Mog’s Return On Investment: Pennies From Heaven?

Posted by | March 27, 2012 | 7,119 views

It's unlikely that Mog's investors will get all of their money back

For the last few weeks the digital rumor mill has been buzzing about an imminent sale of the Mog music service. CEO David Hyman told Reuters “We’re not actively trying to sell this business…The Facebook integration has been fantastic for us but as we’re not yet profitable we’re always engaged in conversations with our shareholders about all possible options.” A non-denial denial at best. (Note to Hyman: never lie to reporters. Look what happened to Richard Nixon.)

Since then AllThingsD’s Peter Kafka broke the story that Beats will be buying the struggling servce, and a few days ago GigaOm reported that the sales price is rumored to be around $14 million. CNET’s Greg Sandoval reported that Beats intends to use Mog as the platform for an expansive online store that would include headphone sales and related merchandise.

Taking a close look at Mog, or at least what we can reasonably surmise, the service only has 500,000 active users, according to what Hyman told Reuters. Utilizing a rule of thumb conversion rate of 10%, that would leave Mog with somewhere in the neighborhood of 50,000 paying customers. Some of those subscribers pay $5 a month (for the pc-only service) and others pay $10 a month to have mobile access. So logically that would mean that Mog would take in an average $80 per year per subscriber. But we don’t know how many people subscribe for pc-only and how many for mobile, so let’s be generous and say that Mog averages $100 per year per subscriber.

That sounds great, but is it? If true, that would bring Mog’s total annual sales to a paltry $5 million, and of that approximately 70% goes to the content owners. That leaves $1,5 million gross profit for Mog to pay for their expenses. Even if we added another million for affiliate fees, any advertising revenue, etc., it’s still a money pit. Mog has raised about $25 million in venture capital and you can imagine that the investors have been screaming at Hyman to get them out. Rumor has it that Mog’s last round of financing was a down round, with the company only getting a $10 million valuation. So if you look at the Mog music subscription service alone, you would think that they would jump at a typical offer of 3-5 times turnover, or $15 to $25 million. My guess is that it’s closer to the low end of that.

From the get-go Mog had a lame offering. As opposed to the freemium model pioneered by Spotify, Mog offered a very short free trial to lure new subscribers. The problem with that was that the trial period just wasn’t enough to get a user truly hooked on a service. This is one reason of many reasons why Spotify, in spite of harsh resistance from record labels, has wiped out the competition and is valued at nearly $4 billion.

What exactly is Beats buying anyway? This is a question that was posed by one of many digital music executives I spoke with. The answer seems to be…nothing, aside from a very small subscriber base and a UI. As one exec reminded me, Mog doesn’t even own its own technology. They outsource that to MediaNet. You could say that the personnel have value, but they haven’t done such a great job so far and even with Beats’ deep pockets, what makes you think that they would suddenly become geniuses? They do have an ad network that reportedly brings in about $8 million a year, but it’s not clear if that is part of the deal.

So that leaves the obvious–the content licenses. HTC evidently has found that building a music service from scratch isn’t so easy. The licensing takes about 2 years to complete and costs many millions. With Mog they get a service that is at least licensed and up and running.

As usual, though, there’s always a snake in the grass when you’re dealing with record companies. Here’s the kicker: as the licenses typically have a clause that require any new owner of the service get approval from the licensor, the label. Which means that a label could, if they want to, hold up Beats for a ton of cash, especially when they see HTC’s deep pockets behind the venture.

Obviously Jimmy Iovine won’t have any issues with his UMG deal, as he now has a part-time gig with them running Interscope/Geffen Records. Besides, as one label source told me, “It’s just not Universal’s MO.” Naturally EMI won’t be a problem since they’ll be owned by UMG. Sony, of course, wouldn’t think twice about screwing with anyone, but Jimmy is tight with Sony Music’s septuagenarian CEO Doug Morris and you can bet that nothing will happen there. So that leaves my friends at Warner Music. Hmmm. They wouldn’t try to stick up Beats, would they?

I was talking with some reporter pals about Warner Music and why they always seem to be the last to the party, and in the case of Google Music, no-shows. I certainly know from personal experience how difficult they are when it come to licensing, and everyone knows how Junior Bronfman personally tortured the Spotify guys. That’s just scratching the surface. So the conversation led to the question, “what is Warner Music’s digital strategy anyway?” I posed that to a very highly placed digital music exec and he said, “Their digital strategy is to make sure they increase Lyor’s net worth.”

I couldn’t have said it better myself.

Although Warner has always been very aggressive in promoting themselves as THE leaders in digital music they just fall way short of the competition. By comparison, a full 70% of Island/Def Jam’s total sales are digital as opposed to WMG’s 29.7% (as of fourth quarter 2011). Warner has historically slammed the door on new business models, opting to force new services to comply to their ideas. They also are known for wanting as much in advance money as UMG or Sony, despite the fact that they have less than half of the market share of either of those labels. Universal, on the other hand, has laid out the welcome mat and is willing to license almost any new model out there–a marked departure from the good old days when septuagenarian CEO Doug Morris and “Mr. Personality”, his henchman Zach Horowitz (paint gets bored watching him dry!), called all the shots.

Another question is who is really calling the shots at Warner Music now? Sources say that there’s a very interesting dynamic going on now between new owner Len Blavatnik, CEO Stephen Cooper and Lyor Cohen. My sources say that Len and Cooper are laying back right now, giving Lyor some leeway. There is evidently a scenario set that could erupt in fireworks at any time.

I wonder how that would effect Lyor’s net worth?

 

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Posted by on Mar 27 2012. Filed under Business Models, Digital, featured. You can follow any responses to this entry through the RSS 2.0. You can skip to the end and leave a response. Pinging is currently not allowed.

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