Skip to main content

Updated from 1:43 p.m. with additional comments from analysts. 

Watch out, Spotify -- Apple Inc. (AAPL) - Get Apple Inc. (AAPL) Report is coming for you.

On Monday, the iPhone giant announced that it had acquired Shazam Entertainment Ltd., the popular music recognition app that identifies songs, TV shows and commercials from audio clips. 

Apple declined to comment on the terms of the deal, but several reports, including by TechCrunch, which initially reported on the deal, indicated that Apple will pay roughly $400 million for the London-based company. Shazam, which has been downloaded more than one billion times, also reportedly fielded offers from Snap Inc. (SNAP) - Get Snap, Inc. Class A Report and Spotify. 

"We are thrilled that Shazam and its talented team will be joining Apple," Apple said in a statement. "We have exciting plans in store, and we look forward to combining with Shazam upon approval of today's agreement."

Shares of Apple were advancing 1.7% to $172.36 on Monday afternoon. The stock has climbed 49% year to date vs. the Nasdaq's gain of 28% so far this year. 

If the roughly $400 million purchase price is accurate, the Shazam deal would mark one of Apple's largest acquisitions to date. Apple's $3 billion purchase of music streaming and headphone maker Beats Electronics in 2014 still clocks in as its priciest acquisition. 

A tie-up between Apple and Shazam is poised to benefit several of the tech company's key businesses, according to industry watchers. Here are three reasons why Apple is acquiring Shazam.

1. Shazam is a 'natural fit' for Apple Music.

Apple's subscription-based streaming service, Apple Music, has gotten off to a promising start since it launched in 2015, attracting more than 30 million subscribers as of September, but it still has a ways to catch up with rivals such as Spotify. As of July, Spotify had amassed 60 million-plus subscribers, up 20 million from 2016. 

More and more players are entering the streaming market, including Alphabet Inc.'s (GOOGL) - Get Alphabet Inc. Class A Report YouTube, which is prepping to launch a new music subscription service in March 2018. The internet giant would join existing services like Inc.'s (AMZN) - Get, Inc. Report Amazon Music Unlimited. 

Image placeholder title

Shazam's core value comes from its vast treasure troves of user data. For example, the company has created charts of popular songs based on the clips that users are identifying through the app. 

"Apple Music and Shazam are a natural fit, sharing a passion for music discovery and delivering great music experiences to our users," Apple said in its statement.

TheStreet Recommends

Shazam's user data should help Apple Music better compete with Spotify, which has excelled in creating personalized playlists and building sophisticated algorithms. Spotify's Discover Weekly playlists serve up at least a dozen songs each week that are tailored to a user's musical tastes and have been streamed 1.7 billion times, according to Spotify.

For Apple, Shazam serves as a data play, due to its massive database of user listening behavior, said music industry analyst Mark Mulligan, managing director of MiDIA Research.

"It can map musical tastes and profile music fans based off of all those years of Shazam-ed songs," Mulligan explained. "That will enable Apple Music to build a recommendation engine to rival Spotify's." 

2. Shazam extends Apple's augmented reality capabilities. 

Shazam doesn't just build music identification technology. The app also has visual recognition technology that identifies objects in real-time on a user's phone, including packaged goods and posters, using a QR code. The function is similar to Google Lens, a product that uses a smartphone's camera to superimpose graphics on real-time video. 

Earlier this year, Shazam enhanced its visual recognition technology even further by adding augmented reality (AR) features that bring "marketing materials to life." Using a smartphone, users can scan an ad with a Shazam logo, which prompts an interactive experience on the device's screen. 

"If you look at what Shazam is moving towards, that probably indicates what Apple is more interested in," said Neil Cybart, who runs Above Avalon, a site dedicated to Apple analysis. "I don't think this is just about taking the functionality from Shazam, either. Usually from Apple's perspective, you want to own to investigate something else." 

With the acquisition of Shazam, Apple could integrate Shazam's AR technology into its own augmented reality platform, ARKit. Apple could also build out any existing AR features in iOS 11, Apple's latest mobile operating system. 

3. Apple's HomePod could get smarter. 

Apple could apply some of Shazam's music recognition technology to the HomePod, its upcoming smart home speaker. The $349 HomePod, which won't be available until 2018, has been considered a late entrant into the voice-controlled speaker market, which has largely been dominated by Inc.'s (AMZN) - Get, Inc. Report Echo devices and the Google Home smart speaker. 

Image placeholder title

"Music is clearly important to Apple," Cybart said. "You see this with the HomePod and the AirPods. Those are accessories all about delivering sounds." 

Apple will likely use the Shazam deal to improve Apple Music, but probably also has bigger ideas that fall in line with products such as wearables, AR-powered cameras and smart speakers -- all things that indicate "where the company is headed next," Cybart added. 

Shazam's song recognition technology could enable some extra features on the HomePod, similar to Google's 'Now Playing' feature, which continuously listens to identify and recognize background music.

Apple and Alphabet are holdings in Jim Cramer'sAction Alerts PLUS Charitable Trust Portfolio. Want to be alerted before Cramer buys or sells AAPLor GOOGL? Learn more now.

More of What's Trending on TheStreet: