Spotify competitor Deezer just secured a massive, $130 million funding round to fuel a major expansion.
But is this just another Spotify monster in the making, complete with outrageous salaries, ridiculous royalty checks, and risky balance sheets? We interviewed Deezer’s CEO, Axel Dauchez, with that very question in mind.
Digital Music News (Paul Resnikoff): Congratulations on the gigantic funding round.
Deezer CEO Axel Dauchez: [laughing] Thank you very much, it’s a happy day.
DMN: I heard that every major label is popping champagne corks in the wake of this funding.
DMN: But honestly, isn’t a huge percentage of this money going straight to the major labels for licensing?
Dauchez: Do you know — I don’t know if you know this — but so far we are profitable.
DMN:”Do we find out in six months that Axel Dauchez is enjoying a gigantic compensation package just like [Spotify CEO] Daniel Ek?”
DMN: But if it’s profitable, why accept a $130 million funding round?
Dauchez: Yeah, but we need money to speed up growth. So we’ll optimize the growth, but the reason isn’t survival. So, your question is, ‘is it possible to have a sustainable and profitable business considering the major terms and conditions?’ The answer is, ‘yes,’ and we’ve proven it.
So yes, it’s possible, but it’s not possible if you want to go quicker than the music industry. And that’s the big difference.
DMN: Axel, I’m not sure I understand. I just read a report from financial firm PrivCo, they did a brutal dissection of the Spotify financial situation. And it showed that every dollar Spotify earns goes right out the exit door, pretty much on a one-to-one basis, thanks largely to royalty costs. I’m not sure why you wouldn’t be subject to the same gigantic royalty costs?
Dauchez: There are some major differences, including our geographic strategy. There are some profitable markets and there are some non-profitable markets, and if there’s one big non-profitable market, it’s the US. Because of the competition is not only with Spotify, but iTunes and Pandora, and every stakeholder is upset about the US. And because when you launch in the US you become US-centric, because you need to succeed in the US. And that comes at the expense of the rest of the world, where you have not only growth (because there’s no growth in the US), but you are creating value where there wasn’t revenue for the music business before. So this was the first choice we made.
The other is our DNA. We are never trading profitability and sustainability to get speed. If you are patient and you move at the same pace as the music industry, it’s possible to be profitable. Am I saying that the conditions are the same as they used to be? No, the condition of the music industry isn’t good today, and we need a lot more competition than what we have today. But we also need more local competition, it’s just not the case right now.
DMN: So does this mean you’re not entering the United States, I thought that was what this funding round was all about?
Dauchez: “We’re going to the US only when the market conditions are good. And we won’t do it as a ‘me too,’ but with a strategic edge that will make our presence significant on day one.”
DMN: Do we find out in six months that Axel Dauchez is enjoying a gigantic compensation package just like [Spotify CEO] Daniel Ek?
Dauchez: I really have no idea about that. By the end of the year we’ll have 200 people, but when you are on a sustainable track with low overhead, you just take care of salaries, the organizational costs and stay lean. I don’t know if you know, but before this investment, the total funding on Deezer was 15 million euros. So we’re in another world [than Spotify], we’re on another track. We’re building a business, we’re making it profitable, we expand it, and then we get money to make it grow more quickly.
DMN: But what happens when Universal Music Group, which now includes EMI, says, ‘hey Axel, we want twice as much for royalties, and if you don’t give it to us, then you can kiss your service goodbye.’
What would you say to that?
Dauchez: I’d say to them, ‘What will be your distribution structure in five years time? When 80 percent of your revenue is digital, do you want a huge, global, non-musical distributor? Because your added value will be crushed by the conglomeration of music and movies and TV. Or, do you want some competition against those companies from a solid pureplay [music] player?’
DMN: Let me ask you a question about valuation. Typically, an investor is looking for an investor that is more than 10X the money put in. It looks like Deezer would have a valuation far north of $1.3 billion, so what is the actual valuation of Deezer right now?
Dauchez: I can’t comment on that. We’re not in a race, we’re trying to build a long-term business. So, of course there’s a valuation that makes the link between the investor and their percentage, but we don’t want to discuss that. That’s between my equity holder and myself, and the only thing is to prove that this works.
DMN: I guess I’m not understanding. I’m sitting here in San Francisco, where the investment ethos is to exit within 3-5 years with a 10X multiple, so are you telling me that this investment idea is different than that?
Dauchez: No, no, the expectation for a return from [financier] Access [Industries] is exactly the same as the expectations as any VC in San Francisco, there’s no question about that. But there are less constraints on timing than the traditional VC, to divest at a certain time. But they are no different in terms of return expectations.
DMN: But then that would mean that Access wants a return of more than $1.3 billion, and that would have to happen through a sale, IPO, or some gigantic liquidation event. That doesn’t sound like slow growth or long-term to me.
Dauchez: [Laughs] Are you trying to get the valuation out of me?
DMN: No, this isn’t a sly attempt to get a valuation, I’m just trying to understand how this would be a slow growth investment.
Dauchez: No, no, they are expecting a huge return on Deezer, and my job is to provide it to them. But it won’t happen through gambling.
DMN: There’s a gigantic concern within the artist community that the rise of streaming services is making artists completely poor, and that the payout rates for artists are stunningly low. What is Deezer’s solution to help pay artists a better rate, especially with such a large influx of cash?
Dauchez: Of course there’s a big difference between what the artist is getting and what the press is reporting based on the revenue from the free service. Deezer’s free service is only one channel, it’s not the business by itself. And when you look at the free service, you have to compare it to YouTube or radio, and we’re paying five times as much revenue as YouTube and radio.
“So you can say this is cannibalization, but at the peak of this industry in 2000, the average person in a major metropolitan area like Paris was buying 4 CDs a year…”
But, our model is paid subscription, and in France in one year, our model made more than iTunes. Actually, every artist in France has seen his revenue from Deezer almost double that of iTunes. So you can say this is cannibalization, but at the peak of this industry in 2000, the average person in a major metropolitan area like Paris was buying 4 CDs a year, and half the population was buying 4 CDs a year. So when those people are using subscription services, they are paying $120 a year, so there’s no question we’re creating value. All the rest is a misunderstanding about the differences between the free and paid services, all the rest is about the overuse of the free service which we’re not recommending, and about the terms between the labels and the artists, which is none of our business.
DMN: OK, so you’re saying that as long as you are paying labels, the rest is out of your hands, you don’t have a mechanism to pay the artist directly so that’s not a concern of yours?
Dauchez: I think we’re setting up some mechanics on that, but when I said none of our business, my personal view is that every market has to take time to adjust to a new business. So in the meantime, there’s a debate and negotiation between different parts of the value chain. So the real question is whether this is growing the cake or reducing the cake, and it is growing the cake so I’m confident that we’ll find a balance that pays every piece of the value chain.
Transcribed while listening to Volta Bureau.