ATRN exploding after 3$ break (3,6 mil float) - and HERE is why:
Should Google, Amazon or Facebook Skip the Music Labels and Buy Atrinsic? 0 comments
May 11, 2011 1:46 PM | about stocks: GOOG, ATRN, AMZN, AAPL
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After fighting the good fight and apparently failing in its widely reported quest to secure licenses from the big four music labels, it appears that Google (Nasdaq: GOOG) has decided to go the "Amazon Route" to put pressure on the labels to move the negotiations forward. The services are not identical (Google allows users to make playlists, Amazon (Nasdaq: AMZN) offers a store where songs can be purchased and loaded to a consumer's "locker"), but they are based on the same premise - that they can offer a "music locker" (glorified virtual hard drive) where a consumer can load songs they already own and stream the songs back to that consumer over multiple access devices (ie their laptop, smart phone, ipad, etc.). Google's announcement and "music beta" moniker left no doubt that the company inttends to offer something significantly more substantial in the future, most likely an "on demand" streaming music service like Rhapsody, Napster MOG, Kazaa and Rdio.
The highly acclaimed Spotify music service that is currently only available in Europe is another example of how difficult it can be to get a license to offer "on demand" streaming music in the US. The company has had officially announced US launch dates (some going back over a year) pushed back so many times that company executives now seem unwilling to make launch expectations anymore. The bottom line is that the biggest players in technology (Amazon, Apple, Google) and online music distribution (Spotify) have tried and are trying to get licenses to launch unlimited on demand streaming music services in the US. Given the apparent futility of this exercise evidenced by both Amazon and Google's attempt to offer music services that skirt the process of obtaining the licenses from the Big four, should one of them consider an acquisition of Atrinsic (Nasdaq: ATRN)?
Atrinsic entered into an agreement with Brilliant Digital Entertainment to acquire Kazaa, the iconic free music download service that had been converted to a paid on demand streaming music service. The deal was struck in early October of last year, but the closing of the deal has dragged well beyond what would have been expected, likely due to the wrangling that must be done to transfer the licenses and the approvals required from the Big four labels. In recognition of the possibility that the labels could make it difficult to transfer the licenses, the company made it a two step deal. Step one has already been consummated, giving BDE a 16.5% stake in Atrinsic in exchange for an extension of their existing "marketing services" agreement that gives it an exclusive license to the Kazaa trademark and an 80% share of the profits generated by the Kazaa music service for 30 years. The marketing services agreement also grants ATRN 100% of the profits from Kazaa until it has recovered the advances and expenditures by Atrinsic in the build out of the Kazaa streaming music service, which is currently a little over $12 million. Thus, even if Atrinsic does not complete step two of its acquisition, the company will get 100% of the first $12 million in profits and thereafter 80% of the profits. ATRN would essentially be a "super affiliate" earning 80% of the profits without the necessity, expense (additional dilution) or approvals required if transferring the licenses is involved. While we hope that they do close the deal and gain full ownership of the Kazaa business and licenses, this concept presents an interesting poential scenario.
Since Google and Amazon already went to great lengths to circumvent the process of bowing before the record labels, what would prevent one of them from buying Atrinsic and instantly launching a fully legal on demand streaming music service (Kazoogle or Amazaa)? They would get dollar for dollar what capital is invested into growing the service + the first $12 million in profits + 80% of the profits beyond the recouping of that investment. Given the vast resources available to these larger players, they could sink enough capital into the business to grow it rapidly to show the labels the potential for such a service with the backing, talent and expertise of these companies, with an existing contract that ensures that they will get 100% of any profits until that investment is recouped + $12 million already invested by Atrinsic and then 80% of any profits going forward. This approach would allow them to have a full function service to launch on day one, buys more leverage with the music labels and more time to work out a full license deal without allowing one of the other competitors to beat them to market with a full featured streaming service. In a worst case scenario, they determine that this is not a business they want to pursue further or they find that the music labels are simply unwilling to do any kind of deal with them (unlikely) and they are stuck only earning 80% of the profits from the service. Even that scenario is not as bad as it may seem on its face - how many companies are built on a model that only allows them to keep 80% of their advertising revenue while Google provides the ads and keeps 20% for its trouble? In any case, it seems much more likely that Amazon or Google would be able to show the labels how they can create value for the labels and artists in addition to the shareholders of Amazon/Google.
I have discussed all of this using Amazon and Google as examples, as they are two companies that obviously want into this space enough to push the envelope by circumventing the established system to get a product to market. There are others who could also find value in this approach including Facebook, who along with Google was rumored to be in talks with ATRN's largest shareholder (and Skype investor/director) Mark Dyne about such a deal a few weeks ago.
There are currently only five companies operating an on demand streaming music service in US with the appropriate licenses and two of them (Napster and Rhapsody) are owned by very large well funded entities (Best Buy and Viacom/Real Networks respectively). Kazaa, MOG and Rdio are the remaining three players. Kazaa is much larger than the other two in terms of subscribers and subscription revenue and Rdio (due to yesterday's purchase of Skype) is now partially owned (could be as much as one third based on publicly available funding data) by Microsoft (Nasdaq: MSFT) .
Spotify's recent capital raise of $100m+ after long negotiations with the music labels, Kazaa's own $100m+ payment to the labels and other industry talk suggest that the labels have been pushing for very large upfront payments and/or guarantees in that range for those attempting to gain a US license. If $100m is the cost of admission through the front door, what would happen if one of these players made a tender offer of $8 per share (approximately $50m total) to buy all of the shares of ATRN to slip through the back door as described above? Alternatively, what if one injected enough capital to gain a significant enough stake to make it worth their while to offer it as their co branded or white labeled service? In any case, its become increasingly clear that the companies operating in the on demand streaming music service space have something that the big technology players want very badly, these companies usually end up getting what they want and it will be interesting to see where everything lands over the next few months.
Themes: music, internet Stocks: GOOG, ATRN, AMZN, AAPL
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