HTC revealed Tuesday in a note to its shareholders that it spent $14M on music subscription service MOG through its Beats Electronics subsidy this week (hat tip to Unwired View). Of course, the number is not much of a surprise to GigaOM readers, as Om first reported it as the acquisition price more than three months ago. What remains is the question: Why did MOG sell for so little after raising $25 million?
The obvious answer is that MOG simply didn’t have that many users. MOG had never broken out the number of paying subscribers, but the company’s CEO David Hyman said in February that it had a total of 500,000 active users, which included users of its free service tier. To compare, Spotify announced in January that it had reached three million paying users worldwide.
But there’s another reason for MOG’s low valuation, and it has nothing to do with its popularity: MOG’s music licenses are of limited use for any buyer, HTC included. This was pointed out by former MOG employee and web audio pioneer Lucas Gonze when rumors of the sale bubbled up in March. Back then, Gonze wrote on his blog:
“Companies like MOG, Spotify, and Rdio rely on negotiated deals with record labels. Those deals usually contain clauses that make the deal non-transferable in case of a change of ownership.”
I asked Beats about this, and a spokesperson replied via email:
“Mog the music service and the rights they retain will remain the same today as they were last week pre-aqusition.”
That’s decidedly vague, but makes some more sense if you put in in the context of the acquisition announcement itself. Monday, Beats announced that “MOG’s music service will continue to operate as an independent company,” which may just be what it needs to do in order to not lose those precious licenses. Or maybe it’s part of a deal hammered out between the labels and Beats during those long months ever since the first sale rumors surfaced in March. Maybe one day, we will know why selling MOG for so little took so long.
However, one thing is already clear: HTC won’t just be able to take the licenses MOG originally negotiated with the labels and use them to launch its own, Beats Audio-branded music subscription service for HTC handset owners. To do so, it has to go back to the negotiating table. The same would have been true for any other potential suitor, which explains why in the end, MOG was worth so little.
So why did HTC buy anyway? Because it’s one of the few companies that doesn’t actually have to worry much about music licensing. Again, Gonze:
“It happens that one of the major stakeholders in Beats is Jimmy Iovine, who is also a lead at Universal Music. That’s not to say that in this deal UMG is getting ownership of MOG (they already have equity anyway). It is to say that getting Universal’s blessing is pretty much a done deal. And where Universal goes, Sony and Warner go, because Universal is the 600 pound gorilla of labels.”
And of course, it only helps that Universal also has equity in Beats. In other words: HTC is a perfect buyer for MOG – but there aren’t many other companies in its position, which meant it could pick up the subscription service on the cheap.