Apple to Add Music-Recognition App Shazam to Its Portfolio
In this segment of the MarketFoolery podcast, host Chris Hill and Million Dollar Portfolio's Jason Moser weigh in on the direction of the music streaming space. Can stand-alones like Pandora (NYSE: P) and Spotify make a profitable go of it against services like Apple (NASDAQ: AAPL) Music and Amazon (NASDAQ: AMZN) Prime Music, which are value-adding parts of much wider ecosystems? Where does the latest Apple acquisition fit in? And what does the future look like for the music business?
A full transcript follows the video.
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This video was recorded on Dec. 11, 2017.
Chris Hill: The lead story on Motley Fool Money over the weekend was about the music streaming industry, which I think is becoming one of the more interesting industries to watch in 2018. We started with the reports that Yahoo is reportedly going to make a third go of a music streaming business, launching something in March. And Apple this morning, reports are out that Apple is going to be buying Shazam, which is a music recognition app. This is on the heels of another acquisition that Apple just made, they bought a podcast search start-up called Pop Up Archive. You were not on Motley Fool Money over the weekend, where do you think music streaming is going? You have Spotify, which is probably going to go public in 2018. You have Pandora, which is already public. You have Apple Music, you have Amazon Prime Streaming. And this seems weird to say, but Google (NASDAQ: GOOGL) (NASDAQ: GOOG) right now appears to be a distant fifth place.
Jason Moser: Yeah. My take on music streaming may be a little different than others, I don't know, but generally speaking, my belief is that music streaming is primarily a form of engagement as opposed to a stand-alone opportunity. And I think that all you have to do is look at the financials of stand-alone offerings, and I think it makes a lot of sense there. We know the challenges Pandora has encountered here since going public. That's a business that's faced with big-time problems, financials that are getting worse and not better, and haven't been profitable yet. And by all accounts, Spotify is very much the same thing. I mean, Spotify is signing up people, and they're bringing in revenue, but they're chalking up losses quarter in and quarter out, they're just not making any money. And I think one of the biggest challenges there is that the economics, for a long time, and even now, really don't seem to work out very well in the musicians' favor, and I think the musicians are pretty pissed off about that, honestly. I know I would be. And I don't think it's a very good time to be a musician, unless you're really committed to touring. I think that's where the biggest success stories in the space are making their hay. They're just touring businesses, and they put their music out almost as a form of marketing, so to speak. That's streaming as a form of marketing. I think, for companies like Apple and Amazon and even Google, music represents a form of engagement. It gets people into their universe and keeps them there for more reasons. When you look at the advent of the home speaker system, whether it's Alexa or Google Home --
Hill: Please don't use the A-word.
Moser: Oh, yes, the Echo. I apologize to everybody out there, as your Echo's light up. But, whether it's the Echo or the Google Home, and now Google has this high-end Home speaker that's coming out, which is essentially the same thing, it does the same things as Google Home, but it costs around $400 and it's a better-quality sound. You have Apple's HomePod, which I don't think it's really going to compete with Google or Amazon on that home assistant, that virtual assistant, so to speak. I think it's more musically based. For me, the Apple purchase of Shazam is simply an opportunity for them to add more to their current music offering. In the current music offering for them, it's not as meaningful for them as something like, obviously, Pandora's offering is for it. Pandora is pretty much a one-trick pony. For Apple, music is just part of the whole deal. I think Apple's biggest challenge is that, if you're not using an Apple device, then you don't really have any incentive to use Apple Music. And while domestically, Apple does pretty well here, we know that probably about 50% of the country here is on the iPhone and the other 50% is on some sort of Android device. Globally speaking, Android is the leading operating system by a mile. So, when you look at it from that perspective, it's really hard to imagine how anybody in this line of work succeeds just as a music streaming company alone. And I include Spotify in that as well. I've looked at the potential Spotify IPO, they're talking about possibly $20 billion. That's absurd. It makes no sense whatsoever. There's no switching costs involved, there's no competitive advantage. I know you can go in there and cater your own playlists and whatnot, but that's not even an advantage, you can do that anywhere. So, to me, whether it's Apple or Amazon or Google, I think music really represents a great opportunity to keep your customers, your users, engaged, and that's why I think they continue to make these little investments, and the Apple purchase of Shazam is just that.
Hill: The fact that Jimmy Iovine, who's part of the Beats sale to Apple, the fact that he came out recently and said point-blank, Apple's not making money on this, the fact that he said it's not profitable for them, you have that, and then your point. I mean, Spotify is the leader. Spotify has 60 million subscribers.
Moser: Something like that.
Hill: Some insane number like that.
Moser: And their losses are getting bigger. And it's not because of all the sales and marketing spend, either. This is really one of the toughest contracts to negotiate in any business. Video is simple, music is really a brutal business. I just can't imagine anyone on their own being able to succeed.
Hill: And the other thing is, we've talked before about video streaming services, and talked about how there can and will be more than one winner, because people will subscribe to more than one service. It's hard for me to imagine anyone subscribing to more than one music streaming service. Even if you subscribe to Spotify or Pandora, or Apple Music, for that matter, and you love it, you're probably only subscribing to one. I can't imagine doing more than one.
Moser: I don't know why you would. It's funny, we've seen Sirius XM has taken a big interest in Pandora, and I think that's actually really interesting, because Pandora is trying to approach the strategy of, we have to be something more than just music, we have to take this to the next level and offer podcast content, other forms of content besides music. And I think that's probably a good move, and I actually wouldn't be surprised at all if at some point Sirius didn't buy Pandora for just a song, so to speak, and incorporate that in to give them a better app presence. Because, that's another thing that Sirius has done a very good job with. They have a very good app presence. You can take it as mobile, it's easy to use. For me, it's hard to understand why you would have a collection of these streaming apps when really, they all essentially do the same thing. There are just a million different ways to get your music, and that ultimately means that there's no real pricing power on this side. And when you have musicians going in there, and they really are commanding more money, as they should, it really makes it difficult to be a distributor of it.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Chris Hill owns shares of Amazon. Jason Moser owns shares of Apple. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Amazon, Apple, and Pandora Media. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.
