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January 31, 2014 11:10 am
At the end of last year, Banks, a young musician from suburban Los Angeles who sings floaty, R&B-infused melodies, was selected as one of 2014’s acts to watch by the BBC. The broadcaster’s longlist, compiled by music media insiders, has a good track record: in recent years it has helped boost acts such as Adele and Jesse J.
But while Banks’ manager, Trevor Skeet, was grateful for the BBC’s endorsement, he was even more excited that she was selected as a rising star by Shazam, the music identification app. “[It’s] a new medium for gauging the stickiness of a song and it’s pushed radio programmers to add songs they otherwise wouldn’t have,” he says.
Skeet believes Shazam’s list – which combines critics’ reviews and data on the number of people who have used the app to find a song – is a more accurate reflection of consumer behaviour and the popularity of artists than radio airplay. The data it accumulates can also be used to predict which artists will be successful. “Discovery is at the root of all musicians’ careers and Shazam is a really popular way for people to discover artists,” says Skeet.
Shazam began life as a music identification service on early mobile phones. It was initially a text service – users could type in a number, hold their unwieldy phone to the source of the music, send a text message and wait for a reply with the song title and artist. Now, in the age of the smartphone, users can open the app, hold their phone or tablet to the radio or television to “listen” and identify the song and, if they want to, download it.
The company says it generates more than $300m annually in digital music sales, largely through iTunes, and for which it receives a small percentage commission (it declines to disclose the exact figure). More than 420 million people use the service in over 200 countries or territories, and 15 million new users are added every month, making Shazam one of the 10 most downloaded apps for the iPhone worldwide.
Last summer, América Móvil, the telecoms operator controlled by Mexican billionaire Carlos Slim, invested just under $40m in the London-based company. Slim’s involvement means that the app is now installed on two million Android handsets sold by his company across Latin America.
Despite making a profit only once in its history, through selling its intellectual property portfolio, Shazam wants to be one of the first British technology companies to float in the US for at least $1bn.
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Occasionally, gripped by nostalgia, Shazam co-founder Chris Barton flips through the PowerPoint presentations he used to pitch the idea in 2001. In the wake of the dotcom meltdown, however, investors weren’t interested. “I’d missed a period of hyper-optimism and felt frustrated,” he says. “Venture capitalists were focused on fighting fires in their existing companies. It was really tough.”
Barton, who now works at the file sharing service Dropbox, came up with the idea while doing an MBA at Berkeley’s Haas School of Business. Inspired by his scientist parents, who had established a nuclear physics consultancy, and a fellow student who had set up real estate company Ziprealty, Barton became convinced that he was an entrepreneur in the making.
Of his top three ideas, he turned down one because it was too boring: “Buying contact lens solution over the internet – I couldn’t see myself ploughing hours into that particular business.” Another because it was too stupid: “I wanted to harness some celebrity appeal to the internet. You’d be on Amazon and a message would pop up, saying ‘Sting’s also on Amazon’. I don’t think Madonna would really let you know what websites she was looking at. My friends called it ‘e-stalker’.” But he thought his third idea might work: a service to identify music over mobile phones.
“I liked music, but I didn’t invest the time in keeping up with the latest bands,” he says. There were already a few tech start-ups in this area, but they focused on recognising songs played on the radio. Barton wanted to enable users to do so in noisy environments, like chatting in a bar.
He went in search of an audio technology expert, and came across Avery Wang, who had completed a PhD in audio analysis at Stanford University. “I saw the problem as unsolvable,” recalls Wang. “Speed was important – you couldn’t have a super-computer crunching the song for an hour.” He initially dismissed Barton as “a naive business school student”, but later realised, over lunch in Palo Alto, that this naivety was in fact “bright-eyed enthusiasm”. Wang had also become tantalised by the “interesting problem”.
Barton went on holiday leaving strict instructions: Wang had to invent the technology by the time he got back.
“I dreaded hearing from him. I was behind schedule,” admits Wang, who is now Shazam’s chief scientist, overseeing innovation and intellectual property. But he soon realised the solution was to turn a piece of music into a “fingerprint” or “numeric signature”. When a song is played, the algorithm he created identifies frequencies of peak intensity, matching this fingerprint or numeric signature with one of the tracks from Shazam’s database. In the early days, Barton recalls, “we were particularly lucky. For the core service [identifying songs] we did not need to have partnerships with the music labels, [because] it was reliant on music fingerprints, which did not require licences or rights, as they are not actual music.”
Later, partnerships were required in order to develop some of the additional services, such as sending songs by email to a friend. That was to prove much more difficult, because music companies were suspicious of digital services cannibalising their revenues (this was the era of Napster’s free peer-to-peer sharing service). Eventually, as Shazam became more established, it became easier to do deals.
Once the technology and infrastructure was in place, next on the list was investment. This was no small task. “Those initial years of Shazam were the worst years in the past couple of decades to raise money,” says Barton. “A few years earlier, the money would have rolled through the door.”
Wang, who sold his company to work full-time at Shazam – joining Barton and his fellow MBA student Philip Inghelbrecht – agrees: “We were either two years too late or five years too early. If we had started in 1998 we would have got millions and gone public.”
Barton says they were sustained by the belief that one day “there would be a world of wonderful things to do with mobile phones”. That, however, was still years away: Shazam was launched in the mobile phone dark ages, five years before the iPhone. It was a clunky service on clunky devices. “I don’t think we realised how long it would take to really get there, but we knew it was coming.”
Just before September 11 2001, after hundreds of pitches and persistence, Shazam finally secured its first round of funding, raising about $7.5m through three venture capital firms: Lynx New Media (a joint venture between Bear Stearns and Virgin Media), IDG Ventures Europe, and FLV, a Belgian fund investing in speech recognition.
By this time, Barton had moved from Silicon Valley to London. Barton, whose father is British, was attracted to the London lifestyle (he studied finance at Cambridge). “We stumbled across business reasons rather than planned it. It was serendipitous – once we moved, we realised that London was the perfect place.”
Europe was a far more advanced mobile market than the US, where you “couldn’t even send a text message to a friend on a different carrier”, he says. In 2000, the auction for next-generation mobile phone licences in the UK produced a windfall of £22.5bn for the UK government. This made London a more compelling place to find investors for a mobile-based offering. Shazam also recruited a fourth founder, Dhiraj Mukherjee.
However, the experience of launching was brutal. Within three years, three of the four founders had left: Barton joined Google’s mobile division, Mukherjee moved to Save the Children and Inghelbrecht went to YouTube. All say they were burnt out. Mukherjee describes the early years as “like running up a down escalator”.
Barton says he still spends “at least 20 hours a week” thinking about the company he started, and despite the awful investment environment when he launched Shazam, he now thinks “the toughest times can be the best years to start a company. There is less competition for talent. It’s easier to get office space, and big companies can’t copy your ideas because they’re too focused on the core business. If you can survive, a downturn can be a great time to start a business.”
. . .
Shazam is headquartered in an unremarkable building in Hammersmith. Aside from a pool table, there are few of the quirks associated with tech company offices. Instead, the company has a slickness that shows its transformation from vulnerable start-up to one preparing for an IPO. Compared with the founders, who still bubble with enthusiasm about their start-up, the current leadership team are guarded and on-message.
Andrew Fisher, Shazam’s executive chairman, who joined in 2005 from internet content company InfoSpace, says one of the biggest mistakes founders make is to “underestimate how long it takes to change consumer behaviour: it always takes a year or two longer than you anticipate.” He believes that an app only works if it gains social currency. “People will help you [expand] your business through word of mouth,” he explains. “People think it’s a fun service; they tell all their friends about it.”
Fisher admits that luck also played a part. Not only did Barton inadvertently choose to move to the right market, but the launch of the iPhone, and in particular iTunes, also helped transform a gimmicky service into a ubiquitous app. Rich Riley, the former Yahoo executive who joined Shazam as chief executive last year, and is based in New York, says: “The smartphone phenomenon is one of the great tech trends in our lifetime – most people have, in effect, a supercomputer in their pocket.”
But like many consumer tech companies, including Twitter and Facebook, Shazam was also a product in search of a commercial proposition. Fisher says the company “zigzagged through business models”, pivoting in a way that is typical of many technology start-ups, which are frequently iterating, building brand recognition, and then figuring out how to make money. “We took a big risk: we went free. Then we changed to a freemium model – part paid for, part free: you could use the service five times a month and then pay for it. We’ve gone back to being free.”
Mike Butcher, co-founder of TechHub, a London-based community for tech entrepreneurs and investors, says Shazam has been good at constantly adapting: “You’ve got the magic in terms of recognising a song – what models do you layer on top of that? They have been pivoting, testing models.”
One such shift has been to the US, where Shazam is known more for TV advertising than as a music recognition app. Brands pay the company to make their ads interactive. Shazam declines to disclose how much it makes from advertisers, but says this is its fastest-growing source of revenue, and the potential is much bigger than that in music.
“TV advertising is worth about $300bn a year and digital music sales are incredibly small,” says Fisher. “The total music market is worth about $10bn now.”
During last year’s Super Bowl, advertisers enticed viewers to use Shazam to enter sweepstakes, unlock exclusive online content and participate in polls by pointing their phones and tablets – with the app open – at a Shazam logo on screen. Fast-food chain Jack in the Box integrated Shazam into its advert for a Hot Mess burger. After “Shazaming” it, viewers were able to watch a music video, complete with long-haired guitarists and Pat Benatar theme tune. At this year’s Super Bowl, all of the ads will be Shazam-enabled, and viewers will be able to replay their favourite spots and share them on their social networks. Fans will also be able to access other exclusive music features during the half-time show, which features Bruno Mars and Red Hot Chili Peppers.
“Why would somebody want to Shazam a shampoo ad on TV? Because they can get styling tips,” says Fisher. “So, if you Shazam the ad, yes, you can get the voucher to buy the shampoo, but you can then watch videos of how to style your hair like the models in the TV ad.”
This behaviour also generates valuable data that can track and predict consumer patterns. The company says it does not share personal data with advertisers unless a Shazam user specifically opts to receive further information. But it does use its knowledge of what has interested a user to serve both ads and content in the app. If, for example, a user Shazamed a specific artist, he or she would be notified of a new album or upcoming tour dates.
Some in the advertising industry, however, are sceptical that simply enabling television viewers to interact with brands will generate much income. Richard Spalding, chief executive of The 7th Chamber, which creates and seeds video content for brands, says “generally, people don’t interact with ads: interactive advertising has failed to make any significant impact on people’s lives. There is value in creating awe around a brand, but ultimately, advertising is about sales.”
Despite not being profitable (last year, Shazam posted a pre-tax loss of £3m, on revenues of £21.8m, up from £15.6m), and talk that the company could be acquired, Riley remains bullish that a high-value listing is within reach. “Profit is a nice-to-have, not a must-have,” he insists. He will not be pinned down on a figure for an IPO valuation (Fisher has previously said Shazam was “looking at $1bn and beyond”), but suggests that the likes of Twitter’s $18bn listing will push his own company’s value higher.
“Various companies have floated and not made a profit,” he says. “We are investing in the future. We’re choosing to reinvest rather than give returns to an investor.” He adds that in fast-growth sectors, people are “less concerned with profits today and more concerned with profits tomorrow”.
Nonetheless, the fact that the date for a Shazam IPO has been pushed beyond this year (2014 was mooted by Fisher last summer), in order that the company can strengthen its finances, suggests that it recognises that the financial underpinnings need to be bolstered.
Ultimately, says Fisher, Shazam’s success will be “measured in three years’ time by how often people use Shazam as part of their everyday lives: whether they go to an internet browser and type in www when they want to engage with a brand or a [television] programme, or whether they just point and click and use Shazam.”
Meanwhile, Barton, who is now based back in Silicon Valley, says he couldn’t “be more pleasantly surprised” by Shazam’s performance. “I always thought it could be popular, but never anticipated the extent of its popularity. We under-predicted how many people would use it.”
If the company does float, Barton stands to become a millionaire. Does he ever regret diluting his stake in the company? “I won’t be so rich I can buy a yacht . . . but I’ll have enough for it to be meaningful. There are entrepreneurs who end up with nothing.”
Emma Jacobs is a feature writer for the FT’s Business Life. To comment, email firstname.lastname@example.org
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