Apple and Shazam sing the same tune

Apple and Shazam sing the same tune

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Apple first gave Shazam a lifeline almost a decade ago. The music recognition service, founded in 1999, was on the brink of closure before the iPhone and its App Store came along.

This week the iPhone maker came to the rescue again, buying the London-based company in one of its biggest deals for 20 years. Terms of the acquisition were not disclosed but several people with knowledge of the transaction said Apple was paying about $400m in cash. 

Shazam was a sensation when it first launched in 2002 for its seemingly magical ability to recognise music by holding up a phone to the radio or a speaker in a pub. It was one of the first technologies to harness the convenience and capabilities of a mobile phone to go beyond the basic voice and text functions. 

But by 2007, a combination of a waning novelty factor and high prices of 50p per text message had slowed usage. 

After laying off staff and cutting expenses, executives were considering whether to pivot into social networking — then the hot new trend of the moment — or wind up the company and return its remaining funds to shareholders. 

Then came the iPhone. In 2008, Shazam was plucked from obscurity to become the star of Apple’s television advertising campaign for the newly launched App Store. Like googling or Skypeing, the tech company’s brand was soon so ubiquitous that it became a verb. 

A decade and more than 1bn downloads later, Shazam is still one of the world’s most popular apps, used by hundreds of millions of people to identify songs or watch along with Beat Shazam, its name-that-tune US TV show hosted by actor Jamie Foxx.

Shazam's success in marrying technology and entertainment includes 'Beat Shazam', a US game show hosted by actor Jamie Foxx

Yet despite talk circling of an initial public offering for years, by 2016 its revenues remained modest for such a large audience at £40.3m. Like the 50p text message before it, Shazam’s once-lucrative income from iTunes download commissions had given way to unlimited free music streaming through Spotify or Pandora, and the company was still looking for a sustainable and scalable source of revenues. 

Shazam has long struggled with the problem of being “cool tech without a business model”, says Mark Mulligan, analyst at Midia Research. 

“They were a huge conduit between music download stores and consumer discovery, but when music streaming came along people began doing all their discovery there,” he says. “They tried to swap to an advertising model . . . but most people don’t really choose to interact with adverts.”

Now, the buyout by Apple will finally take the pressure off Shazam to find a durable business model. The US group said that the company and its 250 employees will initially help to boost its music streaming service

“Apple Music and Shazam are a natural fit, sharing a passion for music discovery and delivering great music experiences to our users,” Apple said on Monday. 

Nenad Marovac, founder of DN Capital, the venture capital firm and an early investor in Shazam, says the sale was a “logical conclusion to a longstanding and close association between the companies. 

“Shazam has since grown into one of the UK’s most successful tech companies in terms of global reach. There aren’t many British apps with that level of coverage, nor the global brand recognition that Shazam has built.”

For Apple, Shazam would be a useful source of historical data about listening habits — the secret sauce of the streaming industry. As competition increases, rival platforms have scrambled to improve their information about music tastes and understand better what else a consumer might want to hear. In 2014, Spotify, the Swedish streaming service, bought The Echo Nest, a so-called “music intelligence company” for this purpose. 

As well as identifying songs, Shazam’s vast reach means it can also be used by the music industry to spot breakout artists early in their career and even predict hits. The same techniques could be incorporated into Apple Music. 

“Shazam tried to position itself as a tastemaker, with its charts becoming useful ‘heat indicators’ for radio stations and streaming companies,” Mr Mulligan says. “Shazam is Apple’s answer to Spotify’s Echo Nest.”

Apple isn’t buying Shazam for music. Instead, Shazam is an augmented-reality play

Shazam’s early efforts to bridge the tech and entertainment industries could also prove useful for Apple as it pushes deeper into Hollywood, for instance, by commissioning original TV shows

Shazam was founded in London by a group of entrepreneurs from across Europe, the US and Asia who met after studying in Silicon Valley. They chose the UK as the base for the business in 2000 because of its combination of what was then a world-leading mobile industry and proximity to top music labels and recording artists

The core audio-recognition software itself was created in Silicon Valley by Avery Wang, a specialist in digital signal processing with a PhD in electrical engineering from Stanford University.

Mr Wang was sitting in a café in Palo Alto in 2000 when he came up with the breakthrough technique for identifying a song from recordings, even with low-quality phone microphones and background noise. 

His original patent, filed in 2001 jointly with his Stanford professor Julius Smith, for a “system and methods for recognising sound and music signals in high noise and distortion” remains a foundational part of Shazam’s technology and intellectual property portfolio

Co-founders Chris Barton, Dhiraj Mukherjee and Philip Inghelbrecht had started pitching investors about the company, even before the music recognition system had been completed. But the dotcom bubble had already begun to burst before Shazam could get off the ground. 

“We knew we had a tiger of an idea . . . but very few of the investors we pitched to believed in it,” says Jerry Roest, who served as Shazam’s chief executive from 2002 to 2005. “Avery Wang was, and remains, the genius behind the delivery.” 

Mr Wang is the only one of Shazam’s four co-founders still working at the company. After he joins Apple, along with the rest of Shazam’s research and development team in Silicon Valley’s Redwood City, the iPhone maker will have fresh capabilities not only in music identification but the ability to recognise a wide range of audio signals, from TV and movies to the sound of people laughing or clapping. 

Some analysts believe that could have a wider applicability in future, as smartphones, headphones and even smartglasses acquire the ability to see, hear and interpret the world around them. 

“Apple isn’t buying Shazam for music. Instead, Shazam is an augmented-reality play,” Neil Cybart, an Apple analyst, said in his Above Avalon email newsletter on Monday. 

Shazam’s founders have joked that despite predicting the growth of mobile data connections, smartphone apps and digital music in their original presentation to investors in 2000, the company launched several years too early. 

Now, a decade after the iPhone launched, perhaps Shazam is joining Apple at just the right moment to help invent whatever comes next. 

The making — and unmaking — of a ‘unicorn’

Two years ago, Shazam touted itself as having reached a $1bn valuation, making it one of the few British unicorns. 

“We’re looking at a billion dollars and beyond” in an initial public offering, Andrew Fisher, Shazam’s executive chairman, said as long ago as 2013. “Investors are starting to see the pervasiveness of mobiles in people’s lives, and there’s a scarcity factor around [our] type of business.”

So the $400m price tag for this week’s sale to Apple has left some investors disappointed. 

Others insist the price, at roughly seven times last year’s revenues, is a “respectable” outcome for a company that has managed to survive several cycles of tech industry boom and bust. 

The company hired Goldman Sachs to find a buyer several months ago and had also considered a stock-based offer from Snap, according to people familiar with the process, but then turned to Apple as the Snapchat parent’s stock price fell

Over its 18-year life as a private company, Shazam had raised less than $150m, meaning most shareholders will see a return on their investment, even if it was made more than a decade ago.

Nick Habgood, managing partner at Azini Capital, a London-based private equity firm that held Shazam shares, says the $1bn valuation was a byproduct of recent investors offering a higher headline price in return for “liquidation preferences” — special terms that would have guaranteed they would be first in line to get their money back if the company had been sold for less than it had originally raised. 

The sale of another well-known UK technology company to an overseas buyer follows a string of similar deals in recent years, from chipmaker Arm’s takeover by Japan’s SoftBank to Google’s acquisition of artificial intelligence pioneer DeepMind

“Some people will say it’s a shame that Shazam has been sold to another American company but I don’t see it that way,” Mr Habgood says. “Now there’s another $300-$400m that can be cycled back into UK tech.” 

US companies, he adds, have been more successful at commercialisation and scaling up a new technology than their British counterparts. “What we are really good at in this country is innovation and creativity. We should try to play to our strengths and be willing to partner or sell out to US companies.”

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