Streaming has yet to convince investors it is future of music industry

A file picture taken on October 9, 2012 in Paris shows headphones set up on a smartphone connected to French music streaming website Deezer. French music-streaming service Deezer announced on October 27, 2015 the indefinite postponement of its plans to launch an initial public offering on the Paris stock exchange. AFP PHOTO / LIONEL BONAVENTURE

PARIS — Music streaming was supposed to have come of age with the public listing of Deezer, but the French company’s postponement of its stock offer demonstrated investors still have concerns about its economic model.

Deezer hit the pause button on the first initial public offering of a music streaming firm at the last minute on Tuesday, citing “market conditions”, sending a bad signal for companies in the sector which have so far been dependent on venture funding.

The French company, a pioneer in the field, had sought to raise at least 300 million euros ($330 million) via the float, with a listing on the Paris stock exchange, and to get more visibility and funds as it seeks to take on its better-known Swedish rival Spotify in a market that is becoming more crowded with the entry earlier this year of Apple.

Despite a number of major investors being interested, Deezer was unable to fill the order book for the operation which would have valued it at over $1 billion.

“It’s a big disappointment, said Greg Revenu, a specialist on IPOs of startups at the investment bank Bryan Garnier & Co.

The postponement of the company’s IPO has resulted in concern about Deezer’s business model.

Despite a 53 percent jump in revenues last year to 142 million euros, Deezer is still not profitable. 

Neither is the much larger Spotify, which lost 162.3 million euros on revenue of 1.08 billion last year as it made major investments in technology and expansion.

Nevertheless many analysts see services like Deezer and Spotify, which make most of their money by getting users to pay a monthly subscription fee for unfettered access to song catalogues that number in the millions, as the future of the industry to the detriment of downloads and CDs.

The market is shifting fast, with streaming revenue to music labels already beating sales of CDs and records in the United States, and in France it is worth half the amount of physical sales.

Deezer’s dependence

Despite the strong growth, streaming services have yet to turn profitable, mostly due to their heavy dependence upon music recording companies for content.

Due to the strong concentration of music labels “the costs of rights and royalties … are too high” and weigh upon the profitability of the streaming companies, said Revenu.

In comparison, video streaming company Netflix had reduced its dependence on film studios by producing its own programs.

Investors were also likely hesitant about Deezer’s reliance on tie-ups with mobile operators for most of its subscriptions.

The service “is unique in having a high integration with mobile operators”, notably with Orange in France, said Revenu.

Of Deezer’s 6.3 million subscribers, only 1.5 million subscribe directly to the service. 

The other 4.8 million get it as part of their mobile phone subscriptions, and of these only 1.5 million were active in June 2015.

The difficult market environment also played a role, said Revenu.

A few days before, shares in Pandora plunged more than 35 percent when the Internet radio station posted disappointing results, and Netflix’s third quarter profits fell by half to $29.4 million.

Chasing a shrinking market

And even as the sector is expanding, it is already crowded.

Spotify says it has 75 million users, of whom 20 million subscribe to the paid service. Apple Music already has 6.5 million subscribers after just four months.

And YouTube is also looking to push into the segment, having in October launched a paid, ad-free service.

And then there is the question of whether the segment will ever be profitable.

Bloomberg View columnist Leonid Bershidsky recently said that both Deezer and Spotify have been hoping that their expanding subscriber base would produce fast enough revenue growth to cover their development and marketing costs.

“It’s not really happening, though: Costs are growing in step with revenue,” he said.

Bershidsky also noted that the music industry is just half the size it was in 1999.

“Deezer, Spotify, Apple Music and others are taking over a shrinking market, so profits will remain elusive,” he wrote in an editorial.

RELATED STORIES

Apple makes product upgrades, pushes into streaming music

Music streaming showdown looms as Spotify competition heats up