Apple bought Shazam for around $400 million.
Shazam adds 120 million active users to Apple Music’s database.
Shazam is a crucial addition for Apple to compete with Spotify.
The deal will turn out to be a valuable addition for Apple.
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Very short following my bullish article about music streaming service Spotify, its rival Apple confirmed the acquisition of Shazam, a music recognition app. Apple paid $400 million for Shazam, as Spotify and Snap were also interested according to TechCrunch. This acquisition is a welcome and much needed addition for Apple to keep up with Spotify and could be a turning point for Apple Music. It also clearly points out the importance of both recognition technology and data for a streaming service, like I already discussed in my Spotify article. In this article, I’ll discuss the importance of this acquisition for Apple and the implications for the company’s music business going forward.
After first looking at Apple Music’s numbers investors may conclude that the company is doing pretty well. Apple reported over 30 million streaming service subscribers in September of this year, growing at just over 1 million a month. With plans of $4.99/month for students, $9.99/month for individuals and $14.99/month for families, that’s billions of USD in annual revenue. However, Spotify is growing faster.
Spotify was able to grow paying subscribers to 65 million in September, adding more than 2 million a month compared to 45 million in December of last year. Add another 80 million users of Spotify’s ad-supported streaming service and Apple Music’s user growth of 1 million a month turns out to be not as good as it appeared in the first place. And then there was Apple’s $3 billion acquisition of Beats in 2014. What became of that? The headphones are still in stores, but looking at the $3 billion price tag, you would hope for a bigger impact.
The first question that comes to mind is whether Apple be competing with Spotify in the first place? Absolutely. The market for music streaming services is getting bigger and bigger. This report by the International Federation of the Phonographic Industry shows that 2016 digital music industry revenue was $7.8 billion and that streaming revenue grew over 60% compared the year before. For 2017, Recode expects streaming revenue to grow another 48%. Altogether a lucrative market to have one of the leading positions in.
Considering the size of the global streaming pie, Apple offering a streaming music service absolutely makes sense and with 30 million subscribers, it’s already the world’s second largest service. So what can Apple do to close the gap with Spotify? Well, this is where the acquisition of Shazam comes in. Shazam is a music-recognition technology, offering its service to consumers via an app. Users can just click on the app to find out the name of the artist and/or song they’re listening to at that moment. The technology definitely suits Apple. In fact, Siri is already using Shazam technology to answer all music-related questions. It’s a natural fit from this perspective, but Shazam brings much more for Apple and especially for its music business.
In my article covering Spotify, I identified having and using user data as key for music streaming services. Not only can user data be monetized directly, for example by selling useful data to record labels, artist management companies and bookings agencies, it can also be used in order to optimize the streaming service and customer experience. Nowadays, up-to-date music offerings and playlists are important factors to increase consumers’ experience of the product.
Apple has 120 less million users than Spotify. As a result, Spotify has much more relevant data to use and optimize its product and playlists. This provides the Swedish-based company with a significant advantage over its competitors. By buying Shazam, Apple adds more than 120 million active music fans to its database. The app has been downloaded over 1 billion times with over 30 billion ‘Shazams’ (search order through its app), very valuable information for Apple to use. Spotify’s advantage has vanished in just one transaction worth 87percent less than Apple’s acquisition of Beats. A very good trade.
Investors not familiar with the music industry may question the importance of data and the accuracy of playlists. Have a look at what one of the industry leaders Kobalt Music has to say about the importance of playlists. Note that this is from an artist perspective, but relevant nonetheless:
For artists, getting added to a popular playlist with a substantial following is everything. It can truly skyrocket both the short-term and long-term trajectory of an artist’s career. Spotify alone is home to 2 billion individual playlists, including ones that are curated algorithmically based on listening patterns.
How about the part stating that playlists are curated by algorithmically listening patterns? Having more and reliable data to work with increases the efficiency of these algorithm’s and makes playlists more relevant for consumers. This should eventually lead to more consumers paying for the service and revenue growth. This is what makes the acquisition of Shazam so valuable for Apple. Consider a scenario where Spotify had bought Shazam. That scenario would have created a irrecoverable user and data advantage for Spotify, now the playing field is leveled and Apple has a much better shot of competing with Spotify than before.
It’s clear that the addition of Shazam is a big deal for Apple Music, but is it a big deal for Apple, a $885 billion company, generating $229 billion in revenue and posting $48 billion in net profits? I believe so. Like I said earlier, the music industry is growing and so is revenue. This Forbes article cites two reports, estimating global annual streaming revenue at $16.5 billion in 2020 and $20 billion in 2025. Let’s assume Apple Music to slightly increase its market share to 35percent, that equals revenue of $7 billion from Apple Music subscriptions alone. Apple has also the potential to monetize the user data, like I also discussed earlier in this article. This could additional revenue and value to Apple’s music business.
Conclusion
All considered, I’m very positive about Apple’s move to acquire Shazam. It will close the gap with Spotify in number of users and provide Apple Music with better data to curate its playlists. This will eventually lead to high satisfaction from users and increase the number of paying subscribers. Apple Music can also generate income from new sources by monetizing data, selling it to record labels and others. This all adds to an increase in revenue and profit in the future. And I haven’t discussed the use and value of Shazam’s technology with Apple’s other features like Siri. This all comes at a price of $400 million, which I consider a bargain. Keep in mind that Shazam was valued at $1 billion two years ago and the acquisition of Beats cost around $3 billion. Paying $400 million for a company that fundamentally improves Apple’s music business in such a fast growing market is a good decision for Apple and its shareholders.
Date: Dec 15, 2017