ATRN/Kazaa Update – Spotify, WalMart, MOG, etc.
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:
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