A Google Acquisition Of Songza Would Be A Shrewd Move

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 |  About: Alphabet Inc. (GOOG), GOOGL, Includes: AAPL, AMZN, P
by: Shock Exchange

Summary

Google is rumored to be in talks to acquire Songza, the music streaming service.

A Songza acquisition could save Google up to a decade in audio coding.

The transaction would potentially remove Google as a suitor for Pandora or Spotify.

Since Apple Inc's (NASDAQ:AAPL) $3 billion acquisition of Beats (the premium headphone business with a fledgling music streaming service) last month, there has been incessant speculation as to who would pair up next. Pandora Media Inc (NYSE:P) and Spotify marrying their music streaming operations with deep-pocketed music industry participants like Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Amazon Inc (NASDAQ:AMZN) were obvious scenarios. Twitter Inc (NYSE:TWTR), which is infatuated with the music industry and recently killed a deal with SoundCloud, could also enter the fray. I like the Songza transaction for the following reasons:

Google Gains Instant Presence in Music Streaming

As the sale of digital downloads declines, music streaming is expected to be the future of the music business. In 2013, Google launched a subscriber-only music streaming service for $10 per month. Since it entered the market late, there was no guarantee Google could garner enough subscribers to make its investment in music streaming pay off. Pandora, the most popular streaming service in the U.S. with with 31% market share, predicts listener preferences through playlist generating algorithms. Songza, on the other hand, uses a combination of computer algorithms and human curation; a cadre of specialists can design playlists based on an artist or even a genre, potentially amplifying the listening experience.

Beats Music also expects to differentiate itself based on curated music. Whether curation will draw subscribers from Pandora and Spotify remains to be seen. On the article, Will Pandora Ever Make A Profit, I asked the following question:

What did you think of Beats? I was curious if customers thought its curated music was a differentiating factor or not.

The results from the comments section on the article were mixed. One commenter thought curated music was value-added:

I thought it [Beats] was great ... actually paid for another month. I think the interface is very flashy, but it can be little busy. That limited my use a little ... The mobile app is very responsive and pretty fun to use ... As I get my saved library built up, I'll probably just start going there and hitting "shuffle" when I'm feeling lazy. I mostly used it for self-guided on-demand listening, but did click on a few curated collections from artists that are related to what I was listening to.

Another commenter hated it:

I did the 7 day trial on Beats, too ... thought it was awful! I did find new music, but Beats was basically just throwing things against a wall and seeing what sticks! They didn't even copy the artist seeding/thumbs feature that makes Pandora so great. I made some new stations on Pandora afterward based on the new music I found. This was what happened when I tried ITR, Spotify and Rdio too - playlists were like listening to a really bad DJ!

In the first quarter of 2014, Google achieved operating income of $4.1 billion, or 27% of revenues. Operating income increased 19% over first quarter 2013 results. That said, the reported $15 million purchase price for Songza will not add much to Google's bottom line. However, Songza's 5.5 million active users would give Google an immediate presence in music streaming and save it upwards of a decade in audio coding:

It's magnitudes harder to program software that can "listen" to audio, code it correctly with the right attributes, and then make those attributes discoverable either in a search or as a stream of similar songs - as Pandora does. The Music Genome Project, which is the back-end of Pandora, represents over 10 years of music analysis. Collecting the data for a single song can take 20 minutes. A decade. That's how far behind Google is, in theory, in terms of music streaming - and why it will pounce on Songza if it gets the right price.

It Is Cheaper Than Acquiring Pandora or Spotify

At a $15 million price tag, a Songza acquisition it would be less costly than acquiring Pandora ($5.2 billion market capitalization) or Spotify, which was valued at $4 billion in a recent private placement. The Apple/Beats transaction set a model where a streaming service teams up with a music industry player with deep pockets. Google or Amazon were likely candidates to partner with Pandora or Spotify. By acquiring Songza, Google could get a strong curation platform without the billion dollar price tag that Pandora or Spotify would come with.

Conclusion

An acquisition of Songza would make Google an immediate player in curated music, and put it in competition with Apple/Beats. The $15 million rumored deal would costs billions less than an acquisition of Spotify or Pandora, and save Google the decade or so it would take to replicate Songza's streaming platform. I am positive on the transaction.

Disclosure: The author is short P. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I have a long/short position on Pandora.