Market Insight

Warner Music owner Access Industries takes control of Deezer

September 09, 2016

Jack Kent Jack Kent Director, Media and Advertising

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Access Industries has assumed exclusive control of French on-demand music provider Deezer according to a release by the French Competition Authority. The change in control dates back to January 2016 when Warner Music owner Access joined existing Deezer investor Orange in a €100m funding round

Our Analysis:

Access’s move on Deezer comes at a challenging time for the French company. Competitors Apple and Spotify have continued to grow their paying user base and capturing international market share. The French competition authority estimates that Deezer commands less than 5% of total digital music revenues across the European Economic Area (EEA) whereas Apple and Google have shares of 40%-50% each. Deezer’s position in its domestic French market is more positive. Here the authority reports it remains the market leader with a 40%-50% share, thanks in part to its long track record of partnering with investor Orange for bundled access as part of mobile subscription plans.

Deezer has raised a total of around $250m disclosed funding, its most recent round coming in January 2016 following it halting plans for an IPO. Its major European rival Spotify, which now claims 39m paying users, has more than $1.5bn in disclosed funding across eight funding rounds. The economics of the on-demand music business mean that profitability is still some way off for most services, Spotify lost a reported $195m in 2015, so services need to be backed with significant funding or owned by larger players such as Apple to stand the greatest chance of long term success. Access Industries’ deep pockets should help Deezer continue to operate despite growing competition, and indicate its and Warner Music’s desire to ensure Spotify and Apple continue to have a competitor.

Access Industries’ ownership of major label Warner Music may raise competition concerns from competing labels Universal and Sony. The French authorities have acknowledged the potential risks, but found that Deezer’s and Warner’s relatively limited market shares across their territories mitigate this threat. Major labels have long been in investors in on-demand service providers – Spotify has included Sony, Warner and Universal among its owners, and Napster/Rhapsody counts Universal among its backers – but Access’s move is the first time a label owner has taken full control. Record labels’ interest in holding stakes in on-demand providers is designed to both help them in rights negotiations and also further their desire to shape the music industry as it increasingly shifts from retail transactions to subscription and ad-supported models. Access’s position in Deezer could now make it more competitive in the on-demand music business. It could put Access in a position more akin to Apple Music or Google Play Music in which the service doesn’t need to make money on its own right as is adding value to other parts of its parent’s business. Apple Music can be run at cost because of the wider value to Apple’s ecosystem, Deezer can be run at much closer to cost if its adds greater value to Access overall - an inversion of the normal model in digital music and (transactional) video. Of course there are limits to how far Access can go here because of the shareholders but it is still an interesting shift

Spotify and Apple may be growing, but the digital music business is still very challenging for many companies. Singapore-Australian Guvera had to cancel plans for its Australian IPO earlier in 2016 as it reported just $1.3m revenues for 2015 from its advertising and brand driven service. US personal radio provider Pandora acquired the assets from struggling rival Rdio following its bankruptcy filing in 2015. Smartphone maker Samsung announced the closure of its Milk radio service in August 2016 and MixRadio, the personal radio service launched by Nokia and then sold by Microsoft to Japanese messaging app Line closed its service in February 2016.

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