FM Wealth Management NewsLetter
Apple (AAPL) last week announce that it was acquiring Shazam, a music
recognition app. The company is paying $400 million for Shazam, as Snap
(SNAP) and Spotify were also interested. This acquisition is a much
needed addition for Apple to keep up with Spotify and signal the turning
point for Apple Music. It also clearly points out the importance of
both recognition technology and data for a streaming service.
If we drill down and look at the numbers on Apple Music we can see that the make of the IPhone is doing pretty well. In fact Apple reported over 30 million streaming service subscribers in September of this year, which represents a growth of 1 million in a month. With plans of $4.99/mth for students, $9.99/mth for individuals and $14.99/mth for a family plan, that adds up billions of dollars in annual revenue. While this all sounds rosy for Apple the truth is that Spotify is growing faster.
What we can see above is that Spotify grew paying subscribers to 65 million in September, adding an additional 2 million in a month compared to 45 million in December of last year. If we now add in the Spotify’s ad-supported streaming service which boasts 80 million users and all of a sudden Apple Music’s user growth of 1 million a month turns out to be not so good. In 2014 Apples’s acquisition of Beats for $2.5 billion was also supposed to be a game changer. What became of that? The speakers and headphone are still in stores, but looking at the hefty price tag, you would hope for a bigger impact.
The question here is whether Apple should be competing with Spotify in the first place? We think that they absolutely should be. The market for music streaming services is getting bigger and bigger. In a report for the International Federation of the Phonographic Industry conluded that 2016 digital music industry revenue was $7.8 billion with revenue from streaming growing over 60% as compared to 2015., Record industry experts expect 2017 streaming revenue to grow another 48%. So therefore a lucrative market to have a leading positions in.
If we consider the size of the global streaming market, Apple offering a streaming music service does make sense and with 30 million subscribers, it’s already the world’s second largest service (Spotify being number one). Is it possible for Apple to close the gap with Spotify? Well, this is where the acquisition of Shazam comes in. Shazam, as some readers and clients may already know, is a music-recognition technology app. If you don’t know the song or artist you are listening to at that moment, you can just click on the app to find out the name of the song and artist. The technology definitely suits Apple. In fact, Siri is already using the technology to answer music-related questions. It is therefore a natural fit, but Shazam brings much more for Apple and especially for its music related business.
For Apple 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. It is essential today to have up-to-date music offerings and playlists because they can be important factors to increase the consumer’s experience of the product in order to induce them to pay for a subscription plan instead of free ad-supported streaming.
Spotify has 120 million more users than Apple. This of course means that Spotify has much more relevant data to use and optimize its product and playlists thereby giving the Swedish-based company a significant advantage over its competitors. By acquiring Shazam, Apple gets to add more than 120 million active music fans to its database. The app has, in fact, been downloaded over 1 billion times with over 30 billion search orders through its app. This is very valuable information for Apple to use. So in other words Apple with this transaction (worth 87% less than Apple’s acquisition of Beats) has possibly made Spotify’s advantage disappear
So What do We Think
It is still early and we still have the bad taste of the Beats deal lingering, but we are very positive about Apple’s move to acquire Shazam. It definitely helps to close the gap with Spotify in number of users and provide Apple Music with better data to curate its playlists. From everything we understand about the music industry and music streaming, this will eventually lead to more 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 up quickly and will impact revenue and profit in the future. All this comes at a price of $400 million, which we consider cheap when you look at what Apple gets in return. It is important to remember that Shazam was valued at US$1 billion only two years ago. Therefore at a price tag of $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.
If we drill down and look at the numbers on Apple Music we can see that the make of the IPhone is doing pretty well. In fact Apple reported over 30 million streaming service subscribers in September of this year, which represents a growth of 1 million in a month. With plans of $4.99/mth for students, $9.99/mth for individuals and $14.99/mth for a family plan, that adds up billions of dollars in annual revenue. While this all sounds rosy for Apple the truth is that Spotify is growing faster.
What we can see above is that Spotify grew paying subscribers to 65 million in September, adding an additional 2 million in a month compared to 45 million in December of last year. If we now add in the Spotify’s ad-supported streaming service which boasts 80 million users and all of a sudden Apple Music’s user growth of 1 million a month turns out to be not so good. In 2014 Apples’s acquisition of Beats for $2.5 billion was also supposed to be a game changer. What became of that? The speakers and headphone are still in stores, but looking at the hefty price tag, you would hope for a bigger impact.
The question here is whether Apple should be competing with Spotify in the first place? We think that they absolutely should be. The market for music streaming services is getting bigger and bigger. In a report for the International Federation of the Phonographic Industry conluded that 2016 digital music industry revenue was $7.8 billion with revenue from streaming growing over 60% as compared to 2015., Record industry experts expect 2017 streaming revenue to grow another 48%. So therefore a lucrative market to have a leading positions in.
If we consider the size of the global streaming market, Apple offering a streaming music service does make sense and with 30 million subscribers, it’s already the world’s second largest service (Spotify being number one). Is it possible for Apple to close the gap with Spotify? Well, this is where the acquisition of Shazam comes in. Shazam, as some readers and clients may already know, is a music-recognition technology app. If you don’t know the song or artist you are listening to at that moment, you can just click on the app to find out the name of the song and artist. The technology definitely suits Apple. In fact, Siri is already using the technology to answer music-related questions. It is therefore a natural fit, but Shazam brings much more for Apple and especially for its music related business.
For Apple 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. It is essential today to have up-to-date music offerings and playlists because they can be important factors to increase the consumer’s experience of the product in order to induce them to pay for a subscription plan instead of free ad-supported streaming.
Spotify has 120 million more users than Apple. This of course means that Spotify has much more relevant data to use and optimize its product and playlists thereby giving the Swedish-based company a significant advantage over its competitors. By acquiring Shazam, Apple gets to add more than 120 million active music fans to its database. The app has, in fact, been downloaded over 1 billion times with over 30 billion search orders through its app. This is very valuable information for Apple to use. So in other words Apple with this transaction (worth 87% less than Apple’s acquisition of Beats) has possibly made Spotify’s advantage disappear
So What do We Think
It is still early and we still have the bad taste of the Beats deal lingering, but we are very positive about Apple’s move to acquire Shazam. It definitely helps to close the gap with Spotify in number of users and provide Apple Music with better data to curate its playlists. From everything we understand about the music industry and music streaming, this will eventually lead to more 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 up quickly and will impact revenue and profit in the future. All this comes at a price of $400 million, which we consider cheap when you look at what Apple gets in return. It is important to remember that Shazam was valued at US$1 billion only two years ago. Therefore at a price tag of $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.
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