David v Goliath: Deezer seeks musical edge on Spotify

From Brazilian gospel to Puerto Rican reggaeton and Dutch hip-hop, music streaming company Deezer is scouring the globe for gaps in the market where it can survive and thrive against Spotify and Apple.

The French firm has little hope of success going toe-to-toe with its far bigger rivals in the mass-market realms inhabited by the likes of Taylor Swift and Ed Sheeran.

Instead it is focusing on local music genres in fast-growing, often non-English language markets, areas where it believes it can steal a march. It is targeting local listeners while also looking to position itself for a global audience as a “cool”, non-mainstream alternative.

As part of this strategy, launched this year and called Deezer Next, it is dispatching local teams of “editors” to identify talent in niche genres and create original content, Netflix-style.

The aim is not only to differentiate its catalog but also to reduce its reliance on the record labels that take the lion’s share of streaming services’ revenue. It has 40 editors globally, and is looking to recruit more.

Deezer Chief Executive Hans-Holger Albrecht said he would target selected markets in Latin America, Asia and Africa where Spotify was not already predominant. They include Guatemala, Bolivia, Paraguay, Colombia, Nigeria, Senegal and South Africa.

“I strongly believe in the localisation of content,” he told Reuters. “While Spotify is mainly playlist-focused, we are betting on local differentiation, and this has helped us become number one in gospel in Brazil.”

But finding a path to profit represents a formidable task for the loss-making company.

It has a similar "freemium" to market leader Spotify, whereby it attracts users by offering advert-supported free access and charges a monthly fee of about $10 for the full service. However it has only 12 million active users - about 9 million paying - compared with Spotify's 60 million paying subscribers, and brings in just a tenth of the Swedish firm's $3 billion annual revenue.

Deezer, controlled by billionaire investor Len Blavatnik, is nonetheless sinking tens of millions of euros into this local music drive. Its strategy is based on a bet that music streaming will continue to grow rapidly to eventually eclipse all other forms of music listening.

The paid streaming market is expected to grow 16 percent to $28 billion by 2030 in terms of annual revenue, according to Goldman Sachs

“Streaming is a very young market, with just about 10 percent penetration globally, so there is a lot of potential still,” said Albrecht.

Spotify is also loss-making but is nevertheless valued at $13 billion because of this market potential, as well as investor expectations that its fast-growing user base will allow it to negotiate increasingly lower royalty payments to labels.

The company, a millennial megabrand, is eying a stock market listing this year or next, and Albrecht said Deezer could also consider going public should that flotation prove successful.

Algorithm + editors 

Deezer users listen to an average of 30-60 hours of music per month, a seven-fold increase from two years ago, said Albrecht. This has allowed the company’s algorithm, assisted by the team of 40 editors specialized by genre, to recommend more accurately music people may want to listen whether they are at work, at the gym or at home, he added.

The unlisted company, which launched a decade ago, is the market leader in its home market of France where it has been profitable for nearly five years and has double-digit profit margins, said Albrecht, declining to give precise numbers.

“This proves the model works and that we just need more time to replicate this success abroad,” said the 54-year-old, who has been CEO since 2012.

Deezer has annual revenue of 300 million euros ($360 million), and losses of 60 million - a figure which equals its marketing budget.

It is the fourth-biggest music streaming company in the world, by paid users, after Spotify, Apple Music and Amazon. The latter two, as diversified tech giants, have the advantage of being able to rack up losses on streaming while the market grows and recoup the money from bumper sales of products like phones and tablets.

Independent music analyst Bob Lefsetz believes Deezer benefited from a “first-mover advantage” in France, making it hard to replicate its success elsewhere since Spotify and Apple already lead the pack in most other markets.

Some also question whether content differentiation will provide a long-term advantage.

“Over time, libraries are bound to become increasingly similar so banking on content to differentiate your services seems an ill-fated race. It would just give you a temporary edge,” said Gartner analyst Stephanie Pitter-Baghdassarian.

Champeta Criolla

An area where many industry experts believe Deezer is heading in the right direction is its investment in finding and promoting emerging artists in much the same way as a record label’s A&R division.

In the short term, analysts say, it could reduce their reliance on labels and in the long term - perhaps five to 10 years from now - they say top streaming companies could eventually replace the labels.

Deezer says artists discovered through Deezer Next include champeta criolla band Tribu Baharu and singer Martina la Peligrosa in Colombia; Sertanejo girl duo Day e Lara and gospel singer Isadora Pompeoa in Brazil; and pop trios MKN MAKENNA and Layl, and singer Jary, in Mexico.

The company says selection criteria include how closely Deezer can work with the artist and their team and whether the music will bring something “fresh” to appeal to its users.

Acquisition hunt

Scale is increasingly vital to survive in an industry where the bigger fish can cut better deals with labels. This presents the biggest challenge to Deezer and fellow minnows Tidal, backed by rapper Jay-Z, and Berlin-based SoundCloud, which recently came close to bankruptcy.

Spotify’s market-leading subscriber base has allowed it to lower the total royalties it hands to labels from about 80 percent of its revenue to 52 percent. This trend means it can entertain hopes it will eventually become profitable, despite doubling its losses this year to $601 million.

Deezer still gives around 60 percent of its revenue to the major labels, but is aiming to negotiate only a few percentage points higher than Spotify in the coming few years, said Albrecht.

To do so, it needs to significantly increase its user numbers, said the CEO, without disclosing any targets.

Deezer is also scouting the market for acquisitions and would be keen to acquire SoundCloud “at the right price”, he said.

Such deals would provide a quick way to gain scale, but many industry players and analysts think Deezer will eventually sell to a larger rival, something Albrecht said was possible but depended on the company’s owners.

A spokesman for Blavatnik, who was born in the former Soviet Union and is now a U.S. and British citizen, said his policy was not to comment on existing investments.

Mark Mulligan, an analyst with technology research company MIDIA, said the fact the tycoon also controlled major music label Warner Music and other industry assets threw up interesting possibilities.”

“Blavatnik has a card to play,” he added. “An efficient way to compete against integrated tech giants like Apple and Amazon would be to combine Deezer, Warner Music and all the other concert and artists management firms he owns to build a full-stack music powerhouse.”