Spotify, Facebook Vibes and Kazaa’s Billion Dollar Question

July 11, 2011 at 1:25 pm Leave a comment

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 =

http://www.itnews.com.au/News/262659,aussie-eyes-apple-google-over-cloud-music-patents.aspx

Here is a good example of a ruling if they go the court ordered enforcement route (patent enforcement ruling against Apple last week) –

http://www.bloomberg.com/news/2011-07-08/apple-told-to-pay-8-million-in-patent-trial-over-ipod-playlists.html?cmpid=yhoo

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.

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Why ATRN-Kazaa Is Still A Buy at $3.40 Kazaa Discovered, Short Squeeze On and Head to Head with Spotify

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