Apple Inc. AAPL is reportedly in the process of acquiring U.K-based Shazam Entertainment. Per TechCrunch and also confirmed by recode, the iPhone maker may pay almost $400 million for the popular app that can identify any song, TV show, movie or advertisement.
However, the price is significantly lower compared with the $1.02-billion valuation that Shazam received during last funding, in 2015. Per TechCrunch’s other sources, the purchase price can be a nine figure. We believe this is improbable due to the significant competition the company faces in the music recognition market.
Launched in 1999, Shazam has raised $143 million from DN Capital Limited, Institutional Venture Partners and Kleiner Perkins Caufield & Byers, reportedly.
Why is Apple Interested?
Shazam was one of the first applications to be offered by Apple App store way back in 2008. The application reportedly crossed 1 billion downloads in September 2016, reflecting significant popularity. The company reported revenues of almost $54 million and statutory pre-tax loss of roughly $5.3 million in fiscal 2016.
Shazam’s music recognition app already works with Apple’s digital assistant Siri. The acquisition will now allow Apple to offer features like television show recognition as well as augmented reality (AR) brand marketing service to App store users.
Moreover, Apple will not pay the commissions related to the traffic that Shazam redirects to its iTunes store. This cost saving will ultimately boost profitability. Notably, gross margin and operating margin contracted 10 basis points (bps) each in the last reported quarter.
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Further, if the company decides to close the service, it is expected to hurt competing streaming services like Spotify, Google Play Music and Snapchat. Although Apple Music has witnessed phenomenal success in recent times, its user base of 30 billion lags Spotify’s 140 million subscribers, including 60 million paying subscribers.
Apple to Benefit From AR Initiatives
According to The Verge, Apple will benefit from Shazam’s AR platform for brands that were launched earlier this year.
Apple is aggressively pushing into the AR market through acquisitions. The company has bought several smaller firms with expertise in AR hardware, 3D gaming and virtual reality (VR) software.
Apple recently acquired Canada-based AR headset maker, Vrvana for $30 million. Other acquisitions include SensoMotoric, Flyby Media, Emotient, TupleJump, Turi, Metaio and PrimeSense.
Moreover, Apple unveiled the ARKit at WWDC this year that will help third-party developers to work on creating AR experiences for the iOS platform.
We believe that the Shazam acquisition will strengthen Apple’s AR technology portfolio. Moreover, the addition will boost competitive prowess against the likes of Facebook FB, Microsoft MSFT and Alphabet GOOGL.
Facebook has invested almost $3 billion to develop VR technology while Alphabet’s Google division is giving tough competition to Apple with its ARCore developer Kit.
Currently, Facebook’s Oculus Rift and HTC’s Vive are the most notable VR headsets in the market. On the other hand, based on their smartphone devices, Apple and Google are the major proponents of the AR technology.
Moreover, Microsoft has created the term “mixed reality,” which stands for a combination of AR and VR. The company’s latest Windows 10 upgrade supports both AR and VR technologies. Microsoft has also taken the inorganic route to boost position in the AR/VR market. The company has been relying on partners like Samsung, Dell, HP, Acer and Lenovo to provide it a push in the rapidly growing AR/VR market.
HoloLens is Microsoft’s other noteworthy mixed reality product, which is currently used by NASA and the U.S. military, per reports. The company doesn’t expect the commercial version of HoloLens to be launched before 2020.
According to market research firm IDC’s August report, quoted by Business Insider, total spending on AR/VR is expected to soar from $11.4 billion in 2017 to nearly $215 billion 2021 at a CAGR of 113.2%. This provides significant growth opportunity for these technology giants including Apple.
Currently, Apple has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank stocks here.
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