According to an Edison Research report, nearly 73 million people in the US listen to some form of a podcast on a monthly basis. While podcasts have been around for a while, the service gained popularity in 2014 following the release of an investigative documentary called Serial that provided different views on a murder investigation and trial. Recently, Billion Dollar Unicorn Spotify (NYSE: SPOT) also recognized the importance of the podcast market when it announced two acquisitions in the space. But first, the financial results.

Spotify’s Financials

Spotify recently reported its fourth quarter results that delivered a mixed reaction from the market. The Sweden-based music streaming company saw revenues grow 25% to $1.7 billion, marginally shy of the market’s expectations of $1.71 billion. Spotify’s Premium subscriber service revenues accounted for 88% of its total revenue for the quarter. But this was the first quarter that Spotify reported a profit. The company reported an EPS of $0.41 compared with the Street’s estimated loss of $0.22 per share for the quarter. The increase in profits can be attributed to a growth in its premium subscriber count that grew 36% over the year and 11% over the quarter to 96 million.

Among operating metrics, Spotify reported a 29% increase in the monthly active users (MAUs) to 207 million. During the quarter, Spotify added more than 16 million MAUs to its list. The 96 million premium subscriber count also makes Spotify the world’s most popular paid music streaming service. As a comparison, Apple Music currently has nearly 50 million paid subscribers.

But while the user base may be growing, its average revenue per user fell 7% over the year to the equivalent of $5.58. Spotify attributed the drop to a greater percentage of users on student and family plans in emerging markets.

Spotify ended the year with revenues of $6.21 billion and a loss of $92.1 million, or $0.60 per share.

For the current quarter, Spotify expects MAUs of 215-220 million, with premium subscribers growing to 97-100 million. It forecast revenues of 1.35-1.55 billion euros (~$1.5-$1.8 billion) and an operating loss of 50-120 million euros (~$57-$136 million). The market was looking for revenues of $1.68 billion with a loss of $0.37 per share.

Spotify expects to end the current year with 245-265 million MAUs and premium subscribers of 117-127 million. The Street had forecast premium subscribers of 121 million. It forecast total revenues for the year at 6.35-6.8 billion euros (~$7.2-$7.7 billion with an operating loss of 200-360 million euros (~$227-$409 million).

Spotify’s Podcast Ambitions

Spotify recently announced plans to diversify into the podcasting industry. Spotify wants to transition from being known as a music platform to being recognized as a leading audio platform. Unlike Spotify’s traditional library, podcasts are geared to non-music content. Spotify believes that they will help drive audience engagement and estimates that in a few years, more than 20% of its content will be non-music related.

To drive growth in the area, Spotify announced the acquisition of two podcasting companies – Gimlet and Anchor. New York-based Gimlet Media was founded in 2014 by Alex Blumberg and Matthew Lieberand. It became known for its award-winning narrative podcasts that featured names like Catherine Keener, Alia Shawkat, and Kristen Wiig. Recently, Gimlet’s podcast Homecoming was adapted to video and released on Amazon Prime. Prior to the acquisition, Gimlet was privately held and had raised $28.5 million in funding. It did not disclose its financial details, but in 2017, it was expected to be trending at annual revenue of $15 million and a valuation of $70 million. Spotify did not announce terms of the deal, but analysts estimate that Gimlet was bought for nearly $230 million.

Anchor, on the other hand, is a podcast app that simplifies the process of creating podcasts. Anchor’s users can create their own shows, automate production, distribution, and hosting. It also offers some basic analytics and is an ad-broker to help users monetize their shows. Anchor is also based in New York and was founded in 2015 by Michael Mignano and Nir Zicherman. It has raised $14.4 million in funding. Its financial details are not known, but as of 2017 it wasn’t generating any revenues. Anchor’s acquisition price is not known.

Similar to Netflix, Spotify is moving towards content creation. It has already created some podcast content including a series with comedian Amy Schumer and one with rapper and broadcaster Joe Budden. It has found that audience listening to a podcast tends to spend nearly twice as much time on the service as compared with other listeners. It wants to create additional content that can offer a more personalized and immersive experience for its listeners. Besides driving user engagement, Spotify will also be looking to drive monetization for podcasts. According to IAB, US podcast advertising revenues are estimated to grow to $659 million by 2020, compared with $314 million in 2017.

Spotify may be banking on the advertising dollars for growth, but in my opinion, advertising business models are not very attractive unless they come equipped with high degrees of personalization that companies like Facebook, Google, and now, Amazon deliver. Spotify will need more than acquisitions to drive a material benefit from the diversification.

These two acquisitions are only the beginning for Spotify. It wants to spend $500 million this year on its podcast deals. What other smaller funded companies do you think Spotify could evaluate?

Spotify had gone public nearly a year ago by following a direct listing approach. Prior to the listing, it had raised $2.71 billion in venture funding, with its last round valuing it at $8 billion in March 2016. At the time of listing, the reference price for the stock was determined at $132, valuing it at $26.5 billion. Its stock is currently trading at $143.54 with a market capitalization of $26 billion. It touched a 52-week high of $198.99 in August last year. The stock had fallen to a 52-week low of $103.29 in December last year.

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