Here's Why Google Acquired Songza

Learn why Google acquired a music streaming business and how it plans to face the top competitors in the industry.

Jul 8, 2014 at 11:00AM

The music-streaming industry is going through some interesting changes after two tech giants acquired companies that provide original music curation, defying the dominant market share of Pandora (NYSE:P) . Shortly after Apple (NASDAQ:AAPL) bought Beats Music, Google (NASDAQ:GOOG) (NASDAQ:GOOGL) has made a similar move by acquiring Songza. Through its new acquisition, the search engine giant plans to improve Google Play Music and YouTube, which is about to launch its own music-subscription service. 

The value of Songza
Songza, launched in 2007, recommends music to its users in a way that it fits their current mood or state. It collects data such as weather, time of the day, and location in order to provide a well-suited soundtrack. Moreover, its playlists are designed by music experts. As a result, Songza differentiates itself from the algorithm- and computer-based music curation from competitors like Spotify or Pandora. At the moment, this music streaming service has around 5.5 million active users.

Expanding Google Play Music
Aware of these factors, Google acquired Songza to incorporate its differentiated features in Google Play Music, which has underperformed in relation to its competitors since it was launched in 2011. Moreover, it could be an attractive invitation for Songza's large user base to join Google's own music service.

As a consequence, Google could expect to grow considerably in this market segment. Its abundance of resources and large-sized business are able to leverage Songza's qualities, which have engaged millions of users, and propel Google Play Music toward a greater market share.

Adding value to the YouTube ecosystem
Google also plans to work with Songza to improve the upcoming YouTube paid music service, which will feature the content of 95% of the music industry labels. With 1 billion users, YouTube has the reach to adequately promote the new service. Moreover, it could be easier to engage customers in the ecosystem. As a result, Google's ads could enjoy a higher number of user conversions and sales for agencies and publishers promoting their brands.

Facing Apple's new music-streaming service
Apple's recent acquisition of Beats for $3 billion includes a streaming service with music curated by real people. One of its features is called "The Sentence," through which users can access playlists that suit their mood, location, and current activity. Moreover, Apple can now move beyond iTunes Radio, which is limited to selling songs. Through Beats Music, the organization can move away from diminishing digital sales, which have fallen 13% so far this year in the United States, according to a Nielsen report. 

Competing with Pandora
According to Edison Research's 2014 annual report, Pandora holds 31% of the U.S. radio market share and so maintains its leading position. In its last quarter, the company revealed a total revenue of $194.3 million, a 69% year-over-year increase. Moreover, it drives efficient monetization through ads and paid subscriptions. The organization has managed to increase its ad desktop RPM (revenue per thousand listener hours) from $44.63 to $52.75 from the same quarter last year, and ad mobile platform RPM from $20.43 to $29.46.

Final Foolish takeaway
With Songza, Google can add new features to Google Play Music, like music curated by a staff of experts. This improvement will allow users to listen music that fits their moods. In addition, the tech giant can improve its YouTube ecosystem by adding value to the upcoming YouTube music service. Overall, it could increase its top line by increasing the number of users of Google Play Music and user engagement in YouTube, which makes it likelier to expand ad revenue.

Apple also has a similar service, called Beats Music, that provides human-curated music, which poses a threat for Google's expansion in the market. Moreover, Pandora is currently growing its business in terms of revenue, RPM, and active users. For that reason, Google is incorporating new features to its music-streaming service in order to properly compete in the market.

Leaked: Apple's next smart device (warning, it may shock you)
Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out, and some early viewers are claiming its everyday impact could trump the iPod, iPhone, and the iPad. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!

Alvaro Campos has no position in any stocks mentioned. The Motley Fool recommends Apple, Google (A shares), Google (C shares), and Pandora Media. The Motley Fool owns shares of Apple, Google (A shares), Google (C shares), and Pandora Media. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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