Why Spotify Has Spent $500 Million on Podcast Deals

By the end of the first quarter, Spotify (SPOT) had bought three podcast businesses this year. It bought podcast producer Gimlet Media and podcast marketplace Anchor in February for ~$345 million. In March, Spotify bought Parcast, a podcast studio, for $56 million. In all, Spotify has spent ~$400 million on podcast-related acquisitions this year.

With the release of its 2018 fourth-quarter results in February, Spotify said it intends to make more podcast acquisitions, estimating that it may spend $400 million–$500 million on podcast deals this year alone. If Spotify hits the higher end of its forecast, the company could make podcast acquisitions of as much as $100 million before the end of the year.

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Spotify wants to grow its podcast business because it sees podcast content as important for boosting user engagement, reducing churn, and accelerating revenue growth. Podcasts are currently mostly monetized through advertising. The US podcast advertising market was estimated to be worth $169 million in 2016 and is forecast to reach $659 million by 2020, according to a study by IAB (Interactive Advertising Bureau) and PwC.

Spotify generated revenue of $1.7 billion in the first quarter, with advertising contributing just 7.0% of that. Building its podcasting business could help Spotify capture more advertising dollars. Advertising contributed 12% of revenue at Sirius XM (SIRI), the company that bought Pandora, in the first quarter, and 99%, 86%, and 85% of revenue at Facebook (FB), Twitter (TWTR), and Google parent Alphabet (GOOGL), respectively.