How Does Shazam Make Money? Dissecting Its Business Model

Executive Summary:

Shazam is an application that can help users identify music, movies, and other audio-visual content based on a short listening snippet.

Shazam generates revenue through referral fees. These fees are paid whenever a user signs up for a music streaming service via the app or purchases a concert ticket.

Founded in 2000, Shazam has grown to become the world’s biggest music discovery service. In December 2017, it was acquired by Apple for $400 million.

What Is Shazam?

Shazam is an application that can help users identify music, movies, and other audio-visual content based on a short listening snippet.

For instance, if a user hears a song played on radio or TV, they can use Shazam to identify its artist and title.

In order to use the app, you simply download and install it from Apple’s Apple Store or Google’s Play Store. Afterward, you simply open the app and tap the prominent Shazam-branded button to listen to the song.

Under the hood, Shazam analyses a song’s frequency patterns and then scouts its own database of songs for a potential match.

Each song (even remixes) possesses a uniquely identifiable frequency pattern. Hardware-wise, Shazam only relies on a functioning microphone to be able to record sound.

Once Shazam finds the song, it also allows users to add it to their favorite playlists, share it with others (for instance via Facebook or WhatsApp), or even sing along to synced lyrics.

Shazam, furthermore, lists the most prominent ‘Shazams’ across the world to allow people to discover even more songs.

Apart from your mobile device, Shazam can also be used on a tablet, Apple’s smartwatch, as well as on the macOS.

How Shazam Started: Company History

Shazam, headquartered in London, UK, was founded in 2000 by Chris Barton, Philip Inghelbrecht, Avery Wang, and Dhiraj Mukherjee.

Barton and Inghelbrecht, a Belgian native, met each other during their MBA studies at the University of California, Berkeley. Both were able to waive an introductory class and to immediately attend a second-year course.

Unfortunately, that course was full of students that had already become acquainted with each other. As a result, they soon found themselves working on a paper together – and became friends not long after.

In particular, the two would start bonding over their common desire to start a business. At the time, the dot-com hype was taking the world by storm, leading to an onslaught of new companies being launched every new day.

However, it would still take some time until this came to fruition. In 1999, as part of his summer MBA internship, Barton ended up moving to London to work at Microsoft. That’s where he reunited with Mukherjee who had moved there to set up Viant’s first international office in the UK (the pair met years prior in San Francisco).

Yet again, Barton and Mukherjee would daydream about different business ideas. After introducing Mukherjee to Inghelbrecht, the trio struck a verbal agreement that they would eventually launch a business together.

Initially, one of Barton’s ideas was to build software that would help radio DJs keep records of the songs they played. The information would then be stored in real-time and distributed to consumer mobile phones.

His lightbulb moment would come a few months later, though. Barton decided to stay in London after his internship ended to study abroad at the London Business School.

During one rainy night in October, he came home from a class called ‘Strategic Innovation’ during which the professor taught students about the importance of thinking outside the box.

That evening, he finally had his ground-breaking revelation: what if a person could simply identify music based on the sound that was playing and, therefore, not rely on any radio station at all?

Unfortunately, there was just one problem. At the time, mobile phones were still in their infant stage. That meant, for example, that recording sound via the microphone included a lot of distorting sound while the actual song was often hard to dissect.

To be able to extract those sound bites, the trio needed an expert in digital signal processing (DSP) to come on board as their fourth co-founder.

After conducting heaps of research, they were able to identify a set of academics, most of whom were either employed by the Electrical Engineering Departments of MIT’s Media Lab or Stanford’s Center for Computer Research in Music and Acoustics (CCRMA), who were conducting research in that field.

One of the leading researchers in the field was professor Julius Smith from Stanford CCRMA. After a few trials, they were finally able to meet him in person and Smith ultimately agreed to join as an advisor to the company.

They then asked Smith to rank the smartest academics in the DSP industry. Without much hesitation, he put Avery Wang, who had completed his Ph.D. under Smith years prior, on top of that list.

Next, they met with Wang for lunch and were able to immediately impress him, in large part because of the extensive due diligence they had conducted as well as for their passion to solve this problem.  

Within a matter of months, Wang was able to create the underlying algorithms and technology to process sound. They also moved the company’s headquarters to London. Back then, the world’s leading mobile operators all came out of Europe, with Nokia leading the pack.

Moreover, the local carriers in Europe offered cheaper plans and already had payment mechanisms in place. This, for instance, allowed third parties to sell ringtones vis-à-vis SMS messages.

Unfortunately, there was just one big problem: right around the same time, the dot-com bubble burst, leaving them with virtually no funding opportunities. They ended up being rejected by the majority of investors but eventually managed to raise their first round, netting them $1 million, in August 2000.

That first round was used to continue building the project and largely financed by a set of angels who each wrote $250,000 checks. Over the next year, they continued their fundraising efforts to finally be able to launch Shazam.

In July 2001, they managed to raise a Series A of $7.5 million, which was led by IDG Ventures Europe. Back then, building online businesses were substantially more expensive as companies had to rent their own server farms and couldn’t just plug into scalable cloud providers like AWS.

Furthermore, they were reliant on large corporations like T-Mobile and Vodafone to distribute their technology. Many of those partners simply weren’t willing to commit resources to a startup as they assumed that those firm would just fade into obscurity.

In order to appear more professional, they brought on Jerry Roest, who held leading roles at the Financial Times and CompuServe, as the firm’s newest CEO in the spring of 2002.

Then, on August 19, about 13 months after the Series A fundraise, they finally unveiled Shazam to the British public. However, the product was vastly different from the Shazam that people know these days.

Back then, you had to dial 2580 when you heard a song you like and hold the phone to the music. After 15 seconds, the call would automatically terminate and, if a match was found, send you the name of the artist and title via SMS. People would then be charged 50 pence on their mobile phone bill.

In case of no match, people would not have to pay. This became necessary to not turn away customers given that Shazam ‘only’ had around one million songs in its database at launch.

Unfortunately, mobile penetration at the time was still fairly low. As such, the founders continued to rely on raising outside funding while almost always being strapped for cash themselves. In April 2003, they raised another $6.6 million round from the same investors. It raised a further $5 million a year later (April 2004).

By that time, most of the initial founding team had already moved on though. Barton and Inghelbrecht were hired by Google and YouTube respectively to work on various strategic partnerships. Mukherjee stayed in London to work as a director at Bauer Media. All three of them moved to Shazam’s board of directors. Lastly, Wang remained with the company throughout the years as its chief scientist.

Over the coming months and years, Shazam continued to slowly grind away. In April 2004, it entered the United States through a partnership with AT&T Wireless. The next year, in February, the company reached the next logical evolution of its business, allowing customers to directly download the music.

Two months later, in April, long-time CEO Jerry Roest was replaced by Andrew Fisher who joined the startup from InfoSpace Europe. To be able to continue running its operations, Shazam had to sell its tech assets (including all of its patents) to music publisher BMI.

Despite its limited resources, Shazam continued to plug away. The company signed an agreement with Motorola to come as a pre-loaded application on its devices. It also entered agreements with Amazon, Ticketmaster, and iTunes to launch a subscription service for customers, allowing them to receive discounts for concert tickets, merchandise, and ringtones.  

However, the greatest accelerant to Shazam’s business came in September 2007 when Steve Jobs unveiled the first iPhone to the world. Instead of having to send text messages, users could now simply download an app.  

And just a year later, Google launched its Android operating system. Weeks later, Shazam had also introduced its first-ever Android app. Meanwhile, its iPhone app had already been downloaded over 1.5 million times (due to the introduction of Apple’s App Store back in July 2008).

The global adoption of Android and iOS devices finally allowed Shazam to reach true product/market fit. Shazam had managed to add 20 million users in the span of six months, totaling over 35 million downloads across the world.

Instead of convincing mobile carriers about its validity, Shazam could now work off of the rising popularity of app stores. At the same time, the introduction of smartphones finally led to much wider adoption of mobile usage.

Unfortunately, not everything was always going according to plan. In May 2009, Tune Hunter filed a lawsuit against Shazam (as well as a host of consumer electronics makers, wireless service operators, and digital music retailers), accusing it of copyright infringement. Shazam and Tune Hunter eventually settled out of court in January 2010.

Despite the small setback, Shazam continued to take the world by storm. As a result, it was able to raise an undisclosed round from world-class investors Kleiner Perkins in October 2009.

To be able to take advantage of its growth, Shazam decided to introduce a premium version of its app named Encore. The freemium version would only allow five tags per month while the premium costing around $4.99) app equipped users with unlimited searches.

By the end of 2010, Shazam managed to hit the inaugural mark of 100 million users. Its app was available on all major hardware providers, including Android, BlackBerry, BREW, iPhone, iPad, J2ME, Symbian, and Windows Phone.

The company had successfully managed to corner the music discovery market. Naturally, it began to move into TV and other visual content. In January 2011, for instance, it entered a partnership with Syfy for a series-long “TV tagging initiative” for the cable channel’s newly released show Being Human.

On the backbone of a $32 million Series C funding round in June 2011, the company was also able to make its first-ever acquisition. It purchased Tunezee, a startup that displayed song lyrics in sync with a currently-playing song.

The company also continued to experiment with its business model as user behavior began to adapt. In September 2011, it made Encore, the paid version, free of charge and reintroduced unlimited tagging. Instead, the company began relying more and more on advertising and affiliate revenue.

The continuous growth, furthermore, allowed Shazam to reacquire its intellectual property from BMI in November. By reacquiring its core technology, Shazam was able to integrate it more fully into its core services.

By the beginning of 2012, the company had surpassed 175 million users worldwide, with 1.5 million people downloading the app every week. Over the course of that year, Shazam continued to double down on its television efforts, for instance through partnerships with shows like American Idol or the Major League Baseball.

In February 2013, Shazam surpassed 300 million worldwide users. A month later, long-time CEO Fisher stepped down from his position to be replaced by Yahoo’s former SVP of the Europe, the Middle East, and Africa Rich Riley. His assignment was to continue building Shazam into a global media powerhouse that could one day become a public company. Its goal was to essentially become the ‘Google for Audio’.

To fund those ambitions, Shazam announced a $40 million fundraise America Movil, the largest wireless carrier in the Americas, to be able to engrain itself into South and Central America. Another round of funding, netting them $20 million, was raised in March 2014.

Over the coming months, Shazam continued to deepen its integration with Android and iOS while entering a variety of partnerships (such as with music streaming service Rdio). After raising another $30 million round in January 2015, which brought another $30 million into the business, Shazam was finally able to enter the unicorn club by reaching a valuation of $1 billion.

Yet, despite continuously introducing new features and partnerships (while finetuning its business model), the company never really was able to fulfill its vision of becoming a powerhouse like Google. After rumors emerged that Snapchat, which had entered a partnership with Shazam for in-app music discovery, was interested in buying the company, another global player finally pulled the trigger.

In December 2017, Apple announced that it would acquire Shazam for $400 million, a far cry from the $1 billion valuation it had received three years prior. Notably, Avery Wang, who was still with Shazam at the time, joined Apple as a principal research scientist.

Apple, at the time, had just launched its own music streaming service (Apple Music). The Shazam acquisition allowed it to promote that service over competitors like Spotify or Tidal. However, not everybody took a liking to that.

In February 2018, the European Commission announced that it had initiated a review of the acquisition, which was based on a request made by seven European countries. The acquisition was ultimately cleared in September.

After Apple acquired the company, it first made sure to scrape all advertising from Shazam. Furthermore, the speed of new updates decreased significantly. Whereas Shazam used to launch new features almost on a monthly basis, it now was releasing them every six months at best.

Most of the innovation coming out of Shazam these days is somehow tied into Apple’s ecosystem, for instance by getting its very own home screen widget on iOS. However, it also continues to update the Android app, in large parts to promote Apple Music on Android devices.   

Today, more than 150 people are still directly working for Shazam. Over 50 billion songs have been tagged since it launched back in 2002.

How Does Shazam Make Money?

Shazam generates revenue through referral fees. These fees are paid whenever a user signs up for a music streaming service via the app or purchases a concert ticket.

In the past, Shazam had been not only promoting Apple Music but other competing services like Spotify, Deezer, Tidal, and more.

However, after being acquired by Apple back in December 2017, these recommendations were slowly and quietly removed from its app.

Technically, one can still connect their Spotify account to Shazam. However, if there’s no registered account, Shazam will recommend Apple Music by default.

Therefore, Apple is either able to expand its userbase for its own music service or can charge its competitors when Shazam refers a new user to them, which diminishes their margins.

Apart from the music recognition software, Shazam also runs its very own charts (both globally and locally). This allows users to discover new artists and further incentivizes them to join Apple’s streaming service.  

Shazam has since vertically integrated into offering concert tickets as well. Users can find upcoming concerts for touring artists when accessing a song they shazam’d.

You then normally have multiple options to purchase a ticket, depending on where it’s sold. Shazam then likely gets a cut from each ticket sale it facilitates.

Although Shazam may technically not be the biggest moneymaker, especially to a juggernaut like Apple, it still serves an important purpose to the iPhone maker.

Since Apple does run its own music streaming service, it can, for example, utilize the data that Shazam users generate to promote artists that have created a catchy song.

Shazam Funding, Revenue & Valuation

According to Crunchbase, Shazam has raised a total of $143.5 million across 14 rounds of venture capital funding.

Notable investors include Kleiner Perkins, DN Capital, Barclays, Flashpoint, Universal Music Group, IVP, and many others.

The last time Shazam’s valuation was publicly disclosed occurred during its acquisition. Apple paid $400 million to acquire the company. Apple does currently not publicly disclose any of Shazam’s revenue figures.

Hi folks, Viktor checking in! Years of experience in various tech-related roles have led me to start this blog, which I hope provides you with as much enjoyment to read as I have writing the content.