China using capital as a strategic competitive advantage

Forget SoftBank. China is a great example of how you can use capital as a competitive advantage.

Yesterday, I came across a clip on China’s investing in one of Montenegro’s infrastructure projects and using it to benefit itself geopolitically. The European country doesn’t have sufficient infrastructure and badly needs capital assistance. China came in and loaned a huge sum of money to the country. The loan came with a few catches. Chinese suppliers would have to be involved in the project. The loan came with interest after the first few years. Failure to pay back the loan could result in China’s repossession a part of Montenegro.

The same thing happened with Sri Lanka. The country had to give China 99-year access to a strategic port due to its inability to pay back what was owed.

African countries such as Kenya and Djibouti face the risk of losing strategic ports to China as a payment for their outstanding debt.

Securing maritime keypoints isn’t the only thing China is after. In Africa, China also lends capital to help with infrastructure projects in exchange for natural resources.

“The Chinese come and they want your iron, your bauxite, your petroleum. In return, they’ll deliver you turnkey projects, where they supply the materials, the technology and the labor, with salaries that are mostly not paid in the country and do not contribute to the economy”

Source: China’s Second Continent: How a Million Migrants Are Building a New Empire in Africa

A booming natural resources exporter, with large exports of gold, cocoa and now oil, Ghana was one of a rapidly growing number of African countries where China had recently structured a huge package deal of loans and investments in order to gain a seat at the banquet. Early in their discussions, it appeared likely that Ghana would agree to a resource-for-infrastructure swap, similar to big financing packages that had been pioneered a few years earlier by Angola and Congo, both large African countries that were immensely rich in oil or minerals, and, significantly, lacking in any meaningful practice of democracy.

In Ghana’s much more vibrant political system, though, public debate helped nudge things in a different and arguably more prudent direction. The country’s recently tapped commercial oil production would not be used as a direct collateral, but paid into an escrow account, as had been the case in Angola. Ghana would remain free to sell its oil on the international market, even if under the contract terms China legally reserved the right to pocket income from its production if Ghana fell behind in its payments

Source: China’s Second Continent: How a Million Migrants Are Building a New Empire in Africa

In Zambia

There, the state-owned China Nonferrous Metal Mining Company bought the mothballed Chambishi Copper Mine, once one of the crown jewels of Zambian mining, for a mere $20 million…

The new Chinese owners poured over $100 million into rehabilitating and modernizing Cambishi, where production resumed in 2003. By 2008, the Chinese buyers had reportedly recoued their investment. And by 2010, according to the Chinese newspaper Southern Weekend, the Chambishi mine was producing a regular profit

Source: China’s Second Continent: How a Million Migrants Are Building a New Empire in Africa

China is in Africa for not only natural resources, but also for food security.

This doesn’t mean, of course, that China doesn’t need African farmland, or indeed that it doesn’t aim to eventually obtain control of as much of it as it can. China has 20% of the world’s population, and only 9% of its farmland. There were only two large developing countries with less arable land per capita: Egypt and Bangladesh, and massive construction, pollution and erosion were whittling away at China’s farmlands all the time.

Vaclav Smil, a prominent environmental scientist who studies China’s land use and food security, has said that as the country’s living standards rise, by 2025 its food needs will far surpass what is available on today’s open market.

Africa alone has 60% of the world’s uncultivated arable land and whatever Beijing declares, it stands to reason that China will come to see its food security as increasingly bound up in bringing that land into intensive production.

Source: China’s Second Continent: How a Million Migrants Are Building a New Empire in Africa

China uses its massive capital to gain influences around the world, help Chinese companies with new businesses and secure natural resources, strategic checkpoints as well as food security while putting in place measures to protect its investments. What’s there not to like? What’s the point of accumulating capital if you can’t put it to great use?

Disney+

Thursday was a big day for Disney as the company announced the much anticipated streaming service called Disney+. You can learn more about it from this link. The top executives went through a lot of aspects of the new service, including programming, roll-out plan, pricing, investment in future original content and forecast financial impact. The service will offer users ad-free access to an incredible library of content owned by Disney, such as Marvel movies, Pixar, Star Wars, Disney and National Geographic. Users will also be enjoying some new original content such as WandaVision, Loki or Falcon and The Winter Soldier. The price is very attractive at $6.99/month or $69.99/year with all content downloadable for offline consumption.

It is a serious challenge to Netflix as Disney has plenty of content that can appeal viewers across demographics, the brand name, the marketing expertise and the financial resources. It can be argued to some extent that Netflix also has a brand name (apparently “Netflix and chill” is quite popular in our society), content (it invests billions of dollars in originals) and the marketing power. But there are two things that Disney has going for them: additional revenue streams and the ability to bundle more.

Firstly, below is the segmentation of Disney’s revenue and operating income. (Figures are from Disney 2018 & 2017 annual reports and in $ millions)

Metric2018201720162015
Revenue – Services        50,869         46,843         47,130         43,894
Revenue – Products          8,565           8,294           8,502           8,571
Revenue – Media Networks        24,500         23,510         23,689         23,264
Revenue – Parks and Resorts        20,296         18,145         16,794         16,162
Revenue – Studio Entertainment          9,987           8,379           9,441           7,366
Revenue – Consumer Products & Interactive Meida          4,651           4,833           5,528           5,673
Operating Income – Media Networks          6,625           6,902           7,755           7,793
Operating Income – Parks & Resorts          4,469           3,774           3,298           3,031
Operating Income – Studio Entertainment          2,980           2,355           2,703           1,973
Operating Income – Consumer Products & Interactive Media          1,632           1,744           1,965           1,884

In 2018, Parks and Resorts’ operating income is almost three times that of Netflix in total, let alone other segments of Disney.

Source: Netflix

I think it’s great for Disney to offer an attractive penetration pricing model to quickly sign up viewers and scale up. Additional revenue streams, in my opinion, can help finance the play. Meanwhile, a Netflix plan is almost twice as expensive as Disney+, at least in the US market. I doubt that Netflix will lower its price to match Disney+’s, given their increasingly big investment in content and troubling negative free cash flow.

Source: Netflix

It’s not a zero-sum game. I believe that a lot of viewers will have both streaming services or even have Netflix exclusively, but on the other hand, some will likely choose Disney+ over Netflix. If the economy is still strong and folks have disposable income to spare, I think it will be beneficial for Netflix. However, if the economy contracts in the future and spending cut is required, I suspect that Disney+ at this current price will appeal more than Netflix.

Secondly, Disney now also has ESPN+, a sports subscription, and Hulu. Disney already said that there was a chance they would bundle Disney+, Hulu and ESPN+ together. It will be even more attractive to viewers.

With all that being said, execution matters. Though it seems Disney has a lot going for them, this is a new territory for them while Netflix is the trail blazer in video streaming services. I am excited about this competition in the future and Disney+ itself, as a big Marvel fan.

Disclaimer: I have Disney in my portfolio, but this post stems from my curiosity and is not an investment suggestion or anything more than just my opinion.

Bundling and Unbundling with Apple

“Gentlemen, there’s only two ways I know of to make money: bundling and unbundling.”

Barksdale

Bundling is the act of adding several individual services or features together in one package. Think of Amazon Prime as the example of bundling. With Prime, you’ll get fast deliver (my experience lately hasn’t exactly matched that), free return, Prime Videos, audiobooks and access to exclusive deals, just to name a few.

Unbundling refers to the act of selling a service/feature separately from an usually bundled service or product. Think of flight tickets as an example. Before low-cost no-frill, flights tickets had many features, but low cost fliers such as Ryan Air were the pioneers of selling only flight tickets and making the other features such as luggage, priority check-ins as add-ons and additional revenue.

With Apple, an example of their bundling is Apple Card/Pay. I have seen quite a bit of criticisms online about the features of the service aren’t anything new. To some extent, yes, that may be true. The thing is that Apple managed to bundle all the following features together to make an attractive product that is yet to be seen elsewhere.

  • Beautifully and elegantly designed titanium card
  • No fees
  • Rewards and immediate cashback
  • Acceptance everywhere (Apple claimed) for Apple Card and 40+ countries for Apple Pay
  • In-app management
  • Security as in that biometric validation is required for payments with both Apple Card and Apple Pay
  • Privacy as in that consumer data won’t be used or shared with advertisers
  • Application process is fairly easy, reportedly, through Apple Wallet, which is loaded on your phone by default
  • Integration between Apple Card and Apple Pay

With regard to unbundling, I think that’s what Apple is doing with their hardware and services. Most services can only be enjoyed on Apple devices, yet such services lure consumers to the luxury devices which have been highly profitable to Apple. On the top of my head, there are three subscription services from Apple that an average consumer may likely use: Apple News+, Apple Music and iCloud. Soon there will be Apple Arcade too. Selling services separately and services from hardware gives users freedom to choose. If Apple bundled everything into, let’s say, $100/month for 1.5 years for the use of a new iPhone and all services, that would make some customers pay for what they didn’t use. Nonetheless, if the usage of paid services is high and consistent, I wonder if Apple will have an optional bundle for services alone for power users.

Thoughts on Apple Card

On Monday, Apple introduced its in-house credit card called Apple Card. Since it’s not available yet and the details are quite numerous, you can read more in these two articles on TechCrunch and The Verge or watch the presentation yourself here. I’ll just lay out my thoughts on the card below

I am convinced that Apple Card will attract a lot of sign-ups. After all, it’s Apple. The application process is reportedly straightforward and easy (we’ll see soon in the upcoming months). You can apply for the card from your Wallet app and the card will be shipped to you. If you use an iPhone 6 or later and are a fan of Apple, you will likely want to try your hands on the beautiful-looking titanium card for free, as long as you qualify for one. Plus, there are millions of installed iPhone 6 or later out there. So getting folks to sign up won’t be an issue. What about the usage for Apple Card? For consumers to use the Card, Apple has to give them a reason to, an incentive.

Security & Privacy

Security & Privacy is a big sell from Apple and it’s no different in this case. Apple Card comes without the stuff that makes credit card fraud possible from the physical card perspective. Plus, the way Apple sets it up makes credit card fraud significantly more difficult

Because of the way it is set up, every purchase with Apple Card requires biometric identification aside from purchases with the physical card. In the case of a non-Apple Pay transaction online — you must get your card number from the app and that is unlocked via Touch ID or Face ID, so biometrics are still in the path. And, for Apple Pay transactions, they are authenticated at the time of transaction. I personally think it would be cool to optionally require a confirmation from your phone to let a charge go through as well, but that is likely a v2 situation.

From TechCrunch

In other words, somebody needs to steal your card, your phone and either your thumb(s) or your face to make an unauthorized purchase.

Apple claimed that it wouldn’t know anything about consumer purchases using Apple Card. Plus, Goldman Sachs won’t sell data to marketers. If you care about privacy, it is attractive. Now that I work in the credit card industry, I can tell you that the level of privacy intrusion by banks is crazy. It is entirely possible to track the location of a cardholder to a store, know whether a purchase is made and if a purchase is not made, use the user data to run ads offline and online to motivate spending. If Apple and Goldman Sachs can do what they claim, this is an appealing feature, but I doubt it will be the dominant one.

No fees

According to Apple, you won’t be charged with late fees or penalty fees. You will just incur interest on your late payments. A nice feature, but from my perspective, it is not a hugely attractive one, especially if you are like me who isn’t late on credit card payments. After all, late payments will affect your credit score and consequently future APRs.

APRs

Pretty in line with the industry standard. Nothing special about this as far as I am concerned

Visibility into purchase details

Apple claimed that users could see more details on what a purchase was and where it happened from the Wallet app, instead of the user-unfriendly lines you see from your balance statement or mobile app. Once again, a nice feature that won’t be a dominant one.

Cash back

Above is the cash back policy for Apple Card and Apple Pay. 3% on Apple-related purchases is nice, but it is not a daily event, given how expensive Apple items are. 1% cash back with the physical card is nothing special. It’s even less attractive than many credit cards out there on the market. The interesting one is Apple Pay

From Creditcards.com

Because other credit cards offer two percent cash back or more on certain categories only, two percent cash back on every category by Apple Pay is more beneficial to users. According to Apple, Apple Pay will be available in 40+ countries at the end of this year. The number of merchants that accept Apple Pay is impressively high in some countries. Here is what Apple reported on the presentation

There are cases in which Apple Pay will not be competitive. For instance, if you have a card that gives back 4% cash back on dining, it sure is a better alternative than Apple Pay, even if Apple Pay is an available option. Or if you have a co-branded credit card such as a hotel or airline co-branded credit card, there is a switching cost as you want to increase your rewards points.

But using a physical credit card isn’t as convenient as a contactless option such as Apple Pay, nor is it as secure. So which payment option works in a situation depends on what situation that is and what kind of credit card user you are. If you care a lot about rewards and cash back, as well as have the time and mental fortitude to remember all the details, using multiple cards is the way to go. Nonetheless, if you are like me, a “one guy, one card” type, I would prefer something simple and easy to use/remember. Then I can see the appeal of Apple Pay. Contactless, fast, secure and decent cash back.

A push for Apple Pay

I believe that Apple Card is another push for Apple Pay to make it the “iPhone” equivalent of payment methods. Since Apple Pay is not ubiquitously available, the Card offers the connection between Apple Pay and merchants who don’t accept the service yet. If you use the Card, you’ll earn cash back that can be, in turn, used for Apple Pay. As explained above, Apple Pay can seem to be an attractive payment method to a certain type of users. According to Apple, they are on their track to meet the goal of 10 billion transactions on Apple Pay this year. If you are already satisfied with Apple Pay, I suspect that you will get more hooked when Apple Card is launched.

It makes sense to push for Apple Pay as I think Apple will earn more revenue from the service than the Card. After all, whatever revenue from the Card will have to be split with Goldman Sachs as well.

To recap, I think that this is a push for Apple Pay from Apple, an attempt to thread a delicate line between getting into the financial world and not suffering from the regulatory headaches that come with actually getting in there. Personally, I don’t think it is a “winner takes all” situation. I suspect that users will carry multiple options around and that each type of credit card user will display different levels of love towards Apple Pay and Card. I am excited about the future updates from Apple for the Card, regarding features and benefits. After all, this is just their first iteration.

Thoughts on Apple News +

What is Apple News +?

On Monday, Apple announced their “Netflix for news” or “Netflix for magazines” at the moment. They call it Apple News +. With $9.99/month, you have unlimited access to hundreds of magazines and several participating news outlets such as LA Times, Wall Street Journals, The Skimm or TechCrunch. Notable absences from Apple News+ are The Washington Post and NewYork Times

As common practice in the subscription world, the 1st month of Apple News+ is free. Once a user subscribes, the subscription is free for all family members. I never share any Apple services with my family members, so I am interested in how all that sharing with family members works and how they can avoid heavy scammers.

Apple claimed that they used “on-device intelligence” to suggest articles based on readers’ behavior. That way, Apple doesn’t know what users read. Additionally, advertisers won’t know what users read either, or at least that’s what Apple claimed.

From the demo, content on Apple News+ follows a specific format that is easy on the eyes and visually attractive. According to Macstories, out of 251 participating magazines, 125 are using Apple News Format, compared to 126 are still sticking to the old PDF format. Here are a couple of looks

Though the app allows browsing by alphabet and categories, some choices are not easy to find.

In fact, I needed to go to “Following” tab at the bottom, searched for Los Angeles Times to find the outlet. Then, I had to “follow” the LA Times to have it featured on my feed. If you want to look for TechCrunch or The Skimm, the search function in the following is probably the fastest way.

Does it make sense for popular news outlets to work with Apple?

With regard to revenue sharing, Apple reportedly seeks to keep 50% of the revenue from Apple News+ subscriptions while the other half is shared between the partners based on how much time is spent on each partner’s content. Partnering with Apple will potentially give publishers exposure to at least millions of Apple device owners, for now before Apple may decide to make the service available on Android. Publishers hope that their quality content and free marketing boost by being presented at an Apple event will catapult their digital business. On the other hand, there is also a “I already subscribed to Apple News+” risk from existing subscribers. In other words, if a user can access the same content while paying $9.99/month, why would he or she pay $39/month for WSJ, as an example?

Reportedly, even though publishers can’t have customer data, they will know what content is being read and can offer specific deals like newsletter. Plus, adhering to the new format championed by Apple requires an investment of time and effort. WSJ hires 50 more staff just for the partnership with Apple.

For the LA Times, it is understandable why they accepted the risk. The paper has 150,000 digital subscribers as of 15th March 2019. Compared to the 3 million digital-only subscribers and 4 million in total boasted by New York Times, or 1.71 million by the WSJ, the number is meagre. Hence, I can see the upside can justify the cannibalization risk. The same sentiment can be argued for the magazines. I don’t have the numbers for magazines, but I can’t imagine that their digital business is as big as LA Times or WSJ.

As for the WSJ, the math is more interesting. The WSJ has more to lose than the LA Times, but it is reported that users on Apple News + have access to only 3 days worth of archive. As an avid reader of the WSJ myself, it can be a challenge. I usually have to go back to articles even several weeks old for information. I guess that the management at the WSJ is betting that the avid readers will keep subscribing and the new revenue will flow in from extra consumption and new users.

It would be so interesting to see 6 months or a year from now whether partnership with Apple truly brings net benefits to the currently participating publishers. If it does, it will put the publishers that opt out right now, in an awkward position. Continue to stay out and risk losing more digital business or opt in?

What about readers?

I think the obvious winners here are the users. If you are an avid reader of even just a couple of magazines and news outlets, the deal is financially attractive. Some may argue that a normal user would never subscribe to that many publishers. Well, a normal Netflix user would never be able to consume all of their content library either. We are in the world of instant gratification and endless choice. I don’t see the difference here. Plus, you don’t have to worry about your data being collected by publishers as it would when you consume content on the web. Additionally, reading content in the new Apple News Format is a pleasant experience. I have an iPhone 5S and I liked what I saw. I can imagine the experience would be better on a bigger screen like newer iPhones and iPads. Finally, family members can use your subscriptions for free! At least for now!

In short, I find the launch of Apple News exciting. If there is one company that can pull this off, I can’t think of another one, except Apple. It has 900 million installed iPhones and 1.4 billion devices, a dedicated fan base, a household name and control over the iOS. The upcoming months will be interesting as I can’t wait to see the impact the new service has on the partnering publishers and how the result will change the dynamic between Apple and the opted out publishers. How would a competing service on Android look? Hope we can have some more color on the service at the upcoming earning call by Apple.

Thoughts on Dell’s position in Enterprise IT world

I like to learn about business strategies, particularly in the technology world. This post is just to put into words my understanding of Dell’s position in the Enterprise IT sphere. While I spent a lot of my free time on reading to navigate through as much as possible the abstraction and complexity of the IT world, I can’t understand the products/services as well as I do with, let’s say, a streaming service like Netflix. With luck, I may get some constructive feedback on what I might be incorrect about or what I have here is useful to someone out there.

IT is no longer a cost center to companies. It is where companies gain competitive advantages as the world goes digital. There are several notable trends:

  • While public clouds such as Azure or AWS offer flexibility, geographical reach, functionalities, quick time-to-market and cost-effectiveness, private clouds provide more control and better security. Companies need both. Hence, hybrid cloud is where enterprises are headed. Multi-cloud is a flavor of hybrid cloud in that a firm may use different public clouds. Whether hybrid or multi-cloud model works for one firm depends on the business requirements and resources available to that firm
  • As enterprises have IT footprint on both the cloud and on-prem, it becomes a challenge to manage the whole network. It’s critical to know which data travels to where and whether data is safe. The challenge compounds when the need for productivity forces companies to use 3rd party cloud applications such as ServiceNow, Box and Google Drive, just to name a few. As a result, the management a, automation and security of, as well as visibility into the network are instrumental to a successful hybrid/multi cloud.
  • A lot of companies have operations in different locations. Banks have branches. Retailers have stores. These branches are important touch points through which customers expect to have great experience and services. And these branches need to talk to data centers or cloud application providers. The network that links branches, data centers and the cloud must be secure, efficient, manageable and cost-effective.
  • Brands must release applications fast and often to continuously bring values to customers. From a user perspective, that’s why we often have to update our mobile applications, but there is a lot more that goes behind the scenes for brands to bring new updates to life. In order to have fast and continuous software releases, companies need to set up the necessary infrastructure that allows developers to do their job quickly and efficiently. Hence, software-defined data center (SDDC) and Kubernetes have become increasingly popular. With SDDC, data centers can be set up and later scale quickly as new technological advances increasingly relieve engineers of time-consuming manual workload. With regard to software development, micro-services is the de facto approach in which Kubernetes is a major component. Developers either want to build new software from scratch using Kubernetes or re-package existing applications on a Kubernetes-based platform
Google Trends Graph on Kubernetes

Dell itself

In short, Dell offers services and products that help companies build and scale data centers such as backup, disaster recover, file systems, storage, SDDC solutions such as VxRack. As the majority shareholder of VMWare, Dell integrates a lot of VMWare products in some of its own. The integration is critical to seamless connection between on-prem infrastructure and data on public clouds. For instance, if a firm builds its data center on VxRack, Dell’s SDDC turnkey product, and deploys some workloads on AWS using VMWare on AWS, the data and applications on-prem and on AWS can be set up quickly to talk to each other. Plus, the firm can manage all workloads using the same VMWare interface.

VMWare

Essentially, VMWare has built itself to be the one ingredient that companies wishing to adopt hybrid cloud need. It has built partnerships with AWS, GCP and IBM as collaboration with Azure is reportedly in the work. On top of that, through its offerings such as vSAN (storage), vSphere (compute), NSX (network), VeloCloud (SD-WAN) and a host of services designed for analytics, management and security such as Workspace One, Wavefront, AppDefense or vRealize, it is the glue that connects 3rd party applications, public clouds, private clouds (data centers) and branches.

Through its acquisition of EMC, Dell is the majority shareholder of VMWare.

Pivotal

Pivotal is Dell’s answer to the world’s current obsession with micro-services and Kubernetes. Pivotal offers services that help companies build applications better, faster and more efficiently. Developers want automation to relieve them of infrastructure-managing tasks so that they can focus on developing code, but they don’t want to lose too much freedom in development. Through its portfolio, Pivotal strives to meet those needs. Heptio is their latest acquisition and provides managed Kubernetes services. With Heptio, developers are not subject to the limitations imposed by PAS, but at the exchange of limited automation. With PAS, there is a lot of automation, but developers may not appreciate the rules that come with a higher level of automation. PKS is supposed to bring a balanced mix and the best of both worlds. I wrote a bit about PaaS vs CaaS here

As in the case of VMWare, Dell owns Pivotal by virtue of its EMC acquisition.

Security

Dell has its own security subsidiary in SecureWorks, a $1.8 billion company as of this writing. In addition, VMWare has its own security solutions that are designed to improve security as NSX with micro-segmentation or AppDefense.

Conclusion

The more I read about Dell and its subsidiaries, the more I am impressed by its strategy and growth through innovation and M&A (EMC, VeloCloud, NSX…). Based on my understanding of where Dell stands in the Enterprise IT world, it seems to have the necessary pieces to take advantage of the IT trends mentioned above.

Thoughts on Spotify

Spotify’s business model has been straightforward. Take music from the creators, let users have frictionless access to the content and generate revenue by either ads or premium subscriptions. The company delivers music in an appealing and user-friendly manner to the point that listeners agree to pay a premium for access every month. On the other side, Spotify pays royalties back to artists or labels every time a song is consumed. As the user base grows, Spotify generates revenue from advertisers which want to convey their marketing messages to an engaged audience.

Yesterday, the company announced their latest quarterly earnings and I found the report interesting. First, the number of subscribers. Both Premium Subscribers and Ad-supported MAUs increased.

Source: Spotify Data

There seems to be a seasonality in the subscriber acquisition. Subscriber acquisition seems to pick up more in Q2 and Q4 than in Q1 and Q3. The increase in premium subscribers in 2018 slows down, compared to the pace in 2017

Meanwhile, the Average Revenue Per User (ARPU) has been on decline.

Source: Spotify Data

With regard to revenue, it seems that the increase in subscriber count outweighs the decline in ARPU as revenue is on the rise

Source: Spotify Data

Both Premium and Ad-Supported revenues seem to be affected by seasonality. Ad-Supported revenue growth fluctuates more than Premium revenue growth. In 2018, revenue from ads grew faster than subscription-based revenue.

Source: Spotify Data

Gross Margin for both revenue streams went up with Ad-Supported gross margin growing at a faster clip in the last four quarters

Source: Spotify Data

In Q4 2018, Spotify became profitable for the first time. Free cash flow also reached the all-time high

Source: Spotify Data

Based on the numbers, it seems that everything is going in the right direction for Spotify. User base is expanding, revenue is going up, free cash flow is growing and the company becomes profitable for the first time. Even though ARPU has been declining, it’s understandable as many users were acquired on a discount. However, it’s necessary to maintain the network effect and grow the user base to attract advertisers.

As Spotify doesn’t own the majority of their content and it still has to pay a small royalty for content enjoyed by free users, Spotify faces two significant risks. First, it relies too much on the labels that can take their content elsewhere. Second, paying for content while generating zero revenue from free users might hurt the company’s margin. Hence, it needs original content. Already featuring original series with Amy Schumer and Guy Raz, the company now seems to switch its focus on another source of originals: podcasts.

During the earning call, Spotify announced the acquisitions of Gimlet Media and Anchor. The former is a podcast production company and the latter is a DIY tool that allows publishers to produce and broadcast original podcasts. In the call, CEO of Spotify mentioned that over time 20% of content on Spotify will be non-music and that several potential acquisitions which the company is considering in 2019 will all be related to podcasts.

The acquisitions and focus on podcasts make sense in terms of original content and monetization. Podcasts are gaining in popularity as a form of engaging content. Media outlets have podcasts. Companies have podcasts. Celebrities have podcasts. As an audio platform, Spotify certainly cannot afford to sit this one out. Having podcasts, in addition to music, makes Spotify more appealing. During the earning call, Daniel Elk, CEO of Spotify, hailed podcasts’ positive impact on the engagement of users on the platform. He indicated that podcasts could lure users who wouldn’t have signed up for Spotify. Plus, it’s definitely easier to have access to different content forms on one app than multiple apps. And what’s the better and faster way to be able to produce content than to acquire a proven production firm?

There is also the monetization piece. One revolutionary aspect of Spotify is to help obscure and less-known artists to get their creativity out to the world and get paid. The more their songs are listened through Spotify, especially the Discovery, the more dollars the artists receive. Spotify is in a position to do the same for podcast creators. According to a blog post by Anchor, nearly all podcast advertising concentrates in the top 1% of podcasts. The other 99% have to hope that their episodes are downloaded to the tunes of thousands to be able to attract advertisers. If Spotify can help podcasts generate revenue for their work in the same way as it has done for artists, Spotify can become the Spotify for podcasts and stand a higher chance of securing exclusives and originals in the future.

All in all, I think Spotify is going in the right direction. Securing key capabilities through acquisitions in a key area such as podcasts is crucial to future growth.