would justify its burn rate, enough that, in another universe, it could have led them to feel confident about raising another round. Or maybe they didn’t. In any case, they’re selling, and here we are.

In Spotify, Gimlet has found an attractive suitor. The Swedish music streaming platform, which has been itching to do something with podcasting for a while, isn’t just any potential buyer of a podcast company. Indeed, the company is a particularly sexy suitor that would validate the brand that Gimlet had clearly labored to build and whose disruption narrative vibes with the worldview of Gimlet’s tech-centric investors. (A thought experiment I’ve been playing with: at this point in time, how long is the list of possible suitors in which an acquisition would still feel like an actual achievement?)

Gimlet’s exit might also be well-timed, given the probability of future turbulence. As I brought up last week, some smart folks argue that there’s a good chance of a recession in the coming years. That would bring significant uncertainty to podcast-land as we know it. Such an event may impose considerable pressure on podcast advertising rates, challenge optimism and confidence around the industry, and truly force the question on whether there is a podcast bubble. Faced with the opportunity to cash out now… feels like an understandable choice.

***

This newsletter has already spent quite a bit of digital ink thinking through Spotify’s angle with podcasting, most recently in an issue that came out just last month.

But to quickly recap: Spotify is looking to diversify away from purely focusing on music, where it has long been locked into bruising rivalries with other music streaming platforms (Pandora, Apple Music) and traditional music industry Powers That Be (music labels). Podcasts, or talk content more broadly, offers the Swedish tech giant two things: firstly, a completely new growth channel for its investors to get excited about, and secondly, the opportunity to differentiate its product, deepen its value to the user, and increase the friction of shifting away to another service. (Until competing services ramp up their own respective podcast plays, of course.)

So, I wasn’t particularly surprised to hear that Spotify was acquiring Gimlet. First of all, there had been rumors floating around for a while. But mostly, because there’s apparent superficial logic behind such an acquisition: Gimlet would give Spotify a buzzy portfolio of shows with which the platform can use to focus attention on and build a narrative around its podcast offerings.

What did surprise me, however, was the $230 million price tag, which was significantly higher than I was expecting. For what it’s worth, I figured a sale to be worth around the $70-$100 million range, if only because of Recode’s original reporting on the company’s $70 million valuation after its most recent fundraise. Maybe I’m just a naive small business owner who knows nothing about scale or corporate development, but holy shit does $230 million feel like a stretch. Especially when contextualized against iHeartMedia’s $55 million acquisition of Stuff Media, a pure podcast content company, last fall. And your suspicion lies somewhere along the lines of differences in infrastructure, a data point to note: Stuff Media had around 50 employees powering production slate of around 25 shows at the time of acquisition; as mentioned previously, Gimlet has over 100 staffers powering 24 shows.

Which prompts the question: what, exactly, is the specific nature of value that Spotify sees in picking up Gimlet? (An alternative theory is, of course, a simple bidding war. But I haven’t picked up on any traces of such a thing, and until we see reliable reporting on the matter, let’s proceed with the assumption of Spotify as the sole suitor.)

So, the major assumption I’ve been seeing around this deal is that, in Gimlet, Spotify would primarily be getting a show portfolio that they could use as the major cornerstone to their “original podcast programming,” with which they could push more of its users towards consuming podcasts on its platform. That push may or may not take the form of Gimlet’s shows becoming Spotify exclusives, but I’m pretty comfortable betting it will.

But I also think Gimlet Creative, the company’s advertising division, is another key piece to appraise here. Consider that Spotify’s core competency isn’t content, but distribution, engagement, and monetization — and that monetization, in particular, is both a podcast problem that a good deal of people are fixated on and the one that established media platforms (like Spotify, but also Pandora) fancy themselves well-positioned to solve with their existing assets.

We know that Spotify has been tinkering pretty hard with podcast monetization: a recent press push noted that the company was already experimenting with selling ads on its own original podcasts since 2018, and that it is currently exploring the possibility of building out its own ad insertion tech. And I continue to be convinced that all of this is going to link back to, or draw lessons from, Spotify’s adventures in directly building relationships with musicians; initially by directly striking deals with independent artists, and then rolling out a feature that allows artists to upload music directly onto the platform and automatically receiving royalty payouts. In other words, they have been trying to become the monetization layer for musicians straight-up. I imagine they would want to do the same for podcasts.

But of course, podcast advertising is a completely different animal from digital audio advertising as they would know it. (For now, anyway.) Which brings me to my tin foil hat theory: a possible future is one that sees the Gimlet Creative team being diverted to focus on developing new-age advertising experiences for Spotify to inject into its original programs and to supply its future podcast monetization tools.

To put it another way, instead of seeing Spotify picking up one end-to-end podcast company, you could also perhaps see it as picking two different (albeit conjoined) assets that can each be applied to different aspects of its business: a publisher and a creative agency.

And what an agency. One can debate Gimlet being a category leader in original podcast content — and it’s a debate worth having, competition’s mad fierce — but the way I see it, Gimlet Creative is the company’s most notable creation that’s still quite far ahead in its peer group. This is a creative agency that has developed relationships with, built advertising experiences for (both branded podcasts and in-episode spots), and extracted a ton of money from an array of attractive advertisers that includes Ford, Gatorade, Virgin Atlantic, Mastercard, Google, Microsoft, eBay, and Reebok. I imagine that all makes for a pretty attractive asset to somebody. (Not unrelated: Spotify itself has been experimenting with branded podcast production.)

Or maybe it’s all not that complicated. Maybe it really is the simplest version of the situation: a big entity acquires a smaller entity, provides it with resources and support but generally leaves it alone, and reaps whatever benefits that can be generated. Disney-Pixar, essentially.

Maybe. But I never really liked Occam or his razor anyway.

(One more thing: I wouldn’t be surprised if Spotify isn’t done shopping for podcast stuff, by the way.)

***

Miscellaneous Notes:

(1) The ripple effects of this deal is going to be wild. What might come next, I suspect, is a minor arms race that sees other companies — from direct Spotify competitors like Pandora to media companies more broadly — feel the sweaty heat of FOMO and begin exploring the possibility of bringing in their own podcast asset… regardless of whether they have an actual, informed strategy around such an acquisition. It would be, in some ways, a more extreme version of what we’ve already been seeing for a while now: various media companies rapidly assembling podcast operations without quite knowing how podcasting works, except with added pressure to buy their way into expertise than develop it on their own.

The next few months will prove to be interesting, as an array of podcast companies may see this period as a strong opportunity to cash out. (I’d keep an eye on other venture capital-backed content companies, if I were you.) And given the high $230 million watermark that was just set, those companies could be emboldened to ask for high prices. What I can’t tell, though, is the actual extent to which it’s a seller’s market. On the one hand, FOMO is a powerful force. On the other hand, as established earlier, the future is more uncertain than it ever was, and it’s quite possible both sides of the table will know it.

(2) Count me as someone who doesn’t think there’ll be any layoffs or trims as Spotify brings Gimlet into the fold. In the immediate future, anyway. For one thing, this doesn’t strike me as a straightforward “Team A absorbing Team B” sort of acquisition, where audio producers will now be made to sit next to its content partnerships team and work together or whatever, thus resulting in some cuts due to redundancies. And for another, Spotify isn’t exactly a struggling media conglomerate fighting against the march of technological apocalypse — quite the opposite. I imagine they have the money and patience l to spend on the whole cloth for now.

Something to consider, though: unless I’m overlooking some obscure part of its history, Spotify hasn’t governed over a big editorial staff before. (They have, however, governed a small staff: that of Dissect, the music podcast that it acquired last year.) That could lead to complications. Anyway, keep an eye on how that shakes out. In any case, I’m crossing my fingers that Gimlet and its new Swedish overlords will do good by its producer workforce, and I hope that everybody gets to keep doing what they signed up to do. Unless, of course, they came in for the money, in which case, good for you.

(3) I wonder if Gimlet will be made to considerably expand its publishing portfolio and volume. Such an imperative might prove challenging, given that the company has generally tended to favor seasonal or limited-run productions that tend to cost a lot of time and money to make. The task of either scaling up that process, or expanding into higher-volume shows that’s not its core competency, is a tricky one, though any success in such a move would hopefully be captured in a business school case study. (Also: if Spotify puts them down this course, there would be some interesting poetry here. Gimlet once sought to brand itself as the “HBO of Audio,” and as fate would have it, HBO, that premium cable darling, is being made to greatly expand its publishing volume by its new corporate overlords, AT&T.)

(4) Here’s a commentary thread that I’ve been seeing around the news: what an oasis of good news in a desert of shitty media stories, with companies laying off staffers left and right! I share the thirst-quenching, but only to an extent. To be honest, I just don’t see Podcast Company stories as being completely in the same universe as Digital Media Company stories. (Unless, of course, it’s a Digital Media Company Making Podcast story, which is a different kind of story altogether.) Also, personally speaking, I don’t see acquisition-exits as an automatically good thing, but that’s just me speaking as a person who sees independence as an ultimate value. For Gimlet, though, it’s probably definitely a good thing, and as previously discussed, perhaps the only possible end.

(5) I’ve seen some Twitter chatter — suddenly everybody’s a podcast expert? — debating the tenability of Spotify pulling off an exclusives-driven strategy. I don’t have much to say on that other than, as always, it depends on the execution, which itself depends on a string of a hundred different design choices. Refer back to my January column for a spread of questions thinking through those.

(6) Let’s do some reader mail. A long-time reader, first-time writer wrote me: “What’s going to be the deal with Gimlet Pictures?” The specific curiosity being, it’s one thing for Chris Giliberti to be slingin’ IP on behalf of a ~quirky content studio~, but another thing altogether when it’s behalf of a giant music platform. Somehow I don’t think IP-buyers will get too hung up on the differences. But if you’re a talent agent reading this who disagrees, @ me.

(7) Got more than a few questions around this idea: “Will Spotify usher in a world of closed podcast platforms? Is this the end of open podcasting?” Probably, and who knows. A while back — and, my apologies, I can’t find the exact column to link — I wrote a long, rambly newsletter (much like this one) arguing my suspicion that the long-arc of open podcasting is one where it ends up not being the default definition of the term, but a genre of it. (Don’t tell me that the word “podcasting” would lose all meaning in that scenario; the iPod is literally dead, for goodness sakes.)  I think I stand by that assessment. In any case, you can bet that we’ll be revisiting this topic over and over again in the coming months, as we are most certainly, barring ecological catastrophe, drifting deeper into a world of fragmented walled gardens.

(8) On that note, a reader raised a good question in my Twitter DMs: “Does podcast industry growth depend on a revamp of the distribution model, and/or walled gardens, and/or fragmentation, etc? Or can the status quo be highly profitable?” I’m sure other people have their own takes on this, but my own amateur-expert opinion is: I don’t think the answer is structural. By which I mean, if a status quo is allowed to grow on its own terms on a long enough time scale without existentially-threatening competition or external expectations, that status quo can grow to become at least comfortable. That was the story of podcasting, more or less, immediately after the ‘08 recession, where the ecosystem as we knew it started to develop. But people got employees to feed, managers, investors, quarterly earning expectations, burn rates. So I can see how the Original Condition might not work for everybody, hence the push to reject and impact the status quo to briskly pursue profitability.

(9) A text message from an independent producer: “I can’t tell if this is a good or bad thing.” Like much of modernity, it’s almost certainly both. More to the point, it’s change — in this specific instance, the neck-aching kind that only a sudden insane burst of money can bring.

(10) Finally, an aside: I spent some of the weekend re-listening to Alex Blumberg’s old stories from This American Life, Planet Money, and Startup’s first season. And man, I wonder if that dude is going to be able to keep making the stuff that he was so good at making before. They feel so different now.

Make no mistake: should the acquisition close, this deal would be an unambiguously important moment in the young history of podcasting, even if it doesn’t work out. Gimlet-Spotify would be podcasting’s first true blockbuster acquisition, a potential major turning point for the ecosystem (for better or worse), and the beginning of something… else. But as the poets of Semisonic once observed, every new beginning comes from some other beginning’s end; in this case, this is the end of an era, the one that was kicked off in 2014 with the Serial Boom. I’ll miss it.

Wow that was melodramatic. Sorry about that.