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Here's the Real Reason Google Bought Songza Media

By Alex Dumortier, CFA - Jul 2, 2014 at 10:15AM

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Google acquires music streaming service Songza Media.

After settling at a new all-time high yesterday afternoon, U.S stocks are slightly higher on Wednesday morning, with the benchmark S&P 500 and the narrower Dow Jones Industrial Average ( ^DJI 0.00% ) both just on the green side of breakeven at 10:15 a.m. EDT. That may have something to do with ADP's latest U.S. employment report, which showed a whopping 281,000 increase in private payrolls in June -- beating the 213,000 consensus forecast and substantially higher than the top of the forecast range (at 240,000). That statistic is a good sign for Friday morning's June employment report from the Labor Department; it also suggests that the Federal Reserve's contrarian was right when he said last Thursday that "the Fed is closer to its goals than many people appreciate. ... I don't think markets -- and I'm not sure policymakers -- have really digested that's where we are." The economy ebbs and wanes, but secular growth stories roll on -- and so it goes with Google ( GOOG 2.95% ) ( GOOGL 2.87% ), which announced yesterday that it is buying streaming music start-up Songza Media, matching recent forays by Apple ( AAPL 3.55% ) and ( AMZN 2.80% ) in this area.

Although the value of the transaction was not disclosed -- Songza is a private company -- Google is thought to have paid above $15 million, or roughly $3 for every one of Songza's 5.5 million subscribers.

In acquiring Songza, Google is responding to an important trend: selling music is giving way to renting it as the preferred model. U.S. sales of single downloads slid 6% to 1.3 billion tracks last year, while album downloads were flat at 118 million. Meanwhile, streaming music services such as Pandora and Spotify have been adding users at a furious pace.

In order to differentiate themselves from these services, which use algorithms to put together playlists for their users, the key concept right now appears to be "curation." Or, as Google said in its announcement, "[Songza has] built a great service which uses contextual expert-curated playlists to give you the right music at the right time."

Similarly, when Apple announced in May it was acquiring Beats Electronics -- its largest-ever acquisition -- CEO Tim Cook said, "We love the [Beats Music] subscription service that they built -- we think it's the first subscription service that really got it right."

Both Songza and Beats Music have teams of experts that develop playlists adapted to different moods and activities. However, Songza appears to have taken its curation process further, creating playlists according to variables such as the time of the day, day of the week or user's location. That know-how has applications beyond just serving up the right music to a listener, including displaying better targeted contextual ads or buying recommendations.

Or, as Songza Media CEO Elias Roman told The Wall Street Journal: "Historically the [Internet] has been about searching and browsing. The future isn't about people finding things, it's about things finding people." In other words, the next frontier in e-commerce for a company like Google isn't showing people what they ask for, it's showing people what they want without being asked. At an estimated $15 million, Songza Media is a small acquisition for Google, but it could have an impact beyond the search giant's ambitions in streaming music.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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