Deezer: Profitability Down the Line? | INA Global

Deezer: Profitability Down the Line?

Article  by  Pascal ROZAT  •  Published 18.08.2011  •  Updated 19.08.2011
Logo de Deezer
Launched in 2007, the French music streaming platform seems to have made a success of  pay subscriptions, thanks to a partnership with Orange. Deezer is now setting its sights on the international market.

Summary

On 9th March 2011, at the "Mobile 2.0" conference in Paris, the CEO of Deezer announced that in just eight months it had reached the level of 800,000 paying subscribers to its music streaming service, beating even its most optimistic forecasts. Behind this leap forward is a new partnership with Orange, which since August 2010 has introduced the Deezer pay service as an option with its mobile and ADSL offers. In joining forces with a major telecommunications player, has the French music streaming leader finally found a way of cashing in on its platform and shelling out the considerable sums it has committed to paying the rights holders? If this is the case, this strategic alliance will put an end to years of trial and error that have seen the site move from a free-of-charge business model to a freemium strategy that at the outset was found to be fairly unconvincing.

A Fundamental Choice: Free and Legal Music

“Deezer.com frees music”, trumpeted the company’s press release on 22nd August 2007, announcing the launch of the new site. Set up by two twentysomething entrepreneurs, Daniel Marhely and Jonathan Benassaya, Deezer is one of those startups that in the beginning bet everything on a free of charge service particularly well tailored to user demand, winning over a large audience but without any clear business model to succeed in the long run. From the start, the music streaming platform nonetheless aroused the interest of Xavier Niel, the founder of Free, who invested 250,000 euros in June 2007 for a 20% share in the young company. At the time of a new capital increase in January 2008, he was joined by the Rosenblum brothers’ (founders of the Pixmania site) Dot Corp fund, which acquired a 24% share for 4.8 million euros, attesting to the exponential upswing in the value of the business in just six months.

The originality of Deezer was to propose a huge free and   legal musical offering as an innovative alternative to piracy. This choice did not come up straight away: Blogmusik.net, a predecessor of Deezer launched in June 2006, operated at its start without any authorisation from rights holders, which resulted in its shutdown in April 2007 following an injunction addressed by several societies of authors and the SPPF [Society of Record Producers in France, representing independent producers]. It was at that time that the two companies decided to enter into negotiations with the SACEM [French Performing Rights Society]. Within a few months, an agreement was reached, enabling the site to re-open under the name Deezer in August 2007. The matter of the catalogue holders was still unresolved, however, and more than two years were required for the platform to convince the four majors to sign on[+] NoteAgreements were concluded successively with Sony BMG (October 2007), Universal Music (May 2008), Warner (September 2008) and EMI (April 2009).X[1], while agreements with several independent labels like Believe and Naive were simultaneously concluded..

These negotiations allowed Deezer to gradually extend its catalogue from 770,000 titles in October 2008 to 8 million today. With such a huge range, Deezer can claim almost universal access to music, all in free streaming. Certain gaps persist, it should be noted, particularly in the area of the independents and classical music. More inconveniently, certain music industry heavyweights like the Beatles, Bob Dylan, Led Zeppelin and Metallica are still missing, as well as several big names from the French variety area, like Francis Cabrel and Jean-Jacques Goldman[+] NoteThese artists, who only allow their music on the Internet via pay download, are consequently not found on rival streaming platforms either, Spotify in particular.X[2]. Lastly, because of territoriality clauses imposed by the record producers, the full Deezer catalogue is not necessarily accessible in all countries: it may be the case that one particular title is not accessible in Belgium, another only in the United Kingdom, etc.
 

While this new model based on negotiations enables Deezer to offer a huge choice of music without any risk of legal reprisals, there is also a cost in terms of the payments owed to rights holders. Although the various players are rather discreet on the matter, we know that the majors demand substantial advances just to make their catalogues available. According to Le Figaro of 9th March 2010, the total amount is close to 3 million euros, and the site then has to pay around one centime every time a title is played. As for the SACEM, the agreement signed in 2007 provides it with 8% of the platform’s advertising income. At the end of the day, Jonathan Benassaya admitted in October 2009 that he was paying half his turnover (about 6 million euros per year at the time) to the rights holders –  a heavy price to pay for a business with modest earnings, whose original advertising-based model had not proved profitable.
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The Mirage of Financing via Advertising

From the word go, Deezer stood out as an audience success, with a tally of 773,000 unique visitors in its first month of operation in August 2007 – a figure that was shortly to reach 2.75 million in May 2008 and 7 million by December 2009. As with many startups, the challenge was clear: how to profit from this constantly rising traffic?
 
From its inception, Deezer proposed a system of affiliation with iTunes, enabling users to download a title they had heard on Deezer onto the Apple platform. But the commissions then paid by Apple only played a marginal role. To cash in on its audience, Deezer initially relied almost exclusively on advertising, especially in the form of banners. Reaching an audience of mainly high income young adults, the startup indisputably had   convincing arguments with which to attract advertisers. But as in the case of press sites, this source of income very quickly proved inadequate, despite fairly strong performance: with 875,000 euros in revenue during the first half of 2008, the business was hardly able to face up to the payments owed to the rights holders, much less turn a profit.
   
Présentation des profils des différents types d'utilisateurs du site Deezer
The platform still carried on and in July 2008 set up its own in-house advertising agency, Deezer Media, before gradually adopting a more aggressive policy. From February 2009, registration became mandatory to take full advantage of the free streaming service, enabling the site to better use its customer registers with advertising campaigns based on sex, age and geographical criteria (with an extra charge for the advertiser, if we are to go by Article 6.1.2 of the agency’s 2010 sales terms and conditions). A little later on, at the risk of irritating users, sound advertising was introduced in November 2009 in the form of interludes between songs about every fifteen minutes.

But these innovations were not enough to create profitability and some representatives of the rights holders were starting to grow alarmed at the small amount they were being paid. In April 2009, Laurent Petitgirard, then-chairman of the SACEM board, kicked up a fuss by informing Le Monde that the year’s hit record on Deezer, a rap title played 240,000 times, had brought the artists a total payment of only 147 euros.
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The Freemium Gambit

It was thus in a somewhat tense context that Deezer proceeded in October 2009 with a fresh fundraising initiative: CM-CIC Private Capital (a subsidiary of Credit Mutuel) and AGF Private Equity entered into the company’s capital, bringing in 6.5 million euros altogether. The fact that these investors agreed to participate in the Deezer adventure signalled that a strategic turnaround was already underway.
 
Whereas Jonathan Benassaya had stated at the time of the launch that he did not believe in the principle of paying for music, Deezer finally abandoned this position. On 9th November 2009, the company announced the launch of its first pay offerings, proposing the “Deezer HQ” formula at 4.99 euros a month, enabling the platform to be used without advertising and with improved sound quality (up to 320kb/s against 128 kb/s for the free version). But the true innovation was in the “Deezer Premium” offer, which, for 9.99 euros a month, also offered mobile access. Since October 2008 and the launch of the first application for iPhone and iPod, Deezer has actually been available on most smartphones (BlackBerry, Sony Ericsson, Android phones), but with limited services: these free applications allow for the use of web radios and smart radios[+] Note“Intelligent” radios offer titles similar to a song or an artist entered by the user.X[3] from Deezer, rather than access to titles on demand, which is, after all, part of the platform’s very brand fabric. Deezer Premium thus offers to to “unlock” these applications (perhaps designed from the outset as teasers for the future pay offering) by providing full mobile access to Deezer services. Another advantage: the subscription also allows titles of the user’s choice to be heard offline thanks to a temporary download system. 
 
As often in the world of online music, it is difficult to get users to take out their bank cards. Whereas the stated objective was to recruit 100,000 paying subscribers by late 2009, only 14,000 subscribed in the first three months. This failure at the starting gate disappointed shareholders and plunged Deezer into a profound management crisis. The departure of Jonathan Benessaya announced in the press was ultimately denied, but the co-founder of the site was soon sidelined by the appointment of a new CEO, Axel Dauchez. Reduced to the status of non-executive chairman, Jonathan Benassaya ultimately quit Deezer in November 2010 on the grounds that he wished to devote himself to new projects, particularly his investment fund and incubator, Milestone Factory.
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The Alliance with Orange, a Miracle Solution?

Having started out in marketing and the audiovisual field, Axel Dauchez (at 41 years of age, the senior figure in the startup) plotted a route map for the growth of Deezer on French territory prior to increasing international development in the second stage. This strategy soon took the shape of a partnership with Orange, announced in July 2010: at the end of the summer, the telecoms operator was to propose flat rates bringing in Deezer Premium as an option, with or without a supplement depending on the offer.

The advantage for both parties was clear. For Orange, this alliance was part of a strategic turnaround: after having invested right and left in exclusive content to bring in new subscribers, the operator announced in June 2010 that it was breaking away from that approach to focus on “open partnerships” with content producers and publishers. In keeping with this approach, it seemed natural for Orange to abandon WorMee, its own music platform launched in 2009, in favour of an alliance with Deezer. As for Deezer, it now had the commercial firepower of Orange behind it to finally win over the missing subscribers. Sealing on the new partnership, Orange entered into Deezer’s capital with an 11% share in exchange for Wormee’s assets, evaluating Deezer at some 80 million euros according to the L'Express. This equity alliance is particularly interesting given that Deezer’s historical shareholder is none other than Xavier Niel, founder of Free, one of Orange’s main rivals.
 
Very quickly, the early results seemed to indicate that the operation was a winner. Thanks to Orange, the pace of recruitment picked up from 6,000 to 100,000 subscribers per month. While Deezer was hoping for one million subscribers by the end of 2011, the 500,000 bar was passed in January and the one million mark was announced for the summer. In isolation, the platform’s pay offering did not seem to attract consumers, but with its inclusion via bundling Orange managed to overcome user reluctance. After another year in deficit in 2010, Deezer has now emerged from the red, with a substantial increase in payments to rights holders. At the Midem in January 2011, Axel Dauchez forecast that the site would be paying about 20 million euros to the music industry in 2011. One unknown remains: how much will the platform make from each Orange subscriber? Axel Dauchez went no further than saying that it is “a little less (…) than the 9.99 euros per month paid by those whose subscribe directly to Deezer”.
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The Beginnings of Diversification

At the same time, Deezer has embarked discreetly on a strategy of diversification. As was emphasised by Jonathan Benassaya in March 2008, Deezer is not just a site but also “a platform with a great deal of content (…) that we are free to make available on other broadcasting channels or via other business models.”

Illustrating this theory: the launch in April 2010 of SoundDeezer, a B2B service proposing background sound in public places and stores. Operating with a box specifically provided by Deezer, the “D-Box”, the service enables programme settings to be configured by a computer alternating between five musical moods that can be broadcast at different times of the day. For businesses of a certain size, SoundDeezer offers more advanced functionalities, such as deployment over a complete network of sales points or the creation of made-to-measure moods based on sound marketing techniques. Making use of the statistics available to Deezer through the users of its consumer site, the idea is to identify the tastes of a given target as closely as possible. The service is offered without advertising, but the customer always has the possibility of interspersing promotions as they see fit throughout the programming. It should be noted that a subscription to the service does not provide exemption from the payment of fees to SACEM for the public broadcasting of protected works. Among the early clients of SoundDeezer were McDonald’s France, the Paris-Bercy indoor arena and Micromania stores. Although rates have not been made public, Axel Dauchez’s statements imply that this recent activity has already generated some 2 to 3 million euros in turnover in 2010, which is far from negligible for a newly launched service.
 
In December 2010, the platform also opened a “Deezer shop” online. Alongside a headset stamped “Deezer”, this offers a whole host of derivative products (t-shirts, basketball caps, mugs, pens, flip-flops) ranked by artist and also – rather surprisingly for a company specialising in virtual music – a limited range of records and DVDs which are more collectors’ items (luxury reissues, boxed sets, vinyl reissues) than anything else. By moving into merchandising, Deezer seems to have acknowledged the process of diversification underway throughout the music business as far as revenue streams are concerned. Could the company be tempted in the future to develop the highly lucrative sector of live music, very much on the upswing? While Deezer will most likely never become a big show business operator, there are synergies that can certainly be exploited, particularly in term of events promotion.
Finally, the announcement on 3rd March 2011 that Slate.fr has chosen Deezer Media to sell ad space on its website signals the further ambitions of Deezer Media in extending its scope beyond Deezer to position itself as a new player in the field of online media agencies.
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Conclusion

The year 2011 is so far proving auspicious for Deezer, which has substantially improved its financial results and put its business model on a sustainable track thanks to the new subscribers brought in via Orange. The site seems to have successfully carried off the switchover to pay music just as free streaming started to be challenged by the record producers, as evidenced by the statements of Universal Music France CEO Pascal Nègre on Radio Campus, suggesting that the number of free listening sessions for a given title should be limited to four – a proposition fiercely contested in an article by Axel Dauchez in Le Monde in which he defended the free-of-charge principle as the way into pay subscriptions.

The stabilisation of the Deezer business model ties into a period of intense structuring in this sector in France: alongside the establishment of an association for editors of online music services (ESML), which includes Deezer, Orange and GESTE[+] NoteA group of editors of online services.X[4] and the downloading platforms Beezik and Starzik, January 2011 was marked by the announcement of “13  commitments in favour of online music” concluded in the wake of the mediation role conferred by the Ministry of Culture upon Emmanuel Hoog, CEO of AFP. This agreement, which subsequently went before Hadopi[+] NoteA newly created government agency promoting the distribution and protection of creative works on the Internet.X[5], promises to make relations between producers and platforms more transparent. This is a positive development for Deezer, which may have the perverse effect of facilitating the arrival of new entrants on the market, particularly if record producers are obliged to significantly reduce the amount of the advances called for.

On the French market, Deezer has definitely reached critical mass, with about 7 million visitors per month, which makes it a force to be reckoned with. The context in which the company is developing nevertheless remains strongly competitive. Apart from the recent resurrection of Jiwa – a French competitor launched in March 2008 and placed in receivership two years later – and the arrival in France of  Qriocity, Sony’s streaming platform, Deezer notably has to deal with the ambitions of the Swede Spotify, which seems to want to team up with SFR to counter the offensive from Orange. But there can be no doubt – the game is now to be played primarily on an international level. Translated into five languages, Deezer was getting about two-thirds of its audience from abroad in as of spring 2010, but the vast majority of subscribers remain French. It is going to be a tough battle, given that apart from Spotify, which already boasted 1 million subscribers in seven countries prior to its recent U.S. launch, the platform must come to terms with the latest projects of the mammoths Google and Apple, also attracted by the strength of the musical streaming market. With support from Orange, Deezer can hope to win market share in several European countries where the French operator is well established (e.g. the United Kingdom, Spain, Poland). The big issue is still the move into North America, which up until Spotify’s launch, had remained practically impervious to streaming “à la carte”because of the reluctance of the big record producers. When can we look forward to a partnership between Deezer and Verizon Wireless or AT&T Mobility, the leaders in mobile telephony on that market?
 
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Photo credits: Deezer / The Wayback Machine
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Key datas

  • Site established: August 2007
  • Chairman and CEO: Axel Dauchez
  • Shareholders: founders (Daniel Marhely and Jonathan Benassaya), Xavier Niel, Dot Corp (Rosenblum Brothers), CM-CIC Capital Privé, AGF Private Equity, Orange
  • Turnover 2010[+] NoteAll financial data is taken from the the interview  given by Axel Dauchez to La Tribune on 3rd December 2010. X[6]: about 15 million euros (10 million from advertising, 2 to 3 million from subscriptions and “the rest” from the SoundDeezer activity)
  • 2010 Earnings: unpublished, but loss-making
  • Payroll: 49 employees listed on the site on 7th March 2011
  • Number of titles available: 8 million, some of which are only accessible in certain countries.
  • Number of unique visitors: 7 million per month in France and about 20 million round the world[+] NoteAccording to the press releases published by the company between March and May 2010 (heading “About Deezer”). X[7]
  • Registered members: 15 million, including 10 million in France
  • Number of subscribers: 800,000 (March 2011)
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  • 1. Agreements were concluded successively with Sony BMG (October 2007), Universal Music (May 2008), Warner (September 2008) and EMI (April 2009).
  • 2. These artists, who only allow their music on the Internet via pay download, are consequently not found on rival streaming platforms either, Spotify in particular.
  • 3. “Intelligent” radios offer titles similar to a song or an artist entered by the user.
  • 4. A group of editors of online services.
  • 5. A newly created government agency promoting the distribution and protection of creative works on the Internet.
  • 6. All financial data is taken from the the interview  given by Axel Dauchez to La Tribune on 3rd December 2010.
  • 7. According to the press releases published by the company between March and May 2010 (heading “About Deezer”).
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