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Spotify CEO lays out his plan to become the Netflix of audio as the stock drops on earnings

Key Points
  • Spotify announced it is buying privately-held podcast companies Gimlet Media and Anchor.
  • The company said it plans to spend $400 million to $500 million in podcast acquisitions in 2019.
  • As of late last week, the deal with Gimlet was expected to close north of $200 million.
Daniel Ek, chief executive officer of Spotify
Louis Lanzano | Bloomberg | Getty Images

Spotify made a major step in building up its original content on Wednesday, announcing plans to acquire privately held podcast producers Gimlet Media and Anchor. The move is just the next step in Spotify's ambitions to become the Netflix of audio by accelerating its spending on original content.

The music streaming service said it plans to spend up to $500 million this year on more podcasting acquisitions. CEO Daniel Ek said in a CNBC interview with Jim Cramer and David Faber that while "the magnitude of the numbers won't be the same" as Netflix's massive spending on original content, "I don't think it's unlikely that it is a Netflix type of story," in terms of increasing investment in the area.

"It's really about expanding our mission from just being about music to being about all of audio and being the world's leading audio platform," Ek said on Squawk On the Street.

Terms of the deals with Gimlet and Anchor were not disclosed, but late last week, Recode and Vulture podcast critic Nicholas Quah reported Gimlet would sell for north of $200 million. According to Quah, those terms would make it the largest podcast industry acquisition to date.

Spotify hopes the acquisitions will broaden the appeal of its platform. Ek said in the interview that Spotify's podcast listeners use the platform "almost twice as much" compared to other users. In a blog post published on Spotify's blog, Ek wrote he anticipates more than 20 percent of listening on Spotify will eventually be "non-music content."

Gimlet's vast array of fiction and non-fiction shows, including "Reply All," "Startup" and "Homecoming," which was recently adapted into a Netflix series, will help add to Spotify's growing library of podcasts. Gimlet already hosted its second season of the popular true crime podcast "Crimetown" exclusively on Spotify beginning in October 2018 and paid actress Amy Schumer more than $1 million for rights to her podcast, according to Bloomberg. Gimlet has recently expanded its focus into pitching adaptations of its podcasts to Hollywood.

Anchor brings a different part of the equation to Spotify with its easy-to-use podcast creation technology. Anchor serves as a platform for podcast creators to make and distribute their shows. Anchor had 15 billion hours of content on its platform in Q4, Ek said in the blog post.

When asked in the CNBC interview about big tech competitors like Apple and Amazon that have made investments in the streaming space, Ek said while they "are formidable companies," Spotify is committed to remaining focused on audio, rather than dabbling in several areas like both those companies do, referencing Apple's work in self-driving cars. Spotify had announced a partnership in video in 2015, but reportedly struggled to gain traction.

"I believe in this day in age that you need to be very very clear with your brand what you are for consumers in order for them to take it up and the best experience wins," Ek said. "And now we're adding the best content to that as well, and that's now Spotify. In a separate interview with The Wall Street Journal, Ek said he is more interested in growing what he estimates is the $100 billion music and radio market, rather than competing in the $1 trillion video market.

"The question I always ask myself is, are your eyes really worth 10 times as much as your ears? And I don't think that's the case," he told the Journal. "If we add more monetization opportunities the industry will grow and that's the opportunity."

Spotify was down 2.8 percent at Wednesday's close following the announcement and the release of its fourth quarter 2018 earnings report. While it beat analyst expectations for operating profit in the quarter with a profit of 94 million euros ($107 million) compared with a mean forecast for a loss of 16 million euros in a Reuters poll of analysts, Spotify saw average revenue per user (ARPU) fall 7 percent in the quarter, as the percentage of cheaper subscriptions rose and as growth in relatively lower ARPU markets outpaced areas with higher ARPU.

Spotify's slowing sales numbers may have contributed to the dip in the stock as well. Sales grew 29 percent in 2018, down from 39 percent growth in 2017 and 52 percent in 2016.

-Reuters contributed to this report.

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