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Apple Is About to Say Shazam

Danny Vena, The Motley Fool

Music has been part of Apple's (NASDAQ: AAPL) DNA since the company debuted the iPod in 2001, which quickly dominated the portable music category. It followed with the iTunes store in 2003, and the acquisition of Beats Music in 2014. Apple launched Apple Music, its streaming service in 2015.

Now, the company is ready to take the next step in its musical evolution.

Apple has confirmed that it is acquiring streaming music service Shazam. Terms of the deal weren't made public, but the purchase was widely reported to be in the neighborhood of $400 million.

Smiling woman wearing headphones connected to smartphone.

Apple's streaming music is about to get a little magic from Shazam. Image source: Getty Images.

Siri, what's that song?

For those not familiar with the service, the Shazam app uses the microphone from the user's smartphone or computer to identify songs, TV shows, movies, and commercials that are currently playing by reviewing a short audio clip. Shazam has been one of the most popular apps in Apple's App Store and has been tightly integrated with Siri since 2014.

Regarding the acquisition, Apple said:

We are thrilled that Shazam and its talented team will be joining Apple. Since the launch of the App Store, Shazam has consistently ranked as one of the most popular apps for iOS. Today, it's used by hundreds of millions of people around the world, across multiple platforms. Apple Music and Shazam are a natural fit. 

In late 2016 Shazam reported that its app has been downloaded more than 1 billion times. The service has 175 million monthly active users and nearly a decade of customer data, both of which would be valuable to Apple in a music streaming market that is currently dominated by Spotify.

A natural fit

The acquisition of Shazam is a logical one as Apple works to improve its music recommendation capability to better compete with other streaming services. Spotify has 140 million active users, 60 million of which are paying customers, while the remainder use the ad-supported model. Apple Music sports only half that with about 30 million.

Shazam's capabilities will likely be more seamlessly integrated into Apple Music, helping to improve the experience for subscribers.

Shazam also debuted visual recognition functionality in 2015, partnering with marketers as a platform to connect with consumers. Earlier this year, the company announced the "launch of a massively scaled augmented reality (AR) platform."

Apple is working aggressively to launch its own AR platform and Apple CEO Tim Cook has been vocal about his excitement regarding AR. During the conference call to discuss the third-quarter 2017 financial results, Cook was asked about the opportunity in AR.

I could not be more excited about AR and what we're seeing with ARKit in the early going... I think AR is big and profound. This is one of those huge things that we'll look back at and marvel on the start of it. So I think customers are going to see it in a variety of ways...and it feels great to get going at a level that can get all of the developers behind it. So I couldn't be more excited about it.

Apple's next avenue of growth?

The deal comes as Apple faces increasing saturation of its flagship iPhone. While the iPhone 8 and iPhone X are expected to be huge sellers, investors are increasingly concerned that sales of the device are nearing a plateau and fear that future upgrades will be more incremental than revolutionary, resulting in slowing sales.

Apple has been working to increase revenue from other areas of its business outside of its iPhone. Cook announced earlier this year that Apple's goal was to double the size of the company's services segment within four years. Services, which includes revenue from the App Store, Apple Pay, iCloud, and Apple Music had generated $25 billion during the previous 12 month period.

Not a magic bullet

Adding Shazam to its ecosystem might provide incremental functionality for Apple Music subscribers, but is only a small piece of Apple's long game. The company's recent improvements in artificial intelligence, combined with data from Shazam, will likely come to bear in providing improved musical recommendations, while potentially resulting in additional subscriber to Apple Music.

While this is a good start, Apple will need to do much more if it hopes to gain ground on Spotify.

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Danny Vena owns shares of Apple. 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.