Why Google Wants To Acquire Songza!

  • Google is mulling the acquisition of Songza a music streaming service.
  • $15 million deal won't boost revenue; will improve Google's music streaming service.
  • Google remains attractive at its current valuations.
Why Google Wants To  Acquire Songza

It seems that every internet business wants a piece of the music streaming pie. In less than a month, we’ve seen action on this front from Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN) and Twitter (NYSE:TWTR). Now Google (NASDAQ:GOOG) joins the fray with its offer to acquire music streaming service, Songza for $15 million. Songza is a relatively tiny player in the music streaming space and revenue contribution will be miniscule. So, the acquisition is unlikely to impact Google’s stock valuations. What the acquisition will do however, is give Google’s music streaming service a good face-lift. Given that Google Play All Access comes at about $10 a month, a makeover will certainly help what is currently a rather plain vanilla offering.

Songza The Music Streaming Service

Songza is a music streaming service with about 5.5 million users and competes with the likes of Spotify, Pandora (NYSE:P) and Beats Audio. It is the smallest among peers in terms of valuation. Further, though it has a larger user base than Beats, the two might not be directly comparable since the latter also makes audio software, speakers and headphones.

Valuation/Market Cap Active Users
Songza $15 million 5.5 million
Spotify $4 billion 40 million
Pandora $5.2 billion 77 million
Beats Audio $3 billion 0.55 million*

* Estimated at 1/10th of Songza's user base as reported

Why Google Wants to Acquire Songza

Songza offers more than a run-of-the-mill music streaming service. The service allows users to pick their mood or their current activity and plays out a list of tracks accordingly, without the user having to choose the tracks. Songza and Google’s Google Music emerged around the same time about 6 years ago. However, Google launched its streaming service, Google Music All Access in May 2013.

As per Songza, the playlists are curated by experts to match the chosen mood. Google’s playlists are very not customized. They are generic and static, and require users to curate their own playlists, possibly the reason why the service hasn’t taken off like Pandora’s despite Google’s reach.

Further, the rumor has it that Google had been mulling the launch of a YouTube powered music streaming service on the lines of Spotify. The rumor also claimed that the service would come with a free ad-based version and an ad-free subscription based version. Whether or not the rumor was of any credibility, Songza fits that description quite nicely.

One disadvantage is that Songza doesn’t let users pick specific songs or tracks that they might want to listen to. Though this keeps a lid on on-demand royalty expenses, the company might not be able to keep it that way for long if it wants to compete with bigger players.

Google has reportedly offered Songza a sum of $15 million. In the last fortnight Apple bought Beats Audio and Beats Electronics for $3 billion, largely in cash ($2.6 billion). Twitter was reportedly considering the acquisition of Soundcloud for an undisclosed amount. The microblogging site eventually decided against the acquisition. Amazon is poised to enter the music streaming space with the addition of a music streaming service to its suite of ‘Prime’ offerings.

Interestingly, Amazon was one the investors in Songza’s second round of funding in Sep 2013, when the company raised $4.7 million. It has so far raised a total of $6.7 million.

Songza Acquisition Impact on Google’s Revenue

No numbers pertaining to Songza’s revenue or profitability are currently available. However, the platform earns revenue from native advertising and an ad-free subscription based service named Club Songza which costs a user $0.99 a week. Songza’s advertising takes the shape of sponsored playlists, banner ads and video ads that are 15 seconds long.

Going by the indicated acquisition cost, it’s safe to say that the acquisition won’t have much of a direct impact on Google’s revenue. However, it might make Google’s existing subscription based music service worthwhile for users. The service comes at a cost of $9.99 a month and if it becomes more appealing, that will translate to revenue eventually. Further, Google has deep enough pockets to bear the royalty expenses that Songza might prefer to avoid, left to itself.

Google Stock Valuation

Google currently trades at a stock price of $566 a share. The stock is valued at Price/Earnings and Price/Sales multiples of 29.3 and 6.2 respectively. Given Google’s robust revenue growth and profitability, we think it’s attractive at current valuations.

As per our Google stock analysis we assign it a buy rating. Given the financial strength of the company, its consistent track record and its valuation at the current Google stock price, the company is set to do well.

Vikram Nagarkar Vikram Nagarkar   on Amigobulls :

Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. The author may not be a certified/registered investment advisor, and the opinions expressed should not be treated as investment advice.

Buying and selling of securities carries the risk of monetary losses.Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Neither Amigobulls, nor the author have any business relationship with any of the companies covered in this post.

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