- Apple acquired music recognition app Shazam in December for a reported $US400 million.
- It was clear Apple would integrate Shazam into its streaming service Apple Music – but neither company has given more detail.
- Shazam’s earliest big investor thinks Apple could get up to 7.5 million new Apple Music subscribers as a result of the deal – a nice bump to its existing 30 million subscribers.
- Analyst Mark Mulligan said the acquisition is probably a combination of subscribers, plus the valuable data Shazam can give on what streaming services people use and what songs they really like.
To understand what Apple might do with its latest acquisition Shazam, you have to understand its evolving business model, according to early investor DN Capital.
The venture capital firm’s chief executive, Nenad Marovac, first invested in Shazam in 2004, when its music recognition tech involved users dialling a number, holding up their phones to a source of music, then receiving an SMS “tag” which identified a song. Now, the song recognition is done through an app.
“The way Shazam started off its business model was that after five [SMS] ‘tags’ you had to pay for it,” said Marovac. “Then it moved into lead-generation for MP3s, then it became an affiliate for streaming companies.”
In other words, if you identified a song, then clicked a link inside Shazam to buy the song through iTunes, a cut of your payment would go to Shazam. But that became less profitable when streaming took off.
Apple once dominated music consumption, when people bought individual MP3 tracks through iTunes. Since the advent of Spotify, it hasn’t kept up. Shazam might be a way to drive growth once again.
“Since Apple has launched Apple Music, it’s still a way behind the curve, behind Spotify,” said Marovac. “Shazam has 150 million active users a month, and about 300 million to 400 million uniques per year. If you convert 1% to 5% of those users to Apple Music, the investment will pay for itself in spades.”
Apple Music had 30 million paying subscribers, according to statistics released in September. Adding 5% of Shazam’s base would add a maximum of 7.5 million paying users – a nice bump, but also best case scenario.
For long-time music industry watcher and Midia analyst Mark Mulligan, the deal is more than just generating paying users for Apple Music.
Apple really needs data to persuade people to use Apple Music more
Customer acquisition is one reason why Apple might have acquired Shazam, Mulligan told Business Insider. It’s also likely Shazam will give Apple Music much needed new features that will keep users sticking around for longer, like Spotify’s massively successful playlists.
“Ultimately Apple will have relatively small concerns about how it will be able to acquire customers for Apple Music in the longer term,” Mulligan said.
“In relative terms, it’s behind Spotify in terms of playlists and weekly active use,” he added. “Those are the metrics it needs to do more to drive. The Shazam dataset will be an important asset.”
When you open the Shazam app and identify a song, you can then stream that song via Apple Music or rivals like Amazon Music and Spotify. That’s valuable insight into how people are using other services.
“It’s a window into billions of data points about Shazam’s Spotify, Amazon, and Deezer users, there’s some value in that,” said Mulligan. “It really comes down – how short was the iTunes dataset coming up? If iTunes’ data on a decade of user preferences wasn’t good enough, then maybe Shazam was necessary.”
Mulligan likened the Shazam acquisition to Spotify’s purchase of Echo Nest, which now informs its massively successful playlists. It’s the poor man’s version though. “To be frank, if I could choose between Shazam and Echo Nest, I’d pick Echo Nest any day,” he said.
With so competition in music streaming, Shazam is also a signal that Apple is “serious” about music. “Look at Yahoo,” said Mulligan. “That should have died off a decade ago, but they kept going by making big acquisitions that made people think Yahoo was serious. It used its increased market cap to then make another overpriced acquisition. There’s a proven business model in making overpriced acquisitions to companies vaguely relevant to the space.”
NOW WATCH: Tech Insider videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.