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2 7 billion ears, 3 hours a day, listening to content, translates into a $100 billion industry that the digital audio market is. Spotify, a music streaming leader, is aiming to capitalize on this industry gap by expanding into “the last frontier of digital media” - Podcasts. (Gimlet Media, HBS). These attempts are a result of shift in audio demand and an effort to reduce dependency on their music business, which requires royalty payments. (Bloomberg Businessweek). Recent acquisition of companies such as Gimlet, Anchor and Ringer place Spotify as alpha in the race of becoming a dominant audio platform. Through Gimlet and Ringer, Spotify accelerates its entry into the podcast production ecosystem and via Anchor the aspect of the industry. (Refer to Appendix) (Spotify Investors). While Spotify’s experience in the digital music market inherently enables it to act as a Player App firm, the acquisitions of these companies enable it to streamline backward and froward integration, gaining competitive advantage. In totality, Spotify’s diversification into the podcast industry appears as the right move, validated by the move successfully passing the attractiveness, cost of entry, and better-off assessments explained ahead. To begin with, the attractiveness test holds industry structure and growth potential as key standards in identifying strength of diversification. Gimlet Media, specializes in creating and distributing audio content and brand advertisements (Gimlet Media). The company falls under the realm of production and publishing. Similarly, Ringer classified as the “next ESPN” of podcasting also falls under the same division as it focuses on creating sports and pop culture content (WSJ). The industry structure of Gimlet and Ringer depicts high entry barriers and less substitutes making it an extremely attractive, high return industry diversification, complying with testing. With large capital investments arising from editing tools, professional script writers, social media engagements, etc. to create differentiated content, low entry exits, clearing the attractiveness criteria (Gimlet Media, HBS). Additionally, the existence of Intellectual property and patenting of show concepts such as Gimlet’s popular, teen-favorite Heavyweight, further restricts entry (Chartable). This focus on quality content differentiation has constructed high switching costs and established strong fan base for content from Gimlet and Ringer, luring Spotify to take advantage off. This acts as the optimum structural environment for Spotify because as an inherent player app, a bilateral mutually exclusive partnership is formed. Gimlet’s exclusive, high-quality content (Heavyweight) is officially only available on Spotify, attracting more subscribers, ad revenue and building strong brand awareness. Gimlet in the bargain is provided with a 406 million user platform to share its content on (Musically). Moreover, this creates network effects as with more subscribers accessing this exclusive content, more brands want to advertise through Gimlet generating big data used as feedback loop, leading to higher profits. Moreover, the most attractive reason for Spotify to diversify into Gimlet’s industry is the lack of substitutes present yet. “64% of Americans, age 12+” are indulging in podcasts as preferences change from radio, audio blogs and books (Gimlet Media, HBS). While radio content remains famous amongst the older generations and attracts significant ad revenue, this statistic highlights those substitutes compared to podcasts remain passive. For example, as a GenZ I do not use radio for sports news but podcasts on my smartphone to stay updated. Recent data indicates podcasting ad revenue to exceed $1 Billion by 2021 (Refer to Appendix) (IAB, PWC), further implementing the switch from other mediums to podcasts in audio entertainment, clearing the attractiveness criteria. This factor also implies that the industry’s growth potential is still untapped, creating significant opportunities for Spotify. Furthermore, Anchor part of the hosting ecosystem is also an attractive offering for Spotify as its industry is experiencing exponential growth with targets reaching $ 47.64 Bn by 2031 (Cision Prn). With more users
3 being able to record, edit and publish podcasts the industry demonstrates significant potential and untapped areas of diversification. With Anchor powering 40% of the podcast creators, this diversification enables instant entry into the market. Hence, due to these factors Spotify’s integration into the publishing & hosting ecosystem successfully passes the attractiveness test. Spotify acquired Gimlet for $230 million, Anchor for $110 million and Ringer for $196 million (Bloomberg Businessweek). While this may appear as a costly acquisition compared to average acquisition amount in the industry, the expected returns outweigh the cost of entry. With 25% increase in consumer consumption already, Spotify is set to surpass Apple podcast viewers by 41% (Refer to Appendix) (TechCrunch). As number of monthly digital podcast listeners increase to 53.9%, these investments will sustain Spotify’s growth. In summary, advertising revenue increased 23%, monthly users reached all time high of 271 million and, paying subscribers doubled; all indicating high returns on investment (WSJ). Ringer podcasts also experienced an 18% MoM growth, emphasizing how all entities are benefiting from the acquisition. Hence, on the path of securing alpha in podcast producing and creating a platform for podcast creators, this cost of entry was essential and is enabling faster penetration, successfully clearing the second test. The final test of diversification, the better-off criteria emphasize on the creation of shareholder value achieved as a by-product, rather than one-time benefit (Porter, HBS). Spotify can achieve this long-term value and gain competitive advantage by synergizing technological abilities and transfer skills within its acquisitions. By sharing technological activities, costs are lowered, achieving movement down the LC for both companies. Spotify’s introduction of ad products like “in-app offers” directly correlate to Gimlet’s brand advertisements, leading to a more personalized, cost-effective advertisement (Motley Fool). Additionally, with Spotify allowing its users to share activities of “hosting, creating and monetizing” podcasts in one place, it sets it apart from every other company and creates significant preference. Moreover, Spotify’s robust reputation in the music industry has helped it secure brand loyalty which enables enhanced revenue for Gimlet and Anchor as reputation spillover activates. Spotify can also transfer meaningful skills not just limited to peripheral activities that help secure competitive advantage. With the company’s core competencies present in audio entertainment, skills of integrating digital audio are creating an advantage. Unlike Apple, Spotify has combined its music and podcasts in one app, allowing users a more convenient experience and attracting a higher number of subscribers (TechCrunch). As explained by Spotify Founder, “the building blocks” developed from the skills used in the music industry can be easily transferred to the podcast ecosystem, saving time, cost of research, leading to greater efficiency (Gimlet Media, HBS). Moreover, management skills can be transferred between the CEOs as Gilmet founders have incremental radio experience, helping in integrating and growing the two businesses. Often management overestimates the transferability of these skills, however in this case with Apple losing 11% of market share after the acquisition of Gimlet and Anchor, evidence shows otherwise (TechCrunch). Therefore, through the diversification long-term value is generated, successfully passing the better-off test. Last but not the least, audio/video content has predominantly always been tailored towards white and well-educated individuals, leaving out a large section of population looking for alternatives (Gimlet Media, HBS). Spotify’s diversification into production and creation can allow it to capitalize on these cultural dynamics plaguing the growth of past companies and aiding it in achieving its long-term vision of becoming the biggest audio platform in the world.
4 In the meantime, its current steps of diversification pass all the three tests and appear extremely successful.
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5 Works Cited:
"Barriers To Entry And Exit | Ag Decision Maker". Extension.Iastate.Edu
, 2022, https://www.extension.iastate.edu/agdm/wholefarm/html/c5-200.html. Accessed 19 Apr 2022. "Spotify Spent $230 Million On Gimlet, But Leaked Data Shows The Podcast Studio Has Lagged Behind Others At The Audio Giant. Insiders Cite Unclear Strategy And Internal Tensions.". Business Insider
, 2022, https://www.businessinsider.com/spotify-leaked-data-gimlet-podcast-studio-struggled-2021-8. Accessed 19 Apr 2022. "Spotify Announces Strategic Acquisitions To Accelerate Growth In Podcasting". Investors.Spotify.Com
, 2022, https://investors.spotify.com/financials/press-release-details/2019/Spotify-Announces-Strategic-
Acquisitions-to-Accelerate-Growth-in-Podcasting/default.aspx. Accessed 19 Apr 2022. Levy, Adam. "Spotify's Unique Ability To Create Value In Podcasting | The Motley Fool". The Motley Fool, 2020, https://www.fool.com/investing/2020/06/23/spotify-unique-ability-create-value-
podcasting.aspx. Accessed 19 Apr 2022
. "Techcrunch Is Part Of The Yahoo Family Of Brands". Techcrunch.Com, 2022, https://techcrunch.com/2021/03/02/spotify-podcast-listeners-to-top-apples-for-the-first-time-in-2021-
forecast-claims/. Accessed 19 Apr 2022. Deighton, John, and Leora Kornfeld. "Gimlet Media: A Podcasting Startup." Harvard Business School Case 918-413, April 2018 Steele, Anne. "Spotify Agrees To Buy Ringer And Reports Growth In Users". WSJ, 2022, https://www.wsj.com/articles/spotify-adds-subscribers-swings-to-loss-as-it-invests-in-podcasts-
11580900543. Accessed 19 Apr 2022. "Mapping The Podcast Ecosystem | Knowledge Artist". Knowledgeartist.Org, 2022, https://knowledgeartist.org/article/podcast-ecosystem-map. Accessed 19 Apr 2022. Iab.Com, 2022, https://www.iab.com/wp-
content/uploads/2021/05/IAB_2020_Podcast_Advertising_Revenue_Report_2021-05.pptx.pdf. Accessed 19 Apr 2022. Gerry, Smith. “Everybody Makes Podcasts. Can Anyone Make Them Profitable?” Bloomberg Businesssweek, 2019, https://www.bloomberg.com/news/features/2019-02-22/everybody-makes-
podcasts-can-spotify-make-them-profitable. Accessed 20 Apr 2022.
6 Appendix Figure 1:
"Mapping The Podcast Ecosystem | Knowledge Artist". Knowledgeartist.Org, 2022, https://knowledgeartist.org/article/podcast-ecosystem-map. Accessed 19 Apr 2022.
Figure 2: Iab.Com, 2022, https://www.iab.com/wp-content/uploads/2021/05/IAB_2020_Podcast_Advertising_Revenue_Report_2021-05.pptx.pdf. Accessed 19 Apr 2022.
7 Figure 3: "Techcrunch Is Part Of The Yahoo Family Of Brands". Techcrunch.Com, 2022, https://techcrunch.com/2021/03/02/spotify-podcast-listeners-to-
top-apples-for-the-first-time-in-2021-forecast-claims/. Accessed 19 Apr 2022.
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