Facebook, Sean Parker and the Value of Kazaa

April 19, 2011 at 1:19 pm Leave a comment

Many rumors swirling yesterday about Kazaa/ATRN getting acquired or getting some investment from Facebook. While we have no first hand knowledge of such a deal, we believe that such a deal might not be as far fetched as some of the short sellers of ATRN and other negative posters to the many online investment forums would have everyone believe.

Sean Parker, one of the largest holders of Facebook stock who is famous for his role in developing Kazaa forerunner Napster and more recently for his role in the startup of Facebook (depicted by Justin Timberlake in “The Social Network”), invested approximately $15 million in an on demand streaming music company called Spotify in February of last year. Spotify is very similar to Kazaa in that is offers an on demand streaming music service but is much larger in terms of subscribers and that it is licensed only in Europe. One of the things that has distinguished Spotify from its competitors (Kazaa, Rhapsody, MOG, Rdio) has been its use of the “Freemium” model to build its user base. This approach allowed users to get access to on demand streaming music for free with some access limitations and the company monetizes the service through advertising and attempts to upsell the free users to its paid subscription service.

This approach has allowed Spotify to build one of the largest subscriber bases in the industry, but it apparently has not earned it a free pass with the music labels who are leery of the services that do not convert enough of the free users to paid users. Many industry pundits have suggested that this is the reason that the labels have not granted Spotify a US license yet. Just last week, Spotify significantly scaled back the amount of free music that its non paying users could access, which has caused an uproar and increased attrition among its user base. This has to cause some concern among investors in Spotify, who no doubt had assumed that it would be able to use the unrestricted freemium model worldwide.

Not long after Spotify added features integrating its users with their Facebook accounts, Parker invested a little over $15m dollars to buy a 5% stake in Spotify. He said at the time that Spotify was seeking US licenses from the four major labels and that they should be live in the US by the end of the year. Fast forward 14 months and Spotify is still trying to get US licenses from the four major labels. Kazaa (as of Monday morning) is now owned by a company (ATRN) whose entire market cap was just over $15 million and they (Kazaa) already own licenses with the four major record labels. Kazaa’s founders paid over $100 million for the licenses back in ’07. Kazaa built tools integrating its service with Facebook a couple of months ago, is it possible that Mr. Parker or his companions at Facebook are seeing the latent value in Kazaa? If Mr. Parker paid over $15 million to get 5% of a company (Spotify) that has been unable to enter the most lucrative market for music consumption (US), what might he pay to take a 5% or larger stake in a company that already has those licenses and their $100m+ cost fully paid for? On the other hand, maybe the run up in ATRN/Kazaa yesterday is simply investor realization of the value of what Kazaa owns.

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ATRN Q4 Conference Call Update Community Update – VTRO and ATRN / Kazaa

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