Archive for March, 2011
Lots of interesting happenings in streaming music this week. While none of them include Kazaa, where management has been very, very quiet over the last few weeks, all of them could have some impact on Kazaa’s future as they impact direct competitors:
1) Spotify has Malware Issues –
2) Pandora fighting the international licensing fight –
3) Amazon launches streaming locker service –
4) Streaming Music Industry Article –
A quick update on our pieces from earlier this month where we took the proxy + Yahoo Finance generated “public float” number from an article and combined it with known sub 5% holdings to construct a “Truly Available Public Float” figure in the 750k range. While we have not received updates from all community holders, the two largest have updated us and indicated that they now own slightly more than they did when we first calculated this number. As such we can still confidently submit that the “Truly Available Public Float” is well below 1 million shares and conservatively in the 800k – 900k share range.
Also of key interest should be the Nasdaq short interest report from the end of last week. We reported on March 10th that we could see a substantial short interest developing in the shares. The official Nasdaq report of the short interest as of March 15 indicated 329,000 shares sold short. We know that the stock sold off significantly on March 14th and 15th, so its likely that many short sellers were able to cover some portion of their position prior to the report and the action since that time suggests a substantially higher short position, likely approaching 500k. This is huge when you consider the truly available public float of 800k – 900k. There aren’t very many shares to go around and we look for the stock to move dramatically higher on any good news published by the company or even just industry related news that reflects positively on the company. As we get closer to the Pandora IPO and get more positive news on Spotify and other players in the space, we believe that investors will increasingly look for avenues to get exposure to the on demand streaming music space. Save for a Second Market excursion, ATRN/Kazaa’s 800k-900k publicly available shares remain the only pure play option.
The IPO of 20 – 40% of Kazaa, while ATRN holds the remaining shares would generate more than enough capital to market the new Kazaa service as aggressively as it should be and it would create an acquisition currency valued more in line with the stratospheric valuations accorded its industry peers. The 60 – 80% Kazaa stake retained by ATRN would ensure that its share price would reflect its stake in Kazaa, giving the Atrinsic Interactive business its own highly valued currency with which to make acquisitions and scale that business. We recognize that the Board may or may not choose to go the IPO route, but believe the recent valuation ranges for MOG, Rdio and Spotify will cause them to give serious consideration to the possibility of a Kazaa IPO.
The article makes a number of points we have espoused here and brings some new meat to the arguments, also crystallizing the primary thought behind item #1 on our ATRN Board of Director’s “wish list”. As our community becomes increasingly recognized as a hub for the sharing of information and collaborative thought development among shareholders large and small, our aggregate product consumption and stock buying power swells, giving us a much stronger platform from which to be heard. As such, we have taken a number of suggestions from the many shareholders who communicate regularly through this forum and compiled a “wish list” of items we would like to see prioritized by the ATRN Board of Directors:
1) Kazaa Value Realization – the IPO thesis in the article was well presented and makes a logical argument for a direct approach to dealing with this issue – Kazaa’s operations and the metrics it has achieved even while in the holding pattern of restructuring and product build out are among the best in the space and Kazaa is simply not being valued appropriately in the marketplace. Competitors MOG and Rdio’s recent funding valuations are more than double that of Kazaa and each’s key metrics (subscribers, revenue, ARPU, etc) run significantly less than half of Kazaa’s. A new report out last night on Spotify suggests a much smaller 2010 revenue figure for Spotify than what has previously been reported – totaling only US $78 million. While this would still be about 4x Kazaa’s estimated revenue for the same period, the recent $2 billion funding valuation puts Spotify’s valuation somewhere between 100x and 200x Kazaa’s current marketplace valuation. The bottom line is that management must seize the opportunity that investor’s current appetite for streaming music investments presents. This must be a focus of management from this point forward or the company (and shareholders) will miss a tremendous opportunity.
2) Shareholder Communication – this applies to existing shareholders as well as potential shareholders – management must take steps to open up the lines of communication. We believe the lack of focus on public relations has contributed to the issue presented in #1 above and management must improve in this regard. A good place to start would be updating the company website. Second would be to consistently inform existing shareholders of new developments and adherence to a consistent reporting schedule with open conference calls. We appreciate that management has had their collective nose to the grindstone building out a world class on demand streaming music service while they consolidated Kazaa’s far flung operations over the last six months. Now it is time to tell the world about it and take steps to keep shareholders aware and involved in the process.
3) New Leadership – If Kazaa is spun out in an IPO, we should seek someone with significant music industry and/or subscription business model experience to serve as Kazaa’s new CEO. If we get this right, it could quickly take care of issue #1 above. We need a rock star (figuratively, though we do appreciate Fifty Cents’ ability to drive shareholder value through his tweets) and the opportunity that the rebirth of Kazaa presents should allow us to get one. If the board chooses not to spin Kazaa in an IPO, the choice will carry even more weight. Now that the restructuring and service build out are complete, the time to make this happen is now.
Over the next couple of weeks, we expect to gain much more insight into how things are progressing with Kazaa and Atrinsic Interactive, as the company releases its Q4 results and (hopefully) updates shareholders on some YTD figures. Of course, we expect little in the way of fireworks from the Q4 report. Management has already indicated that they did not intend to aggressively market the Kazaa service during the restructuring of Q4 and we also know that the majority of the new service offerings did not go live until the middle of Q1. As such, we expect to see essentially flat subscriber figures and what will likely be a small decline in revenues and cash balances/working capital, but a significant reduction in the cash burn rate. More important will be management’s discussion of the outlook for 2011, where we hope to see material improvements in subscriber numbers.
To summarize – ATRN’s float remains well below 1 million shares and most likely in the 800k – 900k range, the short interest has likely swelled from the 329k of March 15 to the 500k range and ATRN’s BOD should spin off Kazaa in an IPO or communicate a different plan for the realization of the value of the Kazaa business. Groove community members should hold tight to those ATRN shares and consider purchasing more as the shares remain cheap and we expect that they will get increasingly more expensive in the weeks and months ahead as more positive company and industry news brings more investor attention to the ATRN / Kazaa story. Additionally, the increasingly significant short interest to true public float ratio could make the shares move substantially higher very quickly without the necessity of a material catalyst.
Quick update for Groove participants on Vertro. We still believe in the potential of Vertro despite the market’s abandonment of the shares. Due to the issues we highlighted following the company’s Q4 preannouncement, we still expect Q1 to be challenging as the company replenishes its key revenue driving Region One user base. As has typically been the case in the past (except 2010) , we expect Q1 revenue to come in below Q4 revenue due to seasonal factors including the annual slowdown in internet usage around the holidays that constrains Vertro’s ability to acquire new users and the lack of the bump in non search revenue that accompanies the holiday shopping season. The stock has already fallen 50% from the highs achieved in November, so the shares will prove to be cheap if the company is able to get back on track in Q2. While we believe that the company will be able to achieve sequential growth again in Q2, any advances in the stock might be constrained in the absence of insider and/or company stock buys or some other catalyst. Other potential catalysts include takeover speculation or accretive acquisitions by the company.
A quick update on happenings in the online streaming music space, as we believe the value of Kazaa is finally beginning to be recognized in the marketplace, even though it is not even close to being reflected in the stock price of ATRN. So many interesting news bytes this week and a few rumors, all of which further confirm that the streaming media business is going to be among the most interesting of sectors in 2011. Starting with Spotify’s funding round at $2 Billion, Wal-Mart/Kazaa deal talk, Kazaa-clone MOG rolls with BMW and Rdio joins Kazaa in the rebellion vs. Apple’s App Store fee.
1) Last week it was reported that there was an additional round of funding for on demand streaming music company Spotify, which operates solely in Europe for now, but is seeking to gain interest to the US market. Spotify reportedly has obtained licenses to operate in the US from two of the four major music labels, lacking only Warner and Universal. The key takeaway from the funding by Russia based DST of $100 million is that it only acquired 5% of Spotify for this sum, which would value the entire entity at about $2 billion.
Spotify has about 10x the subscriber revenue that Kazaa currently generates, but we expect to see a revival in Kazaa’s growth in the very near future as the company has now built out the most important aspects of their service (mobile streaming, social media integration, Kazaa Radio, etc.). And while we fully expect to see ATRN’s valuation swell to reflect its ownership of Kazaa, we have to wonder how long it will take investors to realize the valuation disparity that currently exists. The question is not whether Spotify should be valued at $1 billion or $2 billion, the question is how long will it take investors to realize that Kazaa itself should be worth something closer to $100 million? ATRN’s current $25 million market cap ($19 million if you back out the cash) likely does not fully reflect the value of non-Kazaa assets – Atrinsic Interactive ($25 million revenue run rate), Gator Arcade casual gaming (over 100,000 subscribers) or ringtone.com business (acquired for $8.5 million two years ago).
2) There are rumors about some kind of deal between Walmart and Kazaa floating around. Some say Walmart is looking to acquire a streaming music company, others say its some kind of co-branded consumer offering. We have no independent verification of either, but find it interesting in light of WalMart’s purchase of streaming movie provider VUDU for a reported $100 million + price tag – more than double the amount many industry pundits were expecting the industry “also-ran” to get. Walmart is second only to Best Buy in sales of consumer electronics and they could very well be looking to move into the streaming music space in the same way that Best Buy did. Best Buy originally took a small stake in the on demand music leader Napster and started marketing a cobranded music service before buying the rest of Napster in 2008 for over $120 million. If WalMart does do ANY kind of deal involving Kazaa, this would probably push ATRN shares to new highs based on the value of that additional exposure for the Kazaa brand.
3) Competitor Rdio launches its own affiliate network to avoid Apple’s 30% App Store Fee – If this sounds vaguely familiar, perhaps its because Kazaa has built its 75,000 strong subscriber base using methods like this rather than the App Store approach. As short sellers and other naysayers bombard the message board forums with negative messages about Kazaa, we see the cutting edge players in the space making moves to transition to a more Kazaa-like approach. Of course, Kazaa has the advantage of having an established affiliate marketing network already in place, not to mention one of the top 10 search engine marketing agencies in the world.
4) MOG brings “on demand” streaming music to automobiles through deal with BMW. Many of us are aware that Pandora has already struck several deals to bring its streaming internet radio to several auto manufacturers entertainment platform, but MOG is the first of the “on demand” streaming music companies to move into this space. MOG, Kazaa, Rdio, Rhapsody and Napster are different from Pandora in that they allow consumers to choose specific songs or artists or playlists to listen to and they also offer music catalogs that are about 10x the size of the 800,000 song Pandora catalog.
As media coverage of the white hot streaming music space gathers steam leading up to the Pandora IPO, we expect to see ATRN’s ownership of Kazaa begin to be more accurately reflected in the stock’s trading price. In the meantime, we should all continue to tell friends, family and associates to check out the Kazaa music service and sign up for the premium plan at:
The selling in ATRN shares Wednesday was way overdone We would have expected some consolidation given the trajectory of the previous two days, but the 29% sell off was over the top. Beginning mid morning on Tuesday, there appeared to be a substantial short interest building in ATRN. This will ultimately prove to be a positive factor for those long ATRN, as those traders will eventually have to buy to cover those shares and they may find it increasingly difficult to get them. Don’t forget, we are dealing with a stock that has less than 1 million shares in the public float, so when the trend turns back to the north, the move could be quite violent and quite rapid.
I have received numerous emails from friends about the new Kazaa. Quite a buzz has developed since Monday as so many people did not realize that Kazaa still exists and NO ONE seemed to be aware that they were now part of a publicly traded company. I believe the volatility of the last few days may mask a trend that I believe to be developing – I think that a large number of ATRN shares are being bought by music afficianados who really just love the whole streaming music concept and want to get in on the ground floor. Prior to the ATRN deal to acquire Kazaa, the closest thing the retail investor could get to owning a stake in a streaming music concern was to buy Real Networks, which owns slightly less than half of Rhapsody. Of course, that holding amounts to a small portion of their overall business, so there would be little correlation between Rhapsody’s results and that of Real Networks. The other option is to get in the lottery to purchase Pandora IPO shares, which are likely to be pretty expensive, as early indications suggest a total market cap valuation post placement of over $1 Billion. Of course, these two alternatives just highlight the value and potential returns for investors who buy into Kazaa (ATRN) at its current $20 million cash adjusted market cap.
In doing some due diligence on Kazaa late last week, I did a Google News search for the word Kazaa and then Atrinsic. There was one story about Kazaa, actually one about Rdio that mentioned its founders also started the original P2P Kazaa. There was also one story about Atrinsic, the one announcing that Andrew Stollman’s contract was not going to be renewed. I did the same search tonight and there are a total of 503 stories since Monday that mention Kazaa and/or Atrinsic. Between the financial news outlets reporting on the stock action and the music industry blogs reporting on Kazaa’s juke of Apple’s App Store fee, ATRN is getting the kind of advertising and exposure that you simply cannot buy. The positive implications for shareholders are real and can be material to the company’s results going forward – do not discount the value of marketplace buzz for a company in an evolving space like streaming music and it is even more valuable in the context of the rebirth of an iconic brand like Kazaa. That’s right folks – Kazaa is back and ATRN shareholders will be the biggest beneficiaries.
GrooveVC participants who hold stock in ATRN at current prices might do well to consider adding more at current levels and they should definitely add to their position if it dips further. Keep spreading the word to buy the stock/use the service (Kazaa).
(March 8 Update)
A quick note to GrooveVC community participants. Yesterday we put out a note about the Apple/ATRN-Kazaa article that was published over the weekend where we explained the situation with the very low number of shares in the “true public float” so that Groove participants could grasp the full impact of what is transpiring here with the supply/demand of shares and how this might impact what happens going forward almost as much as the fundamental misvaluation of ATRN’s Kazaa. GrooveVC participants who updated us on their holdings prior to that note indicated an ownership of approximately 480,000 shares.
After that note was published, we received a note from a hedge fund manager at a firm that had acquired a significant but less than 5% stake in ATRN over the last six months. Apparently, they had a shot at one of the early funding rounds with Spotify, but passed on it. As they watched the growth of Spotify and what has happened with streaming music in Europe and watched each new funding round for Spotify vault ahead (the last was at $1 Billion), they started seeking alternative options for getting exposure to what they expect to be a revolution in US music consumption similar to what they experienced in Europe, which ultimately led them to Kazaa and ATRN. Given their holdings, we are now updating our count of the true publicly traded float number that should be adjusted to about 700,000 shares.
As I write this, I see that the volume already traded today is already approaching 1 million shares. Given the long term perspective of the larger GrooveVC holders mentioned in this update (none of whom have sold, three of whom have bought more today) and the restrictive nature of the other holdings listed in the SEC filings, I think it would be fair to say that the remaining publicly available float has changed hands today. Given the volume and what we now know to be the “Truly Available Public Float”, it is apparent that some portion of that float is in the hands of traders. However, I think It would be a knee jerk reaction to assume that all of the new holders are traders. Given what we have learned from our newest participant in the Groove, we know that there are plenty of scenarios where a company’s valuation moves up significantly over a short period of time. That does not mean that the higher price does not still represent a great value if the company executes well in a market that is growing rapidly or if some extrinsic factor tilts the playing field your way (like when the gatekeeper requires their competitors to “pay to play” a fee that exceeds the profit on each transaction).
Consider how many investors likely laughed at those who bid Facebook’s valuation up past $20 billion last year. Who is laughing now – with Facebook’s valuation up to $75 Billion as of last week? Today’s trading range ($5.50 – $6.50 for much of the day) would value Atrinsic at just $30 – $40 million. Forget about the Atrinsic Interactive division (likely worth $10 million+ in a fire sale) and the working capital of $6 million. Focus instead on Kazaa, which has just been handed an enormous opportunity by Apple’s game changing new rules and whose underserved and under appreciated niche (non credit card users) in the streaming music space should likely be accorded a higher valuation than its competitors, many of whom have received VC funding that puts them at $50m+ on the low end and over $100m on the high end. Is it so far fetched for some investors to see Kazaa as having as a potential $100m+ value? Does that seem as far fetched when Pandora and Spotify are getting $1 billion + valuations?
Regardless where you believe the proper valutation for Kazaa lies, the bottom line is that many new investors are now becoming familiar with the Kazaa story. Most people have heard of Kazaa, what most didn’t know until the last 24 hours is that they can buy stock in Kazaa. At today’s closing price of $5.60, the cash adjusted market cap is still only $30 million. Back out the $10m top 10 search marketing agency and kazaa is still only being valued at $20 million. Kazaa is the single most downloaded application in the history of the internet, it has been downloaded over 800 million times over the last 10 years. It is quite likely that most of the people you tell to buy the stock /use the service will say something like the four or five people I mentioned it to today – “Kazaa – I didn’t know they were still around”. Kasaa is still around, they have a great unlimited download and streaming music service, it was just acquired by ATRN and you can invest in the stock at an angel round type valuation that is much cheaper than the venture capitalists are paying for stakes in Pandora, Spotify, Rhapsody, etc. That may not be true for very long because the number of shares that are available as a True Public Float appears to be in the 700,000 – 750,000 range.
A quick note to Groove VC members regarding the article that posted on Saturday afternoon – “Apple’s New Subscription Rules May Clear a Path for a Kazaa Comeback”. In the article a figure for ATRN’s public float is given that pulls the Insider and 5% owner data from the proxy filed at the end of 2010, then takes the mutual fund data from Yahoo Finance and subtracts those from the 6.2 million shares outstanding to calculate a public float of 1.4 million shares. To make sure that the members of our investment community appreciate the economics of the supply/demand scenario we may see developing here as more investors become aware of the situation (ATRN’s gross undervaluation that does not reflect Kazaa ownership), we sent a note to several members of our investment community to see how many shares they held. Our current count is at just under 500,000 shares held by Groove Community members, which would mean that the public float of 1.4 million shares does not accurately reflect the number of shares that will be available to be bought and sold on a short term trading basis – that figure is probably closer to 900,000. Given the attention that Kazaa and the other players in this space are likely to receive leading up to the Pandora IPO, Spotify’s entrance to the space, Apples efforts to stymie those two and Google’s increasingly less clandestine moves to make some noise in the space; we should see an increasing interest from investors in the streaming music space and Groove VC members need to understand that the attention grabbing low float mentioned in the article actually overstates the true “free public floating shares” by about 50%. Again, the true public float is much closer to 900,000 shares, which is one of the lowest I have ever seen for a Nasdaq listed stock.