The meta show: Ben and David turn their gaze inward and examine the podcasting industry through E. W. Scripps' recent acquisitions of the Midroll podcast advertising network and Stitcher podcast client. Featuring discussion of our own product process and metrics at Acquired.
Topics covered include:
The Carve Out
Full Transcript below: (disclaimer: may contain unintentionally confusing, inaccurate and/or just-plain-hilarious transcription errors)
Ben: We’d like to thank our one listener that we see in our analytics on Zune.
David: And the one listener on Stitcher, who happens to be my wife.
Ben: That’s a great way to leap into this episode.
Welcome back to Episode 16 of Acquired, the podcast where we talk about technology acquisitions. I’m Ben Gilbert.
David: I’m David Rosenthal.
Ben: And we are your hosts. Today, we have a few notes before we dive into it. I wanted to take a minute and say a huge “thank you” to one of our listeners, David Resnick. He is known as the @the_rezonator in Slack. David is an entrepreneur with a company called BESTR, but in a former career he was a recording engineer and music producer. David has been helping us tremendously with audio quality, so I wanted to give a shout-out to his company.
BESTR is a platform to share the best things. Curate your best into topics with automated images and links. You can use their widget with your branding embedded on your website. Find out more at BESTR.co. That’s www.bestr.co.
Which brings me to my next point. David and I were grabbing –
David: Big announcement alert.
Ben: Yeah. If this were really a high production podcast, we would have –
David: We would have sound effects.
Ben: That’s right. We wanted to do something a little bit different with this podcast. We’re at about the size where we could start doing some advertising, and actually we’ll get into our analytics a little bit later this episode as part of the topic of the show. Instead, we wanted to do something called a “Community Showcase”. And since so many of our listeners are entrepreneurs that are building things, product people at companies, or venture capitalists, or finance people, or really people that are involved in creating products themselves, we thought it would be really cool to try and just do a community focus every episode.
David: Rather than advertising, at least for now, we're going to experiment with this. We're not charging anything or making any money on this, but we really just wanted to do it as a thank you to our community and listeners and especially those that are really engaged on the Slack channel and emailing us. So if you have something you’re working on and you want us to talk about it on the show, either hit us up in the Slack community or send us an email
Ben: That’s Acquiredfm@gmail.com.
David: Also on our website. We will aim to start with one and maybe do more of these every show.
Ben: Yeah, it’s true. You can hit us up on Twitter too, @acquiredfm. We may do a more kind of traditional advertising thing later but if you’re working on something, we’d love to give you a shout-out on the show. So David, are you ready to dive in?
David: I think with that, all of the preamble here is very appropriate because this episode is a meta episode about podcasts.
Ben: Yes. Today, on this Episode 16, we will be covering the acquisition by Scripps of both Midroll and Stitcher. So, I think we’ll dive right into it. David, you want to do history and facts?
David: Yeah. I should say before we do this, the theme here or topic was first inspired by my wife, Jenny. I wanted to make sure I give her a shout-out. She was trying to get to our website and she was Googling “acquired podcast” and realized that we weren’t in the top hits on SEO. So, this is unabashed SEO play to get the top of the Google Hits for acquired podcast.
Ben: This is the first time I’m hearing of this.
David: So EW Scripps Company, for those that aren’t familiar, is a very old company by technology standards. Not a technology company. They are a broadcast media company and historically had also been a newspaper publisher. But they operate a number of cable networks and television and radio broadcasting stations locally around the country.
Over the last 2 years they’ve made two acquisitions that made a huge splash in the business of podcasting space, something that Ben and I have gotten a little bit about over the last year. So, the first company that they bought was a bootstrap startup called Midroll. Midroll has a super interesting history. Some of our listeners might be familiar with parts of the company. It was started in 2010 by two guys, Scott Aukerman and Jeff Ullrich. It was started as a company called Earwolf. It was actually a comedy podcasting network.
So Scott had a podcast that was in LA and he had a radio comedy show that I believe was originally called Comedy Death-Ray I think. They eventually changed the name of it as a podcast, Comedy Bang! Bang! He had a bunch of comedians on the show and it had a pretty loyal following and so they decided to sort of start a podcasting network around it. So they added a bunch of other comedy shows, added culture shows and music podcast over time. Yes, it was Comedy Death-Ray that started and actually, originally the origins of it were in the Upright Citizens Brigade, standup comedy in Hollywood that Scott had started doing there.
Then it actually went on separate from the company that became Midroll. Comedy Bang! Bang! went on to become a television show on IFC, a comedy television show. So interesting routes for what is today the giant among midgets in the podcasting world. So they bootstrapped this company. For a couple of years they were just purely a content network. Then in 2014, they were doing their own advertising for all of the podcasts in the network. They were direct selling ads and they started getting approached by advertisers who wanted to buy ad space on other podcasts that weren’t part of their own network of shows that they were producing and they kind of thought, “Well, that’s interesting.”
So they launched a separate product that was an ad network, one of the first, if not the first, ad network for the podcasting industry. This was in 2014. They called it Midroll Media.
Ben: That gives you a sense of how new this whole thing is. I mean, it’s less than 2 years ago.
David: Less than 2 years ago which is crazy given that podcasting has been around over 10 years going back to the iPod.
Ben: Yeah, pretty new to advertising-based revenue.
Ben: Really monetization at all.
David: We’ll get into this in tech themes and others, but you know, this industry, the podcasting industry is so fragmented relative to how many people, hundreds of millions of people listen to podcasts.
So from the press release when they launched Midroll, they said, “The new company, Midroll, offers a 360-degree suite of production, distribution, and monetization services to artists, entertainers and thought leaders. Advertisers benefit from access to the talented hosts of more than 120 shows and their engaged audiences totaling more than 15 million downloads a month, using the industry’s first user-focused, self-service platform.”
This is crazy. This is 2014. The first self-service advertising platform for the podcasting industry has 120 shows. I mean compared that to ad networks for display ads or other forms of advertising.
Ben: AdWords has millions and millions of advertisers. Or maybe millions of sites, hundreds of thousands – no, probably millions of advertisers.
David: Yeah. This is like a grain of sand compared to every beach on earth.
Ben: We’ll get to the dollar amounts too, but again, a grain of sand.
David: But they signed up some pretty large podcasts to be part of the network. So WTF with Marc Maron, which is one of the largest podcasts out there, Barack Obama was on it recently. They have Bill Simmons’ podcasts and all The Ringer podcasts.
So, about a year after this and one year ago now, Scripps comes in and they buy the company. It was not announced at the time how much they paid for it but it has since come out reported $50 million upfront and another $10 million earnout to basically take out the giant in this industry, which is pretty good return for Scott and Jeff considering that this was totally bootstrapped. They never raised any money.
Ben: Yeah. I mean 50 million is, well, let’s just – We’re not going to beat around the bush. We’ll get into the numbers now. Podcast advertising, there’s not much money spent right now in podcasting as a medium. According to a Wall Street Journal article from earlier this year, advertisers are only expected to spend about 35 million on podcasts this year and that’s only up about 2% from last year.
David: Yeah. So the whole industry, 35 million, they cross the whole industry of which Midroll represents many of the largest podcasts but nowhere near the whole industry.
Ben: I don’t know about nowhere near. I think it's not ridiculous to say they’re the majority of the advertising spend goes through Midroll.
David: Of independent podcasts probably. But the largest podcasts are probably –
Ben: Good point.
David: The NPR.
Ben: This American Life. Good point. There’s a quote by someone at Midroll saying that a handful of their podcasters gross over a million dollars of year and they have about a 30% take rate. So actually, factoring back, it looks like Midroll’s annual revenue is somewhere in the neighborhood of $2 million a year.
David: Yeah. So, Scripps acquires this company about a year ago, almost exactly a year ago. They operate it for a year. Team stays intact, to the CEO that Midroll had brought in an outside CEO, Adam Sachs. I believe he’s still the CEO of the company. Then just a couple of weeks ago, the other shoe drops.
So, one of the issues which again we’ll get into that’s been holding the podcasting industry back, again, relative to how much usage and engagement it has as a media platform with people and users out there, the amount of advertising spent in it is that all pillars of the platform are basically completely divorced from one another. So you have the way people listen to and consume the user experience, consume podcasts via clients or streaming over websites, that’s completely divorced from where the podcasts are hosted, where the media is hosted, and that’s also completely divorced from the advertising world.
Ben: As a quick aside, why don’t I give kind of what our stack and process looks like so people get a sense. This is not unusual. I mean these parts are swapped in and out but they’re rarely consolidated. Just to start the whole process, .fm domain names are expensive. So you’re not going out and getting an $8 GoDaddy. So you drop 100 bucks on picking up your .fm domain name because that’s the hottest these days. So you need some way to have a consumer-facing website. So we have Squarespace for that. So Squarespace generates our RSS feed and gives us a public-facing site.
Now, the way that we deliver podcasts over almost any client is by submitting that RSS feed to the iTunes directory. Now, iTunes doesn’t host anything. They merely have a URL pointing at your RSS feed which they scan about once a day unless you manually force it and then they update their directory with where your mp3s are hosted. Now we need a place to host mp3s. A lot of people use SoundCloud, a lot of people will use something like Podtrac. For a while we were actually hosting them on Squarespace but you don’t get a lot of analytics that way, so then you need a hosting service. So use Libsyn for that who’s actually been really great. So you pay for a hosting service to host your mp3s which your RSS feed points.
David: So now we’ve got just to get this podcast in the ears of you, dear listeners, we have to go through 3 companies.
Ben: Yep. Then it's in iTunes and there’s a player that hips with iOS obviously or you can use iTunes on the desktop that points at the iTunes directory but it’s made available for others to point to also. So, Overcast or Pocket Casts or there is a variety of players that a lot of you are listening to mostly on your iOS devices, over 80% on iOS devices. Again, that’s completely decoupled from all the other pieces of the ecosystem. So at the end of the day, if you’re advertising on a podcast, all you really know is that your name and company was mentioned at an mp3. They got shipped down to potentially an unknown number of people using an unknown number of platforms and you don’t even know if they heard it.
David: Compare and contrast that to other technology enabled media platforms like medium for blogging or Facebook which we’ve talked about a bunch or Twitter or Instagram, all of those, the consumption of the content by users, the hosting of the content for the content producers and the advertising platform are all very tightly coupled into one product.
Ben: In fact, it’s the reason that those industries, the incredible measurement and the very tight coupling of all those components are the reason why those became dominant advertising platforms. I mean for direct response ads especially but even brand advertising requires an amount of measurement beyond what’s available in podcasting right now.
David: I mean if somebody were to come along and give Ben and me a boatload of money to read their advertisement s on our show, we basically could tell them nothing about what happened with that.
Ben: Yeah. Is this a good time? Should we share what our numbers look like here?
David: Yeah. Let’s do that and we’ll pick the story back up.
Ben: Cool. So here’s what we could tell them. We could tell them, I’m looking at our LinkedIn episode, 2 episodes ago, that we have about 6400 listeners which is unique IPs that have downloaded the URL. We are non-representative. Most of the time, 60% to 70% or higher of listeners are going to come through Apple’s iOS player. We actually have of that, what did I say, 6400?
Ben: About 4100 come from Pocket Casts since they were kind enough to feature us on the homepage. So a lot of you are probably listening through the Pocket Casts app, about 1000 from Apple, 297 from Marco Arment’s Overcast, and then trickling on down from there through various browsers, so people listening on the website. But we basically could tell them a little bit about geography. We can tell them the IP addresses and cities that people are coming from, but we have no idea how many people actually got to that point in the episode.
David: That’s one of the critical pieces. We can’t tell them how many of you actually heard what we would be being paid to say.
Ben: Right. Everybody, you hear those promo codes in a lot of podcasts that give you that nice 10% off, that is literally the only way that the advertiser has to attribute to that channel. So a lot of the times you might hear an ad for SquareSpace and you go to Squarespace and you sign up but you don’t type in the code. That never ends up getting attributed to that podcast.
David: The loop doesn’t get closed. So you get a little bit of the picture of some of the challenges with the industry.
Other people have tried this before, but Scripps actually is really brilliant here like they see there’s a huge arbitrage right now between the listener numbers and engagement on podcast as a whole medium and the complete cluster that is the state of any kind of advertising or analytics on the platform. So the only way you can solve this is to own the full stack and bring it together.
David: Or even just passively to know just like on Instagram, like, did somebody actually see this picture or this ad.
David: So a couple of weeks ago, the other shoe drops and Scripps acquires a company called Stitcher. We’d suspect many of you know about it and might be listening to us on Stitcher but our analytics tell us there is one of you.
Ben: Thank you, Jenny.
David: Jenny is my wife. She loves Stitcher.
So, Stitcher is a podcast client for mobile devices and it was kind of an interesting story. It was founded in 2008 by 3 guys, Noah Shanok, Peter deVroede, and Mike Ghaffary. Just like now in 2008, podcasts were also experiencing a torrid growth pace and Stitcher managed to raise quite a bit of venture money to go after this vision of creating the front door, the aggregated user experience client to become the dominant podcasting client. So they raised about $25 million over three rounds – first from New Atlantic Ventures and then from Benchmark and then from NEA. Unfortunately, it didn’t work.
So in 2014, about the same time that Midroll was getting launched, Stitcher actually ends up getting acquired by the French music streaming company, Deezer, the sort of Spotify competitor. That didn’t work out too great either. It sort of languishes within Deezer and then last month, Scripps bought Stitcher back from Deezer. We don’t know how much Deezer acquired it for but we do know it was an acquihire, so probably not much. So Scripps buys Stitcher for the princely sum of $4.5 million in cash.
This is a company that had raised $25 million as a venture-backed startup failed, been acquihired by another venture-backed startup and then now is being bought by Scripps for $4.5 million.
Ben: Yeah. So you know, the strategy makes a lot of sense. All of a sudden you’re coupling the ability to really turn on the ad sales funnel with Midroll with the ability to have a frontend client that you could instrument and do some creative things around to do advertising. At the end of the day, iOS is still the dominant platform that people listen to their podcasts on and it ships with the podcast client. So, the challenge ahead is to be able to figure out a way to make Stitcher appealing to people that they would actually go and seek out another way to listen to podcasts rather than use the built-in Apple one.
David: Again, Scripps gets this. This is the play that you would run if you want to actually unlock the value in the podcasting ecosystem.
So Adam Symson who’s the Chief Digital Officer at Scripps, who led the acquisition, he was quoted in the press releases basically saying just what Ben said. “We certainly have the ad sales force and the connections that make us a leader in the space, but today we depend almost exclusively on distribution into other channels. This puts in place, with a very strong brand,” arguably with Stitcher, very strong brand, “another piece of the puzzle in the ecosystem play.”
Ben: Yeah. I’m just going to throw out, I don’t know if it’s a bias or if it’s, well, whatever, I think Stitcher is garbage like every time I open the thing, it’s…
David: So let’s get into why Stitcher is a garbage. So the tech industry and especially the corner of the tech industry that is concerned with podcasts or have podcasts of their own, basically erupted in an outcry when this happened. John Gruber who hosts The Talk Show, which might be the largest and most influential technology podcast, he wrote a blog post saying, “Midroll owning Stitcher is not good for the podcast ecosystem. Stitcher is popular, but my show is not on Stitcher because Stitcher re-hosts the audio, compresses it to hell, and unless you opt out, inserts their own ads. That’s not how podcasting is supposed to work. I firmly believe podcasting should be open, like the web.”
Ben: Yeah. So Gruber is a grumpy old man on this one. I mean, I think that there is a lot of things where I don’t believe that the user experience delivered by Stitcher is very good and I don’t think the fact that they’re compressing the audios is great. You want to let podcasters kind of have creative freedom on that.
I think the way they currently deliver ads is kind of garbage. The list goes on. However, is publishing worst than it was when you had to purchase your own rack-mounted web server and install your own blogging software, like, are we in a place where if somebody creates the blogger or medium or the worst case scenario going around everyone’s mind is the Facebook of podcasting is the world’s worst. I think there’s a very valuable business to be made there and I think you can provide potentially podcasting to more people than here today because you can come up with a real sustainable business around it. There’s definitely some sacrifices that would have to be made there because I think that ultimately it would be a programmatic ad network with a full bidding system, the way that AdWords is or the way that Facebook Ads are. Maybe that upsets a lot of people and changes the way that it works a little bit, but I think it makes podcasting a more sustainable business.
David: I totally agree. I completely agree Gruber’s being a grumpy old man here. The problem isn’t what Stitcher is doing. It's that they’re doing a really crappy job of it. Like the parallels here, and I completely agree, I think the opportunity is huge to create as terrified as Gruber and Ben Thompson, another one of the folks we talk about on the show a lot – he has a blog post about this on Stratechery and talks about on his podcast which is excellent, Exponent, that he does with James Allworth – they’re terrified of the Facebook-ization of podcasts.
But the difference between Facebook and Stitcher is, like we talked about in the Instant Articles episode, Facebook cares a lot about the user experience and about making things beautiful. The analogy is exact between Instant Articles where they’re taking content that publishers have created, they’re self-hosting within Facebook and then they are serving ads that they’re inserting into it and then sharing that ad revenue with the publishers. It’s the exact same dynamics. The difference is Facebook acquired Push Pop Press to do this very, very beautifully, and Stitcher is a piece of crap.
Ben: Yeah. Stitcher is under new management now so I’m very curious if Midroll… Midroll strikes me as a very tasteful company. Midroll might do really good things with Stitcher. I worry about it in its current state.
David: Absolutely. But there are a bunch of questions that we’ll dive into. The first question is, what can Stitcher become as part of Midroll and as part of Scripps? That’s interesting talking about in the context of our show, we’ve never really seen something like this, at least on our show, go successfully before where acquiring a product that – Again, we’re hating on Stitcher here. Apologies to the one Stitcher fan listening to us. But we’ve never really seen a product be acquired that isn’t fundamentally a good product. So they’re sort of betting on hope here.
David: Okay, well, that was a little bit different. But, you know, that isn’t like a technology company with a great team behind it and the capability within the company to at least deliver the minimum viable product. Here, it’s a small subscale technology company that’s part of an old-school media company acquiring another vastly subscale technology company and what they need to do is build an incredible technology-enabled user interface.
Ben: Have we seen an example… I don’t think we’ve done example on the show yet where a company does – Actually, I take that back. We sort of saw it with Office. But where I was going is a company does multiple acquisitions and sort of combines them in kind of a classic conglomerate way to build a new product from combining existing ones and the example I’m thinking of there is with the Acompli acquisition building Sunrise calendar into Acompli. But you know, we have yet to see if that is a product success or market success yet.
David: The difference there too is the parent company acquiring them all was Microsoft and you could say whatever you want about Microsoft but their technology chops are a lot better than Scripps.
Ben: Yeah, for sure.
David: So, we’re obviously biased by being part of the startup ecosystem but I’m very excited to see what entrepreneurs come up with, with new de novo businesses to tackle this problem.
Ben: So you know, we're talking about all the weird forces at play in podcasting right now and kind of the weirdness of the ecosystem. There are sort of secret meetings going on with Apple and some of the bigger publishers and existing podcasters to understand should we make this something where it’s actually a monetizable platform and they own the ecosystem top to bottom. One of the things that’s sort of playing into that, the reason everyone’s making a big deal is because the cost per thousand impressions or the CPMs that podcasting commands, at least right now and maybe attributable to the audience that it has, being a very high value audience. But they have $100 CPMs. For anyone in sort of advertising or who’s done online advertising –
David: That’s pretty unreal.
Ben: Yeah. The average YouTube CPM in 2014 was $14. Web display ads can get anywhere from $10, $5. Podcasting is like total breakout and that’s the ceiling with $100 CPMs and I think for this show, we’d be somewhere between $25 and $50. But the people that are making their living as sort of independent podcasters right now are doing great.
David: Are doing great. If you have an audience and you’re an independent podcaster, you can do great.
Ben: Yup. Actually, Ben Thompson makes a good case a while ago before The Ringer started about how Bill Simmons could move to solely podcasting, how it's much more economical. Actually if you’re a writer but you’re also someone who could do a show to write for free and publish that as your lead gen and then monetize your podcast audience.
David: All right, let’s maybe jump in to acquisition category.
David: So, I mean I think it's pretty clear here this is a product acquisition that is getting rolled into this suite of products.
Ben: Yup, got to be. If they can daisy chain these things together correctly, there’s a bunch of money to be made. I think it involves having exclusive content. It’s hard for me to imagine a reason to go download a podcast player to play – Well, it’s hard for me to imagine going and downloading Stitcher to listen to content that I could get otherwise. But if it became sort of a Netflix type thing where they’re producing original content and signing exclusive artists, maybe it doesn’t quite use that model where I’m paying a subscription fee but it does use the model where I have to be listening at the very place where I can be advertised to, then they might be able to create a real business there.
David: This is very explicitly they’ve said so this is their plan. So, Midroll already had two pieces of the ecosystem together with the content network and the advertising network. In a news article, in an interview after the acquisition of Stitcher, Midroll has just come out with a new premium service called Howl which offers original shows and ad-free archives of popular podcasts. So they’re clearly moving into this kind of Netflix type category and the VP of Business Development at Midroll, Eric Diehn, and he said clearly at some point the two will intersect.
Ben: Yeah. Okay, moving on to, you want to do what would have happened otherwise?
David: Yeah. I think in this case this is sort of the first real splash that’s been made of somebody trying to do the obvious and bringing the three pillars of this medium together. So I think otherwise, we would just continue to drift.
Ben: Yeah. Stitcher continues to languish, Midroll continues to grow incrementally and is able to sell ads to some of the big but not network-big podcasts and we continue to see a lack of consolidation and no money go to podcasting.
David: What’s interesting, this is almost the like not what would have happened otherwise, but what will happen now. I do wonder if this is like the shot across the bow that wakes up some folks in the entrepreneurial and startup community to realize, “Man, there’s a big opportunity here,” and attempt to build, you know, what Stitcher tried to in the beginning.
Ben: Yeah. David, it feels like you’re teeing me up a little bit. We actually gave this a go at Pioneer Square Labs and we were really interested in podcasting just based on the growth trajectory of the amount of people that have started listening to podcasts in the last couple of years. It’s still not a huge number of people but the growth rate is really good and one of the reasons, I mean, for all the reasons on this show that we’ve already talked about, we shied away from it where there’s only $30 million to $40 million spent a year on it, you can’t really stick your toe out with an MVP. You have to be the hosting, the analytics. You really have to have a client out there and your client has to have some reason to be better than Apple’s client because shipping with the platform is a huge advantage.
There was one thing that we really wanted to do and that was dynamic ad insertion so that we could sell ads programmatically. One thing that we felt was super important was for the host to be able to read the ads because that’s been one of the things that commands the really high CPMs in the world today. One way that we were going to do that is have the host go through and record ahead of time the ad reads and then we could insert in the host’s own voice anywhere throughout the audio, the ads.
David: Wow, that’s cool.
Ben: So we started looking at this and we started figuring out, okay cool, we can make like pretend mp3 URLs and dynamically generate those episodes with the appropriate ad for that person at the moment that it gets downloaded by their podcast client and send it specifically to them. We started looking around. There really are some people tackling this right now. There’s a company called Acast that’s doing dynamic ad insertion. Actually just recently, Panoply launched a company called Megaphone or I guess a product called Megaphone.fm and they also are doing the dynamic ad insertion. They've got this cool UI where if you’re an advertiser or a host, you can go in and select the spots where you want to insert the ad. So, some people are making runs at this. I continue to think that you need to be able to show real measurement from the client side, but who knows, maybe something crazy will change and Apple will have an API to plug into for that. You know, they’re suddenly not averse to…
David: Services revenue?
Ben: Well, yeah, and an advertising model as we’re seeing with changes in the App Store. If they can find a way that continues to ensure user privacy but makes podcasting more valuable, maybe we’ll see a way for Apple to open up reporting of podcast to advertisers. I don’t know.
David: Yeah. Two things I want to mention. Well, one I’ll just mention real quick. I feel like we haven’t quite sharply pointed out yet. The other dynamic that’s really interesting in this industry is Apple. Apple created this medium or it was created around Apple. They’re still the dominant player but they don’t care about it at all.
Ben: It's funny. They sort of inherited it too. People were creating podcasts and sending them around ad hoc and people were putting them on their iPods and then finally Apple put a podcast section of the iTunes Music Store which was just a directory, not a hosting service for people to do this. It's so funny that it’s still even called podcasting. Nobody has an iPod anymore. Apple has just accidentally had this nascent, huge opportunity unfold that they’re really not taking advantage of because it's really not an Apple type business. Apple classically sells hardware and makes a profit on that hardware and then has software and services to differentiate that experience. And that doesn’t sound like what this is at all. But in this new kind of shifting Apple, maybe we’ll see this, but my bet would still be on Apple letting it –
David: Also, I want to bring up one thing that we thought about, that I’ve thought about, before and in preparing for this show is I bet a lot of listeners are saying, “Well, hey, I mean what you guys are talking about already exists. It's called SoundCloud.” That’s true to a certain extent but I think SoundCloud and Apple both, they’re very focused on music.
I actually just right before we started recording the show went through the – For some reason, my old SoundCloud account got deleted or something and I went through the on-boarding process.
Ben: It's Twitter’s investment.
David: Twitter’s investment. And through the on-boarding process it’s super clear that SoundCloud is about music and that they’re pushing people to music, not to podcasting. Same with Apple. They invested. They bought Beats. Maybe we’ll cover that in a future show and redid Apple Music. They’re investing a lot in that. But nobody is really doing this. I think if you’re going to build a really great client and consumer experience, it has to be about podcasts.
Ben: Yeah, I agree.
David: Second thing I wanted to mention real quick. You know, Ben, this is a great example since you’re talking about PSL, like I’m curious. I bet a lot of our listeners are curious. What’s your process at PSL? How did you guys, when you were diving into podcasts, what did you do to validate the market? How did you look at this?
Ben: So a lot of the times, we start with a space that we think is interesting. That’s what we did here. I’m kind of the guy that buys all of our ads on social and search. In sort of knowing exactly how that world works, it was kind of blindly obvious to me like wait a minute, if I want to buy ads on a podcast, I have to do what? Manually get in touch with someone at Midroll and there’s a minimum spend.
David: Or in the podcast directly.
Ben: It’s a completely immature market. So, we started pushing on that opportunity and trying to figure out okay, what would it look like if we actually pursued this. So, we do two things. We do kind of a top-down and a bottom-up. From a top-down, we look at what is the market today and what market forces do we think will make – What does it look like in 5 or 10 years? And obviously, that’s a guess. But we try and make that an educated guess and we look at things like Apple could be either a big risk or potentially make this a lot easier and that it would be all about timing. So we look at sort of that top-down of okay, how much money could this business really make? What’s the tab there?
Then we do a bottom-up. I think that if we were a VC firm, we would kind of just do the top-down and if I was an entrepreneur, we would just do the bottom-up. But since we’re sort of both the kind of startup studio is responsible for both sides of the house in their early stages, deciding whether to go after the opportunity and actually doing some of the building. Once it kind of passes that sniff test of this could be a big business, which this one didn’t, then we start really validating can we acquire customers for significantly less than a lifetime customer value, building as lightweight of stuff as we could. We really couldn’t think of a good way to lightweight test this because again, you’d have to be the host, the analytics provider, ship the client, get client adoption. It’s a years, years long process and it could be an interesting business, just not one that we could do in sort of a short, early validation timeframe.
David: Which again kind of brings us back to this dilemma and we know we’ll see what happens with this set of acquisitions from Scripps, but this dilemma that the industry is in where it’s kind of hard to just start a company to fix this like to just start Facebook or just start Instagram. You have to do a lot more heavy lifting than they did upfront and you have to contend with these players like Apple that are hugely dominant in the industry but a really complex set of motivations.
Ben: You would have to have a lot of confidence there to make a big investment in this that Apple wasn’t going to flip some switch because it seems like while it’s not in their wheelhouse, a huge risk to your business.
David: At the same time, let’s be clear, like as a VC I believe and you probably believe too, Ben, the numbers don’t like. There is a massive opportunity here.
Ben: Yeah, something will happen in podcasting. It’s not totally clear how it will shake out and our big question in grading this one is do we think it’s going to be these guys.
David: Let’s move on to tech themes and cover that. So, I feel like we were dancing around this a little bit in talking about how the distribution of the audience and listeners is across the industry and different podcasts. My tech theme is the power law. We see this in so many areas of tech whether it’s the App Store and the top 10 apps are responsible for whatever, you know, 70 percent or whatever of downloads. It’s the same thing here in the podcasting industry too. Ben, you had some stats on this. I think was it the top 10 podcasts are responsible for 40 percent of listeners in the entire industry?
Ben: Yeah, it’s the top 10 publisher. NPR, This American Life, those sort, WKYC, I believe, or WNYC. WKYC is Cleveland. WNYC. They have a big portfolio of podcasts and they’re sort of just the parent publisher. But yeah, the top 10 are responsible for 40 percent.
David: So again, and here’s another puzzle you have to unlock to win this industry is you need those top 10 publishers to be on your platform because they represent by far or the top 100 publishers, they represent by far the majority of the market.
Ben: Yeah. My theme is it’s really hard to compete with the platform defaults. Apple ships a podcast app even before they bundled podcast on the phone and, you know, that gets someone 90 percent of the way there, and are they actually going to go the extra mile and go look for a different podcast app, and are they going to look for yours and is yours differentiated enough. I think premium content might be the way to do it, but businesses have won sometimes even illegally over the years because they were able to bundle with the platform. I mean look at how IE achieved dominance on Windows. Yeah, being shipped with the platform is a very clear way to win.
Actually, in the mobile world pre-iPhone, it was really difficult to install those Java apps on your flip phone and the way that those companies used to actually get their games and apps distributed was bundling because if it’s on the platform, it’s going to get used.
David: It’s interesting like the… I’m thinking about the blogging space and Google acquired Blogger and you could argue that that’s an example of the platform Google owning Blogger, the distribution channel owning the platform. But Blogger never had the kind of market share that iTunes does, that Apple does with podcasting.
Ben: Yeah, it’s true.
David: All right.
Ben: You want to grade it?
David: Should we bring this one home?
Ben: Yeah. So I think we should grade them separately. We’ll look at Midroll and then Stitcher. At least that’s how I want to break mine down.
David: I like that.
Ben: Midroll, while it is a better company, they’re really taking on a flyer on spending 50 million on that thing. Their revenues right now are I think like 1.5 to 2 million a year and you really got to believe that there’s going to be a big change in the way that you can stick these businesses together to make that change meaningful and were I a betting man, I’d bet against them.
David: On the other hand though, in defense of Midroll, they are the advertising network for some of the biggest podcasts which as we were saying was one of the keys to unlocking this.
Ben: Sure. I still don’t know if it's 50 million. I don’t know. This is to me an old media company that has money lying around, sees their cash pile shrinking and is concerned about the future –
David: And sees the opportunity in podcasts.
Ben: Sees the opportunity, but $50 million for something that makes 2 million a year?
David: How much did Facebook acquire Push Pop Press for? We don’t know, but a lot less than that.
Ben: Yeah. Midroll is a D for me. Of the two companies, Midroll is definitely my favorite, but God, that’s a high price tag. Stitcher, could they have bought anything else, I mean if there’s another podcast client out there? I guess Stitcher already has this ad pipeline built in that they wouldn’t have to sort of do themselves, but to me, just pointing Midroll’s ad sales at Stitcher, I have more faith in that as sort of a small business than I do of them executing the large opportunity of creating the top to bottom ecosystem successfully. So I’d say, I’d go a B on the Stitcher acquisition just because they’ve already got Midroll and they can point those ads into Stitcher and I’m sure make some money out of it and get their 4.5 million out. But I don’t think they were going to pull this big shebang off.
David: Yeah, the whole rodeo. I think I’m with you. Looking at them separately, I mean one of the things with Midroll, I’m not going to be as harsh as you, really even though the company was founded in 2010, like Midroll only started 2 years ago, so yes, that was a very healthy multiple, whatever their revenue was. It was a healthy multiple that they paid for it. But I’m sure it's growing very quickly and if they can start to get some of the big, big publishers and represent them, maybe there’s more to it. I’m not incredibly bullish but I’d give it maybe a C+ or B- now. You know, again, the real issue is TAM. The whole key to this is you have to unlock the TAM, the total addressable market, and you have to do that through an integrated platform. Which brings us to Stitcher, right? And we have been hating on Stitcher in this, probably with good cause in this episode. But again, what you were just saying, Ben, I think is interesting. Like who else were they going to buy? What were they going to do? They knew they had to have a client and this is Scripps that we’re talking about. And Midroll, well, a great company and a podcasting company, it's not a tech company. It’s an ad network and it’s a low-tech ad network, like spoken word. This is a people business, not a tech business. So they didn’t have anybody that they could build this internally and then who were they going to buy? They’re not going to buy Overcast which I use and love.
Ben: It’s great.
David: Marco Arment. It’s great. No way he’s going to sell this to anybody, let alone to Scripps.
Ben: I wonder how many users Pocket Cast has?
David: Well, that’s what I’m getting to. Oh, Pocket Cast? I don’t know. Pocket Cast could have been a potential one. But Stitcher for all of its problems, and we don’t know how engaged these users are, but they had 8 million registered users. Now, I bet a lot of those were lapsed users. But if you do the math, they paid $4.5 million for 8 million registered users. So they paid just over 50 cents per registered user.
David: If – big “if” here – they can magically hire some great people to come in and actually build a really good user experience here. That’s fairly cheap for a pretty big head start. Again, I don’t think they’re going to pull this off, so I’d give that a B. It’s not terrible. They didn’t spend much money on Stitcher. But I’m handicapping the odds of the success low. But again, if they pull it off, they’re going to look brilliant. If they can pull it off – I don’t think they will – they will spend $54.5 million to win this category. I don’t think they’re going to pull off.
Ben: Yeah. Hey, I also just figured out in looking at CrunchBase to see if Shifty Jelly, the awesomely named parent company behind Pocket Cast, if they’d raise any money. According to CrunchBase, they haven’t, but they are an Australian-based company. So that explains our Australian listeners.
David: Oh, cool. Very cool. Shout-out down under. Yeah, if you know anything about Pocket Cast, hit us up in the Slack Community or by email. We’d love to chat about it.
Okay, should we move on to follow-ups?
Ben: I think it's time.
David: Time. All right. Three quick but super interesting follow-ups this week.
First, Twitch, going way back to one of our earlier episodes. We talked a lot in the episode about the massive volume of transactions that are going through the Twitch platform in tipping, which for those that are unfamiliar with tipping or did not listen to the episode, go back and let’s do it. I think it’s one of our best early episodes. It’s raw but it was good. It’s very raw. Tipping is this amazing phenomenon on Twitch where people will just give other people money. So, like if you’re streaming on Twitch and for a variety of reasons, but your audience will just give you money called tipping. When Amazon acquired Twitch a couple of years ago, all of this was just happening off the platform through overlays and screen overlays that broadcasters would use, could use Bitcoin or PayPal or stuff to do this. They’ve now brought this on to the platform and they just launched it with a feature called Cheering on Twitch and it uses a virtual currency called Bits. Super interesting. This is going to potentially unlock a massive revenue potential for Twitch the company that was already happening in the ecosystem.
I also want to give a tip off the hat to our Slack community member, James Kay, who brought this to our attention in the Slack group. I had not seen it.
So that’s one. Two, follow-up to Facebook Instant Articles. Paper, RIP.
Ben: Oh man, it was the best iOS app ever. Period. Hands down. It was so good.
David: High praise from Ben. Facebook Paper is being shut down sadly. But the spirit lives on in Instant Articles within the main app.
Ben: If you never experienced Paper, you have until the end of July to rush out and download it, play with it.
David: Yeah. So pour one out this weekend for Facebook Paper.
Then lastly, super interesting, we posted this in the Slack community. The SEC filing for LinkedIn detailing all of the ins and outs and blow by blow of the acquisition process came out and it is super interesting. So, we’ll link to this in the show notes and it's also in the Slack group. But, turns out there were actually five parties involved in bidding for LinkedIn. So Microsoft obviously and then everybody assumed, you know, and we speculated on the show that Salesforce, it’s now come out, Salesforce was heavily involved in the acquisition but there were three others. Two have been identified as Google and Facebook. The Facebook story is pretty interesting apparently, assuming that Facebook is the party that is referred to in the filing. Reid Hoffmann had a meeting with the CEO of the company, of Party D or whoever it was, Mark Zuckerberg, and said, “Hey. There’s actually this acquisition process for LinkedIn going on. Would Facebook be interested?” Zuckerberg was like, “No.”
So that was not an involved process with Facebook. But Google apparently went pretty far down the path and then so did the mysterious Party C. Nobody knows who Party C is but they also spent a lot of time looking at LinkedIn.
The other interesting thing in this filing is the bidding war. So the first bid that Microsoft put in for LinkedIn was $160 a share. If folks might remember, the deal got down at $196. So what happened, and I think that was about $5 billion worth of value that’s the difference there. So it turns out, so Salesforce and Microsoft were bidding against each other, started at $160. Deal was on track to happen. Microsoft had won it at $182 per share. The merger agreement was being negotiated, everything was going along.
And then Salesforce or Party A as it’s referred to in the filing just comes in over the top after having essentially pulled out with a $200 per share bid kind of out of nowhere, but the bid was not all cash. It was mostly stock. So that kind of threw the big wrench in the process. The whole deal with Microsoft had to get renegotiated and ended up getting done at $196 all cash.
Ben: Wow. Great move, Salesforce.
David: Yeah. I hope that Reid Hoffmann and Jeff Weiner sent a really nice bottle of wine to Marc Benioff after that.
Ben: Yeah, no kidding. And will now compete against him.
Ben: Should we do The Carve Out?
David: Let’s do it.
Ben: Nice. I have a quickie this week. It's funny we mentioned The Ringer or twice already on this podcast and The Ringer itself has been my Carve Out the week that it launched. But my Carve Out this week is one of my favorite writers of all time announced this week that he will be starting at The Ringer, and that is Mark Titus.
Ben: Mark is a fellow Ohio State alum who was known or still is known as his Twitter handle as @ClubTrillion. It’s the most awesome name of all time because Mark would ride the bench and would get put in for one minute per game. So his stat line read 1000000000. So, he started this blog called Club Trillion while he was at Ohio State with the tagline “Views from the end of the bench” and he became this phenomenal sports writing personality and just hilarious to follow on Twitter. I think he wrote for Grantland actually when Bill Simmons was there. So, really excited to see Mark’s writing come back to life at The Ringer.
David: That’s awesome. I love that. Was he there when you were there?
Ben: He was, yeah. I’d get to watch his few seconds a game when they throw him in.
David: That’s awesome. My Carve Out for the week is actually a concept, a management tool, self-management of your teams that probably a lot of you are familiar with called OKRs (objectives and key results). I bring it up because we just passed the midway point in the year, so I was doing my midyear sort of self-review and check-in. I’ve been using OKRs for a couple of year. They’re really great. So the idea, there’s a cool history behind it. Google uses OKRs and they were introduced to Google when they were still a tiny startup by John Doerr from Kleiner Perkins who was on their board. We’ll link to it in the show notes. Rick Klau who is a partner at Google Ventures and had been at Google and YouTube before that gives a great kind of hour-long overview about how the objective and goal-setting process works at Google. It's really good.
I just use it myself, but it also is great for teams. The idea is that you set a small finite number of objectives for yourself in any period and an objective is a high level thing. So, one of mine is help my portfolio companies. Then you set KRs or key results under each objective and the key results have to be SMART (specific, measurable, actionable, realistic, and time-bounded). I think that’s it. Anyway, but like one I have is spend at least 15 hours per quarter face to face with each founder of each portfolio company I work with. So it has to be super clear, did you hit this, yes or no at the end of the quarter. Anyway, it's a great system. The concept is you should really stretch yourself and achieve half or less of your key results.
But anyway, shout-out to OKRs.
Ben: Awesome. Well, that about does it. If you aren’t currently subscribed and would like to hear more, you can subscribe from your favorite podcast client? If you feel so inclined, we’d love a review on iTunes or to tell your friends on Twitter and Facebook, too. Thanks much for joining us.
David: Until next time.
Ben: Until next time.
We finally did it. After five years and over 100 episodes, we decided to formalize the answer to Acquired’s most frequently asked question: “what are the best acquisitions of all time?” Here it is: The Acquired Top Ten.
Note: we ranked the list by our estimate of absolute dollar return to the acquirer. We could have used ROI multiple or annualized return, but we decided the ultimate yardstick of success should be the absolute dollar amount added to the parent company’s enterprise value. Afterall, you can’t eat IRR! For more on our methodology, please see the notes at the end of this post. And for all our trademark Acquired editorial and discussion tune in to the full episode above!
Purchase Price: $4.2 billion, 2009
Estimated Current Contribution to Market Cap: $20.5 billion
Absolute Dollar Return: $16.3 billion
Back in 2009, Marvel Studios was recently formed, most of its movie rights were leased out, and the prevailing wisdom was that Marvel was just some old comic book IP company that only nerds cared about. Since then, Marvel Cinematic Universe films have grossed $22.5b in total box office receipts (including the single biggest movie of all-time), for an average of $2.2b annually. Disney earns about two dollars in parks and merchandise revenue for every one dollar earned from films (discussed on our Disney, Plus episode). Therefore we estimate Marvel generates about $6.75b in annual revenue for Disney, or nearly 10% of all the company’s revenue. Not bad for a set of nerdy comic book franchises…
Total Purchase Price: $70 million (estimated), 2004
Estimated Current Contribution to Market Cap: $16.9 billion
Absolute Dollar Return: $16.8 billion
Morgan Stanley estimated that Google Maps generated $2.95b in revenue in 2019. Although that’s small compared to Google’s overall revenue of $160b+, it still accounts for over $16b in market cap by our calculations. Ironically the majority of Maps’ usage (and presumably revenue) comes from mobile, which grew out of by far the smallest of the 3 acquisitions, ZipDash. Tiny yet mighty!
Total Purchase Price: $188 million (by ABC), 1984
Estimated Current Contribution to Market Cap: $31.2 billion
Absolute Dollar Return: $31.0 billion
ABC’s 1984 acquisition of ESPN is heavyweight champion and still undisputed G.O.A.T. of media acquisitions.With an estimated $10.3B in 2018 revenue, ESPN’s value has compounded annually within ABC/Disney at >15% for an astounding THIRTY-FIVE YEARS. Single-handedly responsible for one of the greatest business model innovations in history with the advent of cable carriage fees, ESPN proves Albert Einstein’s famous statement that “Compound interest is the eighth wonder of the world.”
Total Purchase Price: $1.5 billion, 2002
Value Realized at Spinoff: $47.1 billion
Absolute Dollar Return: $45.6 billion
Who would have thought facilitating payments for Beanie Baby trades could be so lucrative? The only acquisition on our list whose value we can precisely measure, eBay spun off PayPal into a stand-alone public company in July 2015. Its value at the time? A cool 31x what eBay paid in 2002.
Total Purchase Price: $135 million, 2005
Estimated Current Contribution to Market Cap: $49.9 billion
Absolute Dollar Return: $49.8 billion
Remember the Priceline Negotiator? Boy did he get himself a screaming deal on this one. This purchase might have ranked even higher if Booking Holdings’ stock (Priceline even renamed the whole company after this acquisition!) weren’t down ~20% due to COVID-19 fears when we did the analysis. We also took a conservative approach, using only the (massive) $10.8b in annual revenue from the company’s “Agency Revenues” segment as Booking.com’s contribution — there is likely more revenue in other segments that’s also attributable to Booking.com, though we can’t be sure how much.
Total Purchase Price: $429 million, 1997
Estimated Current Contribution to Market Cap: $63.0 billion
Absolute Dollar Return: $62.6 billion
How do you put a value on Steve Jobs? Turns out we didn’t have to! NeXTSTEP, NeXT’s operating system, underpins all of Apple’s modern operating systems today: MacOS, iOS, WatchOS, and beyond. Literally every dollar of Apple’s $260b in annual revenue comes from NeXT roots, and from Steve wiping the product slate clean upon his return. With the acquisition being necessary but not sufficient to create Apple’s $1.4 trillion market cap today, we conservatively attributed 5% of Apple to this purchase.
Total Purchase Price: $50 million, 2005
Estimated Current Contribution to Market Cap: $72 billion
Absolute Dollar Return: $72 billion
Speaking of operating system acquisitions, NeXT was great, but on a pure value basis Android beats it. We took Google Play Store revenues (where Google’s 30% cut is worth about $7.7b) and added the dollar amount we estimate Google saves in Traffic Acquisition Costs by owning default search on Android ($4.8b), to reach an estimated annual revenue contribution to Google of $12.5b from the diminutive robot OS. Android also takes the award for largest ROI multiple: >1400x. Yep, you can’t eat IRR, but that’s a figure VCs only dream of.
Total Purchase Price: $1.65 billion, 2006
Estimated Current Contribution to Market Cap: $86.2 billion
Absolute Dollar Return: $84.5 billion
We admit it, we screwed up on our first episode covering YouTube: there’s no way this deal was a “C”. With Google recently reporting YouTube revenues for the first time ($15b — almost 10% of Google’s revenue!), it’s clear this acquisition was a juggernaut. It’s past-time for an Acquired revisit.
That said, while YouTube as the world’s second-highest-traffic search engine (second-only to their parent company!) grosses $15b, much of that revenue (over 50%?) gets paid out to creators, and YouTube’s hosting and bandwidth costs are significant. But we’ll leave the debate over the division’s profitability to the podcast.
Total Purchase Price: $3.1 billion, 2007
Estimated Current Contribution to Market Cap: $126.4 billion
Absolute Dollar Return: $123.3 billion
A dark horse rides into second place! The only acquisition on this list not-yet covered on Acquired (to be remedied very soon), this deal was far, far more important than most people realize. Effectively extending Google’s advertising reach from just its own properties to the entire internet, DoubleClick and its associated products generated over $20b in revenue within Google last year. Given what we now know about the nature of competition in internet advertising services, it’s unlikely governments and antitrust authorities would allow another deal like this again, much like #1 on our list...
Purchase Price: $1 billion, 2012
Estimated Current Contribution to Market Cap: $153 billion
Absolute Dollar Return: $152 billion
When it comes to G.O.A.T. status, if ESPN is M&A’s Lebron, Insta is its MJ. No offense to ESPN/Lebron, but we’ll probably never see another acquisition that’s so unquestionably dominant across every dimension of the M&A game as Facebook’s 2012 purchase of Instagram. Reported by Bloomberg to be doing $20B of revenue annually now within Facebook (up from ~$0 just eight years ago), Instagram takes the Acquired crown by a mile. And unlike YouTube, Facebook keeps nearly all of that $20b for itself! At risk of stretching the MJ analogy too far, given the circumstances at the time of the deal — Facebook’s “missing” of mobile and existential questions surrounding its ill-fated IPO — buying Instagram was Facebook’s equivalent of Jordan’s Game 6. Whether this deal was ultimately good or bad for the world at-large is another question, but there’s no doubt Instagram goes down in history as the greatest acquisition of all-time.
Methodology and Notes:
Transcript: (disclaimer: may contain unintentionally confusing, inaccurate and/or amusing transcription errors)
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