Reports surfaced in December that Apple (NASDAQ:AAPL) was looking to acquire popular music-recognition service Shazam, a deal that the Mac maker subsequently confirmed was in the works just a few days later. The rumored price tag is approximately $400 million, a relative bargain compared to the most recent private funding round that valued Shazam at $1 billion.
However, the deal hit a snag in April when European regulators opened an "in-depth investigation" into the proposed acquisition. Regulators are now reportedly preparing to clear the deal.
Regulators were worried about user data and referrals
Reuters reports that the European Commission is set to grant unconditional approval for the deal as it wraps up its investigation. The European Commission was concerned about Apple getting "access to commercially sensitive data about customers of its competitors." The European Union has been among the most aggressive regions in terms of data privacy protections recently, including the recent rollout of GDPR.
There was also concern that if Apple acquired Shazam, it would stop referring users to competing music services. Referrals are a big part of Shazam's model, sending users to music services to purchase or stream the song they just identified. Shazam CEO Rich Riley told The Wall Street Journal in 2016 that it sends about 1 million referrals per day to services like Apple Music and Spotify (NYSE:SPOT). As Apple's biggest music-streaming rival, Spotify could be adversely impacted if Shazam stopped sending referrals there.
The Commission initially noted that it "does not consider Shazam as a key entry point for music streaming services," which could suggest the referral concerns were unlikely to present a major anticompetitive concern. Sweden-based Spotify enjoys a particularly strong brand in Europe, which is its largest market. Approximately 37% of Spotify's 180 million monthly active users (MAUs) are located in Europe, or about 67 million MAUs. Once consumers try out the free, ad-supported service, many of them convert to premium subscriptions; over 60% of gross premium subscriber additions come from the ad-supported tier. Shazam referrals are but a drop in the bucket.
What comes next
This investigation was the most prominent regulatory hurdle that Apple had to clear to acquire Shazam, which is headquartered in the U.K. Now that the purchase is seemingly about to get approved, investors should focus on how Shazam could help grow Apple Music.
The Mac maker can work on converting a portion of its 100 million-plus mobile MAUs to Apple Music subscribers (at least those that are not already subscribers). Apple could also potentially use Shazam's technology to bolster its content discovery algorithms -- a key point of differentiation and strength for Spotify, and one where Apple lags its Swedish rival. "Spotify is more than a music streaming service," Spotify wrote in its prospectus. "We are in the discovery business."
If Shazam can help Apple Music on any of those fronts, it could easily justify its $400 million price tag.
Evan Niu, CFA owns shares of Apple and Spotify Technology. The Motley Fool owns shares of and recommends Apple. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.