Apple deal is the right recognition of Shazam’s magic

In its acquisition by Apple which closed on 24th September, it could be said that Shazam has found its spiritual home. The move was announced last December but finally got the all-clear from EU antitrust regulators after fears were raised that the deal could harm European competitors to Apple’s streaming music service. But Apple played a crucial role in Shazam’s development as a music recognition app – and perhaps in its survival as a business – by launching the first iPhone in 2007. This was the point at which consumer electronics caught up with Shazam’s technology that was far ahead of its time.

That in itself is remarkable, as by this time the company had been going for seven years. Most tech startups would have expected to be working on an exit within that sort of time, and yet here was Shazam, just getting the wind beneath its wings.

It soared to the giddy heights of a billion-dollar unicorn valuation but has ended up in Apple’s hands for a reported $400million.

I think that is actually a fantastic result for Shazam and its shareholders, and Apple is a natural fit, having already integrated the technology into its Siri assistant.

As one of the first angel investors, I’ve had a ring-side seat throughout the company’s journey – and with a stint as interim CEO was briefly ring-master, too.

So what is it about Shazam that has enabled it to overcome the many challenges it faced and make it to a successful exit seventeen and a half years after four very clever founders pitched the idea to me?

The third of Arthur C Clarke’s ‘three laws’ come to mind: “Any sufficiently advanced technology is indistinguishable from magic.”

Quite simply, Shazam is magic.

Spellbinding technology

Shazam’s technology works by turning every section of a song into a series of sound fingerprints which are then compared with its huge database to find a match. It can recognise just fragments of a song – as little as two or three seconds.

The company was founded by Chris Barton, who is still on the board, along with Dhiraj Mukherjee, Philip Inghelbrecht and Avery Wang. In their first pitch to me early in 2001 they brought a laptop with a web-based version of the product that had a few hundred songs in its database. Each time one of these songs was played, Shazam recognised it instantly.

Having a technical background myself, I thought what they were doing looked almost impossible – it was like magic. I was bowled over by the technology and thought it was really exciting. I wanted to help them and so invested in 2001, in the very first angel round before a VC was on board.

At the time I was still working with Chase Capital Partners on what was the final stages of the Chase Episode 1 arrangement and so I felt I ought to show it to them. Understandably, perhaps, they said there was no business model. One or two people remarked on how amazing the technology was, but it was just too hard to see where the revenue would come from. Why would anyone pay to recognise a song?

This has always been the fundamental conundrum for Shazam – as brilliant as the technology is, would people pay for it and, if so, how much?

Nevertheless, soon after I invested the company did raise some VC money from IDG Ventures – now called Acacia, which is still a shareholder.

Once the business had a few million pounds worth of funding it faced the considerable challenge of expanding its database to cover the millions of available songs and creating the acoustic fingerprints for each one.

It did a deal with the biggest UK music wholesaler of the time and built a kind of factory in their warehouse that scanned all the CDs they handled and turned them into the necessary fingerprints. For a startup, that was a massive, complicated and expensive undertaking.

At the same time, several record labels were crying foul over what Shazam was doing, demanding huge amounts of money to fingerprint their tracks, so there were lots of protracted negotiations over rights. Unless it could recognise every piece of music thrown at it, and not just songs from one or two labels, Shazam wouldn’t have a service that people could rely on.

Turning it around

Such issues made the early days very difficult and the project ran late. The VCs decided they needed to hire a new CEO and, having been a non-executive director since investing, I was asked to become interim CEO while they searched for someone, and so for a few months in 2002 I ran Shazam.

One of the other big challenges back then was that the user interface was clunky and complicated. When the service launched in September 2002 you had to dial 2580 on your mobile keypad – this was pre-smartphone, remember – and Shazam would listen to the music via the microphone and then send you a text message identifying it. Mobile phone signals back then were variable and ambient noise could be a big issue, so recognition rates were an area of huge focus and it took time to reach the company’s targets of rates above 90%.

But the technology was always improving and Shazam has always had very clever people working on technology as well as on the business model. The difficulties it always had was that it was years ahead of its time.

The company began to properly take off, though, when Andrew Fisher became CEO in 2005 and he capitalised on the arrival of the iPhone in 2007. The explosive growth of smartphone use saw consumer technology finally catch up, allowing Shazam to make some serious progress. It became one of the first apps in Apple’s App Store and was always high in the list of most downloaded apps worldwide.

Then, with significant Silicon Valley investment from Kleiner Perkins and others starting in 2009 the firm set its sights on strengthening its team, creating a world-class operation and growing its user base. Shazam continued to innovate, expanding into ways for users to interact with TV ads and programs by recognising the TV sound. In 2013 Rich Riley, a highly experienced executive from Yahoo joined as CEO with Fisher moving to Executive Chairman, and the sales team and process was subsequently strengthened.

By 2016 Shazam announced it had been downloaded more than a billion times across iOS, Android and other platforms.

That huge reach led to a unicorn $1billion valuation for a time but it was proving hard to grow revenues – Companies House open public records show that Shazam’s revenues were £35m in 2015 and £40m in 2016.

The right result

From an investment point of view, to sell to Apple now is a great outcome, especially for those who invested in those early rounds.

From a business perspective it makes real sense too. Quite a few world class C level executives have worked on Shazam in all positions without finding the breakthrough formula for rapid revenue growth. Being a stand-alone entity in markets dominated by streaming services is hard. Even Spotify with all its content and reach has a tough job to compete with Apple, Google and Amazon.

Personally, I invested back in 2001 because I was impressed by the people and the product and I like helping companies at the early stage – that is the whole purpose of Episode 1. Many investors will have passed on Shazam because they focus on the evidence of traction and proof of strong commercial potential, which for Shazam proved modest and elusive.

It’s worth remembering that despite its long and often difficult history, Shazam is one of the UK’s most successful and globally recognised tech companies. It will be interesting to see what Apple does with a product that users love and which is a great fit for its services. What they’ve got for their money is magic.

 

Simon

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