Monday, October 22, 2012

French Music Streaming Service Is Taking On the World, but Omitting America

Eric Pfanner/The International Herald Tribune

Most of the biggest Internet companies got their start in the United States or expanded there quickly. One of the most successful European start-ups, on the other hand, hopes to turn itself into a global powerhouse by ignoring America.

Axel Dauchez, the chief executive of Deezer, near a decorative sign reading “Paint it black” at the company’s Paris headquarters.

The company, Deezer, is one of the biggest players in digital music streaming, trailing only the market leader, Spotify, in the number of paying customers it has attracted globally. Like Spotify, which is based in London, Deezer, with headquarters in Paris, offers subscribers unlimited access to millions of songs on demand, via PCs, mobile phones and other devices.

Deezer just got a big endorsement for its approach. Access Industries, the owner of Warner Music Group, pumped 100 million euros, or about $130 million, into Deezer this month, in what analysts described as one of the biggest investments ever in a French start-up.

“This shows that they think the music market is beginning to turn around,” Axel Dauchez, chief executive of Deezer, said in an interview.

Deezer, which started in 2007, has just moved into a slick new headquarters, where employees conduct business meetings on lawn chairs and on sofas disguised as musical keyboards. “Paint it black,” reads a neon sign on the somber-toned wall behind Mr. Dauchez. Like the Rolling Stones, Deezer is on a mission to blot out the color red — in this case, from the ailing music industry’s ledgers.

After a battle with piracy that has cut its sales in half in just over a decade, the music industry has high hopes for streaming, which is growing faster than digital purchases, as many listeners decide that ownership makes less sense than in the days of plastic and vinyl.

While Deezer and Spotify are still losing money, their sales are growing rapidly. Deezer generated about 50 million euros in revenue last year, and Mr. Dauchez has set a goal of 1 billion euros in sales in 2016.

With more than two million paying customers, Deezer trails Spotify, which has more than four million. Spotify introduced an American version last year, and it has been growing quickly. But Deezer has turned its back on the United States and plans to use its new money to finance an expansion into more than 160 other countries.

“Like a canny general who decides to march around a heavily fortified stronghold and thus effectively leave it stranded behind enemy lines, so Deezer expects the streaming war to be waged on different shores,” Mark Mulligan, a music industry analyst, wrote on his Web site. “They are both right and wrong.”

Analysts say Deezer is right to worry about competition in the United States, where Spotify competes with services like Rhapsody, Pandora and Rdio, even though their business models all vary slightly.

Mr. Mulligan says there is room for growth in the United States, because premium streaming services remain too expensive for most consumers. But the field is less crowded outside the United States, where Spotify is the clear leader in streaming in many of the markets it has entered — except France, where Deezer reigns.

Spotify, too, is planning for the battles ahead. Several people briefed on the company’s plans said it had begun a new round of fund-raising, seeking to secure several hundred million dollars in new investment.

New financing is essential for Deezer and Spotify because they are burning through significant amounts of cash. To attract new listeners, both companies offer free versions of their services, subject to certain restrictions. Yet both companies must pay a royalty to a recording company every time someone listens to one of their tracks.

While streaming services sell advertising to cover some of the costs of free listening, Mr. Dauchez said raising revenue in this way had proved to be more challenging than expected. So Deezer now sees its free service primarily as a way to entice listeners into paying for its premium offerings, which include things like unlimited streaming and special content and recommendations, along with no ads.

This makes expanding into new markets expensive. While Deezer says it was profitable last year, it expects to lose money until 2014 as it enters new markets. The company set up sites in several other European countries in 2011 and accelerated its global expansion this month.

“It’s an incredibly difficult business to be in,” said Giles Cottle, an analyst at Informa Telecoms and Media. “The only way to reach profitability is to achieve massive scale or to rewrite the record industry deals, which is unlikely to happen.”

Deezer has reached something approaching a large scale in France, home to the majority of its subscribers. Many of them were added via a marketing partnership with a Deezer shareholder, France Télécom, which includes the service in certain mobile phone packages.

Some analysts question whether customers acquired through bundled deals are as valuable as those who actively seek out a certain music service. But others say such partnerships are important because the differences between services like Spotify and Deezer are relatively minor.

Each offers catalogs with millions of songs and a premium subscription, including smartphone access, priced at about 10 euros a month in much of Europe or 10 pounds, or $16, in Britain.

To try to differentiate itself from Spotify and other streaming services, and to compete with unlicensed, illegal music offerings, Deezer emphasizes its social features and the editorial content of its sites. Deezer editors select playlists and offer users information on local performances by their favorite artists, for example.

“We don’t just want to be a ‘smart jukebox,’ ” as some people refer to streaming sites, Mr. Dauchez said. “If you want to rebuild the value of music, you have to rebuild the engagement with the listener.”

Access Industries, the owner of Warner Music that made the big investment in Deezer, is a vehicle of Len Blavatnik, a Russian-born American investor. Mr. Blavatnik declined, via a spokesman, to comment for this article.

Analysts said it was desirable for Warner and the major music companies, which also own stakes in Spotify, to maintain diversity in the distribution of digital music.

They want to avoid repeating the early days of digital, when there was only one major legitimate platform, iTunes, which could largely dictate the terms of licensing deals.

Mr. Dauchez said the new investors were also attracted to Deezer’s international strategy. The United States accounts for about half of worldwide digital music sales, compared with about a quarter of the overall music business, he noted, so there is room for the rest of the world to catch up.

“I’m not saying we will never be in the U.S., but if you start in the U.S., you are too U.S.-centric,” he said.

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