Archive for July, 2011
It appears that the word is finally starting to get out about Atrinsic and Kazaa. As we have discussed here previously, the introduction of Spotify to the US consumer market has been a huge positive for Kazaa as the storm of media coverage surrounding it continues to do much of the “heavy lifting” of educating the masses about the value proposition of the “on demand” streaming music subscription model. We believe that yesterday’s price action in Atrinsic shares was sparked by the recognition (finally) of investors that Atrinsic is currently the only way to invest in an “on demand” streaming music service. Of course, we are aware that the “true public float” is now well below 1 million shares and that the short interest in the 600k range was essentially a tinder box looking for a spark. For those of you who are tempted to sell your stock now, you should give strong consideration to the fact that there remains a number of things (iPhone/iPad app, Kazaa Radio, official name change to Kazaa, etc.). that we expect to see announced by the company that could be a catalyst for extending what appears to be a pretty effective short squeeze. We would not be surprised to see any one of these items announced this week and we would not be surprised at all to see yesterday’s rally extended as more traders realize what is happening here. Images of Travelzoo are undoubtedly dancing in some trader’s heads as more are obviously piling in to grab a few of the shares in what likely remains (even after yesterday’s huge volume traded) a sub 1 million share public float vs. a 600k range short interest. To put it simply, this stock could rise to $100 per share regardless of whether Kazaa becomes the new iTunes (i.e. the must have music app) simply due to the action of traders continuing to pile in to the stock to further squeeze the short sellers. While we are not saying this WILL happen, we are saying that it CAN, it HAS (see a TravelZoo chart from 2004-2006) happened and the growth potential for Kazaa (Spotify valued at $1 billion+) combined with the obvious consumer appeal of its products and limited number of shares creates the perfect storm. The bottom line here is that you will want to hold on to some of those ATRN/Kazaa shares.
Given all the media hype associated with Spotify’s lauch 10 days ago and in light of the fact that Kazaa offers substantially the same service but has received little, if any attention from the media, we decided to run a head to head comparison of the two services. A member of our community registered for Spotify’s premium tier of service so that it could be compared with Kazaa’s similarly priced ($9.99) mobile service. The notes from this test are included verbatim below:
I signed up for the new Spotify premium service at 9:02am on July 15. I have been testing it since then and I think its a great service with some aspects that consumers will like find superior to Kazaa’s current offering. However, I found Kazaa to be superior in several key facets including speed and accessibility. Here is a brief detail of the key items I compared –
1) Speed – Advantage Kazaa. Kazaa is currently faster, with quicker load times and none of the stalls that we frequently experienced with Spotify. My tests were run head to head in multiple locations, but the bulk of the testing was done in the Orlando Florida area during the middle of the day (between 12pm and 2 pm) and during the middle of the night (between 12am and 2 am). I have read of the articles comparing Spotify with MOG, Rdio, Rhapsody etc. and they all indicate that Spotify is faster. Perhaps Spotify was bogged down due to so many new users all at once (the test was run July 16 – July 23), but regardless, Kazaa ran quicker and without the “resets” that occurred frequently with the Spotify service during testing.
2) Catalog of Songs – Advantage Spotify. Spotify has more tracks. Spotify offers 15 million and the Kazaa service was listed at 5 million two quarters ago. Though I know expansion of the database has been a priority for Kazaa, I doubt they are in the range of Spotify yet. I ran searches for several kind of random songs by not so popular artists (mostly from the 80’s) and found 2 out of five on Kazaa and 4 our of 5 on Spotify. After such a rigorous and uber-scientific method was used, I am confident that Spotify still has a larger base of tracks to pull from. However, I have to say that it is kind of annoying when you search for a specific track and you get 8 versions of the same song and three of them are covers by unknown artists and two of them are karaoke versions. I saw that quite frequently on Spotify.
3) Bells & Whistles – Advantage Kazaa. The basic features (search by track, album, artist) were offered by both and easy access to listen to, create and share playlists were also offered by both. Ringtones and Lyrics were the two big features that were noticeably absent from the Spotify offering. Kazaa offers ringtones and lyrics to most songs and Spotify offers neither ringtones nor lyrics.
4) Accessibility – Advantage Kazaa. Spotify requires the download of its client software to your computer before you can listen to music, Kazaa allows you to stream music without downloading. If you are accessing the service solely on a mobile phone, this is no big deal because Spotify has a good app. However, if you are wanting to access your music from your computer at work, you are probably out of luck with Spotify because most company networks would block such a download. This would not be an issue with Kazaa, where you can just go to http://www.kazaa.com and you can stream music without downloading any software.
In summary, Kazaa bested Spotify in three of the four key measures that I used to grade each service. While Spotify wins hands down in the promotion and marketing of its service, many consumers who tried them side by side might find the Kazaa value proposition to be greater.
This could turn out to be a huge week for on demand streaming music in the US, as many outlets are predicting that Spotify will be launched in the US. Leaked documents have indicated that they expect to generate a media whirlwind that is essentially free marketing for the Spotify brand and service, with expectations that consumers will be getting 370 million “Opportunities to See” which is marketing speak for free exposure. This exposure has an upshot for Kazaa/ATRN investors as well, as this will be hundreds of millions of consumers who are being educated on the value proposition of “on demand” streaming vs. radio/Pandora type streaming since Spotify’s service is essentially the same thing that Kazaa is offering. As many of us already know, the typical thinking pattern is “why would I pay for Kazaa when I can use Pandora for free”, which makes all the sense in the world until you actually try on demand streaming.
Towards the end of last week, a developer discovered code in the Facebook/Skype integration launched last week that referenced a “Facebook Vibes” service and some of the language used has led many to speculate that Facebook Vibes is the much awaited Facebook Music service. Many have speculated that the service will be live within weeks and that it will allow its users to integrate a Spotify, MOG, Rdio or Kazaa account so that their “friends” can see and/or share what they are listening to. Of course, this is a huge deal for the companies who offer this service because it will create a kind of “virtual peer pressure” / viral marketing campaign that we believe will cause exponential growth in each service’s user base. For Kazaa/ATRN investors, an interesting side note is that it was embedded in the Skype code and we all know that Skype was built on the original Kazaa code and technology. Does this give Kazaa an advantage over the other on demand streaming music companies? We should know very soon.
The Billion dollar question was posed to us at the end of last week after an article in the UK based Register pointed out that Brilliant Digital Entertainment (ATRN/Kazaa’s largest shareholder) had received several new patents related to mobile/streaming music. These patents are already being licensed to Skype, Level 3, Iron Mountain, Limewire and others and they appeared to include very specific elements of Apple’s new iCloud service, Google’s music service and Amazon’s music service. The question posed was twofold – 1) were not all of Kazaa’s IP (including patents, pending patents, etc.) transferred to Atrinsic as part of the acquisition and 2) does Kazaa’s owned IP and/or patents might put them in a position to generate a significant income stream from Spotify, Apple, Google, Amazon, Rdio and other streaming music companies?
The original PR related to the deal appears to address this – “The closing of the transactions contemplated by the asset purchase agreement will occur when all of the assets associated with the Kazaa business, including the Kazaa trademark and associated intellectual property, as well as Brilliant Digital’s content management, delivery and customer service platforms, and licenses with third parties, have been transferred to Atrinsic.”
Thus, the answer to #1 appears to be yes, though the deal isn’t expected to close until later this month and the answer to #2 is maybe. If any Kazaa owned patents are determined to be infringed upon by the services offered by Apple, Google, Amazon, etc., it would follow that enforcement actions would lead to either license deals or court ordered payments like this one: Here are a couple of good articles related to this developing story =
Here is a good example of a ruling if they go the court ordered enforcement route (patent enforcement ruling against Apple last week) –
It appears that Atrinsic/Kazaa might represent two distinct billion dollar opportunities – 1) Can Stuart Goldfarb work his magic again like he did with BMG Music Club and Columbia House and turn a shrinking subscription music business into a $1 billion revenue business with a rebirth of the iconic Kazaa brand and 2) Will Kazaa prove to have patents similar to those discussed in these articles and if so can it make millions (or billions) from licensing fees derived from the other big players in streaming music?
While we can not answer either billion dollar question definitively at this time, we do see the new patent angle as just another example of how Atrinsic / Kazaa has enormous potential to create value for shareholders that remains undiscovered and way below Wall Street’s radar.
Our last update on ATRN-Kazaa included a laundry list of several “potential good news” items that we thought could be a catalyst for moving the shares higher upon release by the company. We received a number of messages from members asking the question of whether the move upward in the stock over the last few trading sessions would be a good time to take profits. We believe the answer is a resounding no and that the stock remains an attractive purchase opportunity at its current $3.40 range due to the potential upside that can occur upon confirmation by the company of any of these items and due to the actual value they can add for the company beyond gaining the attention of potential investors. Each of the original five items is listed below, with “the rest of the story” breaking down the actual value beyond the PR exposure:
1) Facebook Music Dashboard – this will bring on demand streaming music subscriptions to the mainstream, which will benefit Kazaa tremendously, maybe even more than any of the other FIVE companies that have the “on demand” licenses.
The Rest of the Story – this has the potential to make on demand streaming music a “must have” app and literally transform the music industry. Zynga started three years ago with an idea and $29 million in capital and they will be valued at close to $20 billion when they come public in a few weeks. Atrnisic has a current enterprise value of $27 million and we think more value will be created in the music industry by a deep integration with Facebook than what has been created in the gaming industry. Everyone loves some kind of music, but not everyone cares for online games. Facebook music will transform the industry and the only publicly traded on demand streaming company should benefit disproportionately – WHEN PEOPLE REALIZE THAT THERE IS A PUBLICLY TRADED ON DEMAND STREAMING MUSIC COMPANY.
2) iPhone App / Android App – should be coming very soon, maybe in days.
The Rest of the Story – Credible sources close to the company tell us that the app has been completed and in the App Store review process for a couple of weeks now. This could be a big channel for growth for Kazaa, as it has been the biggest growth channel for the other on demand players (Rhapsody, MOG, Rdio, etc.) and none of them has the name recognition of Kazaa. Also, consider that Pandora added hundreds of millions of new users over the 18 months that followed its introduction in the App Store.
3) Name change to Kazaa – finally we can use the name that 800 million people will recognize instead of the made up word Atrinsic.
The Rest of the Story – We cannot overstate the importance of this in getting the word out about the Kazaa service. We believe there are thousands and maybe tens of thousands of investors who would want to own shares of Kazaa and/or a stake in one of the “on demand” streaming music service companies IF THEY KNEW THEY COULD. This will only be significantly increased when Spotify launches in the US, something may sources suggest could occur as early as next week. Spotify will make a huge splash and you cannot buy stock in it, but you can buy stock in Spotify’s “on demand” streaming music subscriptions concept through one vehicle – Atrinsic. Atrinsic’s Kazaa will be the only game in town as far as on demand streaming company investment until Spotify’s IPO.
4) Kazaa Radio – OK, its been live for several weeks, but the company hasn’t announced it and its a big deal. Maybe they wanted to give Pandora their week in the sun before they announced that Kazaa Radio is the same thing, but with 5 million songs in the rotation instead of Pandora’s 800,000.
The Rest of the Story – Pandora’s current $3 billion range market cap has to be considered in the context of ATRN/Kazaa’s $22m market cap. Different companies, different models, but we believe that some of the exuberance of investors for Pandora stock might translate into the same for Kazaa/ATRN stock if investors knew that Kazaa had a “Pandora Killer” (ie streaming Radio feature that offers 5 million+ song options vs. Pandora’s much smaller catalog).
5) Industry News – won’t be long until Spotify launches in the US, which will bring a huge amount of media spotlight onto streaming music generally, but more importantly onto the distinction between the “radio streamers” like Pandora and the “on demand” streamers, like Kazaa. Since Kazaa is the ONLY PUBLICLY TRADED on demand streaming music play, this will surely bring more investors into the picture.
The Rest of the Story – its been all Pandora, all the time in the US media, but that will all change within weeks, maybe days as Spotify opens up to US consumers. Most commentators believe it will launch next week and they posted a sign up page yesterday to herald the launch and allow those interested to sign up for day one access. We believe this will be the biggest story of the year in the music industry, eclipsing even Pandora’s IPO and subsequent $3 billion valuation. The combination of Spotify’s US launch and the launch of Facebook Music will make “on demand” streaming what having an iTunes account was 10 years ago, bringing “on demand” subscription music accounts to the masses. The implications for Kazaa will be huge and we can envision its stock benefiting tremendously from both the eduction of US consumers on the value proposition of an on demand streaming music subscription and the relative valuations that will begin to occur as Spotify moves towards a multi-billion dollar IPO, one that should eclipse Pandora’s in size and media coverage. The last reported 12 months for the two companies puts Spotify at about 8-10x the size of Kazaa, so you can do the math and back into that one.
In summary, ATRN/Kazaa at $3.40 is a great opportunity to buy into a company with billion dollar market cap potential before most investors even realize what business they are in and while its trading at a market cap of $22m. This is not a good timeu to sell simply because the stock is up from where it traded a week ago, this is an opportunity to buy more while it is still cheap and relatively undiscovered.