As we have seen, Spotify was not the pioneer of music streaming. Other services, such as RealNetworks/Rhapsody or MOG, had been around for a long time when Spotify arrived. The French music streaming service Deezer also went online before Spotify and temporarily worked its way up to become the second largest music streaming service in the world, but was only able to establish itself as the market leader in France. This part of the blog series recounts the history of Deezer and analyses its role in the international music streaming market.
The Music Streaming Economy – Part 4: Deezer
In September 2006, however, Deezer was still called BlogMusik.net and was founded by school dropout Daniel Marhely[1] as an online platform where users could upload their music MP3s for streaming.[2] BlogMusik.net soon came to the attention of the French music collecting society SACEM because the platform was not paying royalties for its repertoire. In February 2007, BlogMusik.net went offline under pressure from SACEM and began licensing negotiations. On 22 August 2007, BlogMusik.net was renamed Deezer.com and a press release announced that, following successful negotiations with SACEM, the world’s first on-demand music site without DRM restrictions would be available for free and legally via an Internet browser.[3] Deezer wanted to make a “revolutionary” contribution to fight against illegal music consumption, according to its announcement. Deezer boasted that it was already available in 16 different languages and in many countries, where users could access hundreds of thousands of tracks for free thanks to advertising and manage their content via playlists. The press release also announced that Deezer was already in negotiations with the music majors to clarify the master rights to the recordings.
But it wasn’t as easy as Deezer founders Daniel Marhely and Jonathan Benassaya had imagined. Although they managed to strike licensing deals with digital music distributor Believe and some French indie labels, the majors were still reluctant to give their blessing to the new online music service. Negotiations with Universal, Sony, Warner and EMI dragged on until an acceptable result was reached two years later.[4] Meanwhile, Deezer was in danger of failing financially. The company’s limited repertoire of indie music and the majors’ financial demands were putting a strain on its finances. French investor Xavier Niel kick-started the project in June 2007 with EUR 250,000 in seed funding, but the money was quickly used up. In January 2008, the Rosenblum brothers’ Dot Corp Fund bought a 24 per cent stake in the company for EUR 4.8 million, ensuring Deezer’s survival for the time being.[5]
However, even this investment was only just enough to pay the advances to the music majors for catalogue use in the amount of EUR 2.5 to 3 million, as reported by the French newspaper Le Figaro in 2010. In addition, Deezer had to pay an additional 1 to 1.5 eurocents to the major labels for each music track played.[6] Taking into account the agreement with SACEM to pay 8 per cent of annual turnover in royalties, there was hardly any money left over to run the business, as Deezer co-founder Jonathan Benassaya admitted in an interview with Le Musicodrome in October 2009. The Deezer CEO complained that around EUR 6 million a year was going to the rights holders alone.[7] Deezer also needed to raise new venture capital quickly as advertising revenues were not as strong as expected, despite the creation of its own advertising agency. In October 2009, the CM-CIC private capital funds of the major French bank Credit Mutuel and AGF Private Equity provided EUR 6.5 million. A month later, Deezer also had to abandon its free music strategy and from November 2009 offered a monthly subscription of EUR 4.99 for PCs with Deezer HQ and EUR 9.99 for smartphones with Deezer Premium. But with only 14,000 paying subscribers in the first three months, the switch to a freemium model cost Deezer CEO Benassaya his job.[8]
Deezer’s lifeline was a deal with French mobile operator Orange, announced by the new management in June 2010.[9] Accordingly, Orange acquired an 11 per cent stake in Deezer and merged it with its music service WorMee, which was founded in 2009.[10] Orange bundled Deezer into its mobile tariffs, which meant that instead of a few thousand additional subscriptions per month, more than 100,000 subscribed. In the summer of 2011, Deezer surpassed 1 million paying users for the first time.[11] Much like Spotify, which was able to gain a foothold in the market by working with Scandinavian mobile operators, Deezer was able to achieve a turnaround with the help of Orange.
With Orange as a partner, Deezer, which was only available in France, Belgium and the UK in 2011, now could expand internationally. In November 2011, the company announced its intention to operate in 130 countries – but not in the US.[12] In May 2012, Deezer signed a licensing deal with indie label rights management agency MERLIN,[13] which meant that indie catalogues from outside France could be included in the streaming service. This made Deezer a fully licensed global music streaming service that could compete with Spotify and the tech companies’ offerings.
Deezer’s financial situation improved further in 2012 when the industry and technology conglomerate Access Industries, which was also the majority owner of the Warner Music Group, invested US $130 million in Deezer in October.[14] In 2012, Deezer was able to look back on a successful year in which it also managed to gain more than 3 million paying users for its streaming service.[15] And the success continued the following year, when 5 million subscribers were reported.[16] Riding this wave of success, Deezer entered into a strategic alliance with German private broadcaster ProSiebenSat1 in June 2014, in which Deezer acquired the streaming service Ampya, which had been founded only a year earlier, and ProSiebenSat1 acquired a stake in Deezer. Deezer also teamed up with mobile phone giant Vodafone in an ultimately unsuccessful bid to overtake market leader Spotify in Germany.[17]
After Germany, Deezer’s focus turned to the US market, where the streaming service was launched in September 2014.[18] To strengthen its market position in North America, Deezer bought music streaming provider Muve from US mobile phone company Cricket, part of the AT&T group, in early 2015. Muve users’ data was taken over and, after a free trial period, the useres could decide whether to become Deezer customers. With its expansion into the US, Deezer became the second largest music streaming service in the world, behind Spotify, and announced its IPO on Euronext in Paris in October 2015. It came as a big surprise when officials cancelled the IPO three days before its scheduled launch on 28 October, which would have raised an estimated EUR 300-400 million for the company.[19] The economic situation and the poor stock market environment were cited as unconvincing reasons for the withdrawal. Tim Ingham from Music Business Worldwide, on the other hand, saw other reasons for the failed IPO:[20] In the first quarter of 2015, Deezer had to report a decrease of the number of subscribers by more than 500,000 to 6.34 million users, more than half of whom were not paying users but had only signed up for free trials. Ingham calculated that the number of paying subscribers in 2015 was 3.79 million, 90,000 fewer than in the previous year. It was also significant that Deezer had only been making losses since 2012, and was again in the red in the first half of 2015 with around €9 million. This was due to extremely high advance payments to rights holders for the use of their music catalogues. In the first half of 2014, these costs accounted for 86 percent of total revenues, and one year later they still accounted for 76 percent. Most of Deezer’s revenue from streaming music had to be paid directly to the labels. To make matters worse, Orange France stopped bundling Deezer with its mobile services in 2014, which probably also explains the decline in the number of paying subscribers. With Orange’s contract due to be renewed in 2016, there was also a risk that the mobile operator would pull out of its alliance with Deezer altogether, which would have been disastrous for Deezer. In these circumstances, Ingham concluded, the IPO was simply too risky.[21]
Instead of the IPO, owners Access Industries and Orange had to support Deezer with a EUR 100 million cash injection in January 2016, with Access providing the bulk of the funds.[22] As a result, Access held more than 50 per cent of Deezer in September of the same year and Orange’s share shrank to 10 per cent.[23] This made Access Industries not only the majority owner of Warner Music Group, but also the world’s second largest music streaming provider. In 2018, a consortium led by Access Industries and Orange, with partners from Saudi Arabia and the Gulf Emirate of Dubai, invested a further EUR 160 million, increasing Deezer’s value to EUR 1 billion.[24] However, this laid the foundation for a second attempt at an IPO, which finally took place on 5 July 2022 on Euronext Paris with the help of the Special Acquisition Company (SPAC) I2PO. Surrounded by his fellow board members, Deezer CEO Jeronimo Folgueira rang the opening bell at the start of the trading day, as seen in the press photos.[25] The IPO also revealed Deezer’s ownership structure. Unsurprisingly, the largest shareholders were Access Industrie with 38.1 per cent and Orange with 8.1 per cent, followed by investment funds from Saudi Arabia and Dubai with just over 5 per cent each. A surprise, however, was that Warner Music Group, through its subsidiary WEA International, also held 3.2 per cent of Deezer shares.[26] This meant that Deezer, like Spotify, was also owned by a music major, albeit to a lesser extent.
It is therefore no surprise that the former long-term CEO of Warner Music International, Stu Bergen, was elected Chairman of the Supervisory Board of Deezer at the end of February 2023. This probably also has to do with the fact that although Deezer has been able to increase its revenue since its IPO, it is still operating at a loss and had to report a negative result from operating activities (EBIT) of EUR 166.7 million for 2022.[27] However, the number of subscribers fell by 2.1 per cent to 9.3 million in March 2023, which is mainly due to an erosion of user numbers outside of France. And this is precisely the problem for Deezer, which is the undisputed market leader in its home market of France and generates 61 per cent of its total revenue there, but lags far behind its competitors outside the country.[28] This trend continued in 2023, when the annual report for the first half of the year recorded a further decline in subscribers outside France to 2 million, while the number of paying users in France increased from 3.3 million to 3.6 million. This reduced the half-year loss to EUR 42.5 million, but this is still a high figure, mainly due to the high cost of revenue, which amounted to 88 per cent of total revenues.[29] We will see that this is a structural problem for the music streaming services, which have to pay high upfront fees to the labels to gain access to the music catalogues in the first place, which will be analysed in detail in a later part of this series.
Endnotes
[1] Wikipedia, “Daniel Marhely”, version of March 3, 2021, accessed: 2024-07-07.
[2] TechCrunch, “Exclusive: BlogMusik To Go Legit; Launches Free & Legal Music On Demand”, August 22, 2007, accessed: 2024-07-07.
[3] Deezer.com press release, “Deezer.com libere enfin toutes les musiques”, August 22, 2007, accessed: 2024-07-07.
[4] INA Global, “Deezer: Profitability Down the Line?”, August 18, 2011, accessed: 2024-07-07.
[5] The Wall Street Journal, “Deezer’s Expansion Plans Get a Boost”, October 8, 2012, accessed: 2024-07-07.
[6] Le Figaro, “Musique: les sites de streaming menaces”, March 4, 2010, accessed: 2024-07-07.
[7] INA Global, “Deezer: Profitability Down the Line?”, August 18, 2011, accessed: 2024-07-07.
[8] Ibid.
[9] Billboard, “Orange Partners With Streaming Service Deezer”, July 23, 2010, accessed: 2024-07-07.
[10] L’Express, “Musique: Deezer va fusionner avec WorMee d’Orange”, July 21, 2010, accessed: 2024-07-07.
[11] ZDNet, “Axel Dauchez, Deezer : ‘Le cap du million d’abonnés payants sera passé cet été'”, March 9, 2011, accessed: 2024-07-07.
[12] Billboard, “Deezer To Launch In 130 International Markets, U.S. No Time Soon”, November 3, 2011, accessed: 2024-07-07.
[13] Music Business Worldwide, “Merlin licenses Deezer across the globe”, May 10, 2012, accessed: 2024-07-07.
[14] Billboard, “Deezer Raises $130 Million: Report”, October 6, 2012, accessed: 2024-07-07.
[15] Billboard, “Deezer Reaches 3 Million Subscribers, Launches Free Service, Adds Features”, December 19, 2012, accessed: 2024-07-07.
[16] TechCrunch, “Nipping At Spotify, Deezer Passes 5M Paying Subs, Adds ‘Hear This’ And ‘Explore’ For Music Discovery, Unveils New Mac App”, November 6, 2013, accessed: 2024-07-07.
[17] Wirtschaftswoche, “Ampya und Deezer schmieden Allianz gegen Spotify”, June 10, 2014, accessed: 2024-07-07.
[18] Billboard, “Deezer Finally Coming to America on Sept. 15”, September 10, 2014, accessed: 2024-07-07.
[19] New York Times, “Deezer, French Music Streaming Service, Postpones I.P.O.”, October 27, 2015, accessed: 2024-07-07.
[20] Music Business Worldwide, “Deezer scraps IPO that could have raised $400m – here’s 5 reasons why”, October 28, 2015, accessed: 2024-07-07.
[21] Ibid.
[22] Music Business Worldwide, “Deezer absorbs €100m investment from Orange and Access Industries”, January 20, 2016, accessed: 2024-07-07.
[23] Music Business Worldwide, “Len Blavatnik’s Access Industries takes ‘exclusive control’ of Deezer”, September 7, 2016, accessed: 2024-07-07.
[24] Music Business Worldwide, “Deezer raises $185m as new investment values company at over $1bn”, August 2, 2018, accessed: 2024-07-07.
[25] Music Business Worldwide, “Deezer goes public: Spotify rival makes stock market debut on Euronext Paris”, July 5, 2022, accessed: 2024-07-07.
[26] Ibid.
[27] Music Business Worldwide, “Deezer generated over $470m in 2022, with a $175m operating loss, and just named Stu Bergen as a Director on its Board”, February 28, 2023, accessed: 2024-07-07.
[28] Music Business Worldwide, “Deezer’s revenues grew 6.2% YoY in Q1, but its total subscribers fell 2.1% to 9.3m”, April 24, 2023, accessed: 2024-07-07.
[29] Ibid.
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