In the ever-more-crowded streaming music world, Spotify’s acquisition of music data supplier The Echo Nest on March 6 — in a deal thought to be worth as much as $100 million — could have real ramifications. It gives the Swedish company a way to keep a valuable tool out of the hands of competitors like Rdio and iHeartRadio, both of which rely on The Echo Nest to help power their programming. And doing so could help boost Spotify’s valuation, which has already vaulted to estimates as high as $7 billion in anticipation of a possible initial public offering. Neither company would comment on the terms of the deal.
The Echo Nest has raised $26.5 million since its launch in 2005, while Spotify has rallied $538 million in venture financing since 2006. The latest round, which pulled in $250 million from Technology Crossover Ventures last November, valued Spotify at $4 billion. But recent speculation surrounding the company’s recruiting efforts for a financial reporting specialist, as well as steps it has taken to securing a $200 million credit facility, have caused IPO talk to ramp up.
Spotify’s ability to continue raising funds rests on its skill in persuading investors it’s a good bet amid a ferociously competitive field that includes such players as Deezer, Google, Microsoft and smaller startups like Beats Music, Slacker and Rhapsody.
Ek’s answer for how Spotify plans to set itself apart from the pack lies partly in The Echo Nest, a company used by many other streaming services like Rdio and iHeartRadio to learn about the listening habits of their customers and make song recommendations based on such musical attributes as mood, pitch, harmony and rhythm.
The Echo Nest’s underlying recommendation technology sits inside 440 applications used by more than 100 million people per month. Its programs digest billions of user interactions to build taste profiles, while also sifting through millions of music reviews, blog posts and social media conversations daily to spot early trends and popular sentiment.
“Data will be a massive advantage for us in this game,” Ek said in an interview.
Spotify isn’t the only music company that thinks data can give it a competitive edge. Warner Music Group recently formed a joint label with music identification service Shazam where the two would split revenue on any artists uncovered through Shazam’s song ID data. Tribune Co. in February closed its $170 million acquisition of Gracenote, the closest competitor to The Echo Nest.
Gracenote now stands to benefit from Ek’s move. Rdio is already planning to transition away from The Echo Nest, according to sources close to the streaming service, and others will likely follow. Echo Nest CEO Jim Lucchese acknowledged those concerns, but said his company plans to “honor all of our contracts.”
Even as Spotify leans on algorithms to differentiate itself, newest rival Beats Music is swinging the other way with thousands of playlists assembled by radio personalities and others who are regarded as genre experts.
MIDiA Consulting music analyst Mark Mulligan says the services are applying different philosophies. “Beats is taking a human approach, while Spotify is putting its money in algorithms.”