Deezer gets new financing, as business analysis site questions current streaming music model

By | Published on Monday 8 October 2012


Streaming music platform Deezer has just raised a further $130 million in investment, including funding from Access Industries, the parent company of Warner Music.

According to French newspaper Le Figaro, previous investor Idinvest is also putting in new funds, about $32.6 million of which will be used to buy out previous investors. French-based Deezer, of course, is currently pursuing an aggressive growth strategy around the world, though has so far avoided the particularly competitive US market.

The Deezer investment comes as business analysis website PrivCo questioned the sustainability of the streaming music business model. Well, specifically Spotify, though the main issue the PrivCo piece raises – basically how much of the company’s revenue goes straight to the music companies – applies to most subscription-based streaming services (even if Spotify is slightly more exposed because of the costs of running the promotional freemium option).

Although the PrivCo piece seemingly focuses on the latest filed accounts from UK-based Spotify Ltd, which, as previously reported, doesn’t give the complete picture of the Spotify business any more, some of the concerns it raises have been mooted before in some parts of the digital music sector – ie once the venture capital that is propping up this seemingly booming market runs out, will there be a sustainable business without drastically increasing prices to the consumer, or renegotiating royalty terms with the rights owners (royalties that some in the music space already reckon are too low).

PrivCo’s Sam Hamadeh says: “Spotify’s 2011 results indicate that drastic changes must be made quickly to its business model in order to generate growth while actually improving operating margins so that break-even, let alone profitability, is somewhere, anywhere, on the horizon”.

Hamadeh reckons that the flat pricing model that Spotify and most of its competitors currently operate (where pricing is based on devices that have access, rather than amount of music consumed), will have to change down the line. He writes: “Either the online music royalty payment model to artists and music companies needs to change, which is highly unlikely in the near term given that digital royalties are record companies’ only growing revenue stream, or Spotify needs to asap introduce a tiered subscription system, as opposed to its current flat monthly fee model, which is clearly a broken business model. As currently designed, Spotify’s business model is unsustainable. Spotify’s heaviest users will have to pay, for example, for a ‘Spotify Platinum’ level for $25/month with more song plays allowed. No matter how we slice the math, it is patently clear that something must change soon on Spotify’s business model if the company is to survive”.

Of course a lot about the licensing arrangements between companies like Spotify and the labels and music publishers is shrouded in secrecy, making it hard to truly assess long term viability from the outside. Though in the US even long-established services like Pandora and Rhapsody, which have cheaper licensing overheads by offering less interactivity, are yet to prove they have definite long term sustainability. Which is a sobering thought for anyone in the music business still attaching phrases like “saviour of the industry” to Spotify-style set ups.