January 16, 2010 / 3:19 AM / in 8 years

2010 could be busy year for digital music mergers

DENVER (Billboard) - Think last year’s acquisitions of iLike, imeem and Lala marked the end of consolidation for digital music services? Think again.

Gradually thawing credit markets and an increasingly competitive digital music landscape could make 2010 a banner year for mergers and acquisitions.

Apple’s purchase of Lala in December lends a greater degree of legitimacy to the “cloud-based” access model for music distribution. And that deal, along with MySpace’s purchase of iLike and imeem, will consolidate innovative features into a single, well-financed service -- which is surely better for the recording industry than watching them die on the vine individually.

“I see it as a positive sign,” says David Ring, executive vice president of business development and business affairs for Universal Music Group’s eLabs. “If they cannot or choose not to go it alone, that’s OK. Maybe they need more economic backing in order to make something into an enterprise of great worth. I‘m encouraged by the interest in the acquisition of various music services.”

WHO‘S IN THE MARKET

Expect to see Apple and MySpace continue their respective buying sprees. MySpace Music wants to expand quickly into areas like merchandise sales and concert ticketing and has more cash than it has developers. And Apple, for all its dominance in the a la carte download space, is playing catch-up in areas like social media, discovery and recommendations.

Meanwhile, Google is said to be eyeing a stronger digital music presence not only to beef up its music search results features but potentially to expand into additional music services for devices based on its smart-phone operating system, Android. In fact, Google reportedly considered buying Lala before Apple snatched it away.

Microsoft is not only relaunching elements of its MSN portal to improve its search and social networking features, but may also be seeking ways to jump-start its struggling Zune service with an acquisition in perhaps the mobile or Internet radio space.

Amazon’s MP3 store is emerging as a strong, if still distant, second to iTunes in the digital download market, but it doesn’t have streaming or social networking capabilities. And Facebook remains curiously absent from digital music outside of a partnership with Lala for virtual gifting.

Other potential buyers include device makers like Nokia, which may want to replace its Comes With Music subscription service with an on-demand streaming option, and Sony, which may want a music access solution to add to the range of media services it plans to launch on the PlayStation Network this year.

Even big-box retailer Best Buy may aim to add to the stable of entertainment services it’s seeking to bundle into devices sold at its stores beyond Napster -- which it acquired in 2008 -- with an Internet radio or music recommendation technology.

SEARCH AND RECOMMENDATION FUNCTIONS

Likely acquisition targets include technologies and services that address specific areas of the digital music business that a would-be contender would otherwise have to build on its own to be successful.

At the top of this list? Search and recommendation features.

“In the world of on-demand, all-you-can-eat streaming services, what to listen to is even more meaningful than getting access to the music,” says Tim Chang, a principal at Norwest Venture Partners in Palo Alto, Calif.

A particularly tempting takeover target for companies seeking this kind of functionality is Pandora, the customizable Internet radio service that built its own music recommendation engine called the Music Genome. Having finally sorted out a years-long royalty dispute with SoundExchange, the company has clarity on music expenses through 2014 and expects to turn a profit this year through audio ads and premium subscription options.

Other companies mentioned in the search-and-discovery space include the Echo Next and Blip.fm. Kleiner Perkins’ iFund, meanwhile, invested an undisclosed amount in music ID service Shazam in hopes of building it into a mobile music powerhouse, which makes it both a potential acquirer and acquiree.

MOBILE SERVICES

Portability is another area of great interest, mostly driven by accessing music through mobile phones. MySpace Music, for example, cited imeem’s mobile app as one of the reasons it wanted to acquire the company.

But today’s collection of iPhone app developers aren’t seen as likely acquisition targets. Not many make more than a few million dollars per year in revenue, and their technology isn’t seen as particularly compelling, providing little incentive to buy them out except to acquire personnel and executive expertise.

However, such mobile streaming music services as Slacker -- which last year shifted from offering its own portable device to focusing fully on mobile phones as its core strategy -- and the highly praised Spotify are another story. As smart phones become more advanced and wireless networks more reliable, the concept of streaming music to a phone rather than downloading and transferring it is becoming an area of great interest and likely one that will result in several acquisitions this year, although Spotify’s estimated $250 million valuation may be too pricey for potential buyers.

Another company to watch is Melodeo, which offers the nuTsie service that lets users stream their PC-based music library to their cell phones. Currently, users can access only a random stream of their library, in order to comply with webcaster licensing rules, but an on-demand version is in the works. Sources say Melodeo is in negotiations with at least two companies that lost the bidding war over Lala, along with other potential suitors.

SOCIAL MUSIC

As for social music services, there’s no shortage of speculation about MOG, a relatively newer entrant that launched a $5-per-month streaming service in December. MOG would give a potential buyer not only a well-received on-demand streaming music service but also an established music-focused social network and advertising network integrated into more than 300 other music-related blogs.

Aside from these big-bucket needs, there’s a host of additional functionality that digital music services are looking for that they could easily get through buying existing companies. There’s lyrics information and interactivity through Tunewiki, ticketing and event services from the likes of Eventful or Jambase, playlisting technology from Project Playlist, guitar tabs, karaoke, music videos and more.

“They are more likely to be ingredients rather than stand-alone businesses,” says Mike McGuire, research vice president with technology research/advisory company Gartner in San Jose, Calif. “The things that add to the experience are where we are going to see more roll-ups and acquisitions.”

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