M&A Alert - December 4, 2009
Apple Agrees to Acquire Lala
Transaction Overview
On December 4, 2009, Apple (NASDAQ: AAPL) agreed to acquire Lala. Transaction value was $17mm according to TechCrunch.
Target Description
Lala provides online music streaming and download services. Lala lets users listen to its songs for free once, and then provides a 30-second preview afterwards. If a user desires to have access to a song beyond one play they simply pay a subscription fee of $.10 for unlimited future streaming access or $.89 to download an MP3 copy of the song. Lala has access to 8mm songs via licensed streaming music rights from major music labels including Warner Music, Sony, BMG and Universal Music. Recently, Lala secured an agreement with Facebook allowing its users to exchange Lala songs as virtual gifts and Google Music allowing users to search free samples of music. Lala also developed an iPhone application which is now under Apple’s review. Competitors include online streaming music sites such as Pandora, Rhapsody, Last.fm (bought by CBS in 2007), Spotify, Napster, Imeem and iLike (both of which were bought by MySpace Music this year). Since inception, Lala has received a total disclosed funding of $35mm from Warner Music Group, Bain Capital Partners and Ignition Partners (Rich Tong). Founded in 2005, Lala had started as a CD-swapping service and is based in Palo Alto, CA
Buyer Description
Apple sells PCs, mobile communication devices, and portable digital music and video players. Apple is most known for its Macintosh (computer/laptop), iPhone (smartphone), and iPod (digital music/video player) products. It also sells digital content including applications, movies, music, podcasts, games and TV shows through the iTunes Store. Eddy Cue, VP of iTunes was reportedly the key executive sponsor of the transaction. Founded in 1976, Apple is headquartered in Cupertino, California.
Lala currently reports 1mm subscribers, and although not officially disclosed, the transaction value has been reported to be $17mm by TechCrunch. It appears that that number could potentially be overstated as well, depending upon how the existing cash of $14mm was treated in the transaction. LaLa, while generally highly regarded as a service by users, was troubled from a business perspective. Warner Music, the major investor, had written off $11mm of its $20mm investment in Lala, as well as its entire $16mm investment in comparable vendor, Imeem in Q1’09. Several recent comparable transactions of online music application acquisitions are presented below. These numbers represent total transaction value paid divided by the number of registered users at the time of the acquisition, in other words how much the acquirer is paying for each user.
 |
CBS / Last.fm (May 2007) | $18.70 |
|
Apple / Lala (December 2009) | $17.00 |
|
MySpace / iLike (August 2009) | $.40 |
|
MySpace / Imeem (November 2009) | $.03 |
Strategic Rationale
As smartphones and mobile devices with small memory size are gaining popularity, users are now looking to stream music without having to download and store or sync their large music files between their computers, mobile devices, smartphones and/or music players. Long speculated, Apple appears to be preparing to offer its iTunes customers the option of live-music streaming, instead of an mp3-download-only service. In a similar move in the past, Apple used an acquisition, SoundJam Mp in 2000, as a contribution to its iTunes development.
Architect Partners’ Observations
While free online music streaming applications have gained popularity, ad-based monetization has been challenging. Low or no revenues and and heavy licensing fee payments to music labels are an unsustainable burden resulting in a recent flurry of M&A activity within the sector. There has been a major shift in attitude by investor and acquirers around the requirement for near-term monetization. Without a clear and demonstrable path, disappointing outcomes have prevailed as evidenced by the other most recent M&A transaction in the sector, MySpace’s acquisition of iLike. However, as Fred Wilson articulated well, people talent and DNA have value as well.