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'Under development'
This is what you can read when you click on the website (info-deezer.com) especially created for the IPO (Initial Public Offering) of the Paris-based streaming service, Deezer. A few days ago in the same place you would have found the financial statements of the company and interesting arguments about the bright future of music streaming services. The October 27, while the IPO process was on the way, the future turned a bit darker when Deezer CEO finally announced the end the delay of the process due to 'unfavorable market conditions'. The same day, I was in my classroom explaining to my Master students at Berklee College of Music how bad the financial statements of this company looked. To be honest I was not expecting such a setback for the firm. But I was not expecting the fact that Deezer also said in the same statement that “the company is well funded and well positioned as it continues to pursue its growth strategy'. This is pretty ironic for a company who has burnt a $70 million cash injection in a three year international expansion strategy and who lost around $15 million per year.
So the website says 'Under development', but for how long? I think it should state 'Under developed', 'Under attack', 'Over estimated' or 'Over confident' instead. Here is why.
'Under developed'
This is what you think when you analyze the financial statements of music streaming platforms. They are criticized for not distributing the revenue they earned to the Artists - those who make the content. When we look at the figures of Deezer we see that 84% of the revenue is used to pay (1) music rights and (2) fees to App stores (Android and Apple Store). The Gross Profit Margin (17.73%) is very low compared to the Entertainment industry who enjoys a level at around 30/40%. The Current Ratio - which measures the liquidity of the company - looks very bad (0.78). It means that the company cannot meet its short-term commitments (liabilities > assets). The Accounts Payable (66 M) are almost three time bigger than the Accounts Receivable (25 M). In a nutshell, Deezer cannot pay its debtors unless the company is paid by its clients..and this is not enough because debtors are three time bigger in value!
Main ratios for Deezer as of 6/30/2015
Gross Profit Margin: 17.73%
Operating Profit Margin: -13.08%
EBITDA/Revenue: -11.78%
Net Profit Margin: -9.62%
Current Ratio: 0.78 (<1)
How to keep the company afloat when you lose around 20 million euros per year? The answer is cash injection made by Access Industries in 2012 (jump to the last paragraph for more info). But this cash has been used to finance the international growth while France is still the only part of the world that generates a positive net income for the company (and 52% of the total revenue). Their deal with Orange (one of the main French cellphone and network providers) (=25% of total revenue of Deezer) terminated in summer 2015 + the high level of growth of Spotify in the core market of Deezer (France) are two additional red flags for investors. Finally, the power of negotiation of music labels is really diminishing the capacity of the company to generate profits: the three major labels account for 13% of its catalogue but 67% of the music streamed..and Deezer paid a total of 23 Million euros of advances on royalties to them. Without this amount given to the record labels, Deezer would be profitable..a little bit ironic don't you think?
'Under attack'
This is what you think when it comes to observe the competition between music streaming platforms.
Deezer Collagen
Spotify: Wait and See. A few months before Deezer, Spotify last raised money at an $8.5 billion valuation, a figure that gives me a headaches when you think about the size of the whole recorded music industry ($15 billion). More than half of the value of the industry would rely on a music streaming platforms which generates 0.0011 dollars per stream for a songwriter..Like in a poker game Spotify clearly waited to see how good/bad the IPO for Deezer would look like before launching its own IPO process. Youtube video converter for mac. Being the first to move is not always a good strategy. Java plugin for safari mac.
Apple: Wait, See our figures! Apple also waited..to publish the result of the launch of Apple Music - the streaming service for iOS, built upon Beats Music. Apple claimed to have captured 15 million users in the last few months. At the same time Deezer recorded the first decline in its subscription number. Pandora, the Internet radio service, also suffered a 35 percent one-day drop in its share price on Oct. 23 after it downgraded its financial guidance for the rest of the year, in part because of strong competition from Apple. No surprise that Apple chose to announce the 20th of October that Apple Music is now the 2nd biggest platform in the world with 6.5 million subscribers just in front of..Deezer. This announcement was made few days after the beginning of the IPO process of the Paris-based platform..A little bit ironic, don't you think?
'Over estimated'
This is what I thought when I first heard about the 1.3 billion dollars evaluation of Deezer by private banks. This is a common sin from such institutions: over-estimating their clients. Instead a quick assessment of a music streaming platform consists in multiplying the number of subscribers (6.3 million) by the revenue per subscriber per year (around 65 euros per year, retrieving the taxes and the bundle deals with Telco)..which leads to an evaluation at around 400 million euros + assets owned by the company. Using Deezer's range of IPO prices, this scenario's valuation-to-subscribers ratio ranges from $162 to $197. Download free pro tools for mac. Counting only subscribers that generate revenue, Deezer's valuation-to-subscribers ratio ranges from $270 to $330! Glenn Peoples from Billboard Biz stated that Jay-Z did a very smart move by acquiring a Swedish music streaming platform named WiMP. Aspiro's WiMP subscription service, the predecessor to Tidal, had about 515,000 subscribers when acquired by Jay Z in March 2015. Jay Z paid only $56 million. At that price, Jay Z paid just $109 per subscriber..and he has been harshly criticized for that move..a little bit ironic, don't you think?
'Over confident'
Deezer was clearly targeting an IPO from day one. The deal seems pretty clear now: Deezer had no debt to ensure a future IPO but needed cash to grow..so the company accepted a major investor to inject cash. This investment made was made in 2012 by Access Industries who spent 70 million euros to acquire 50 million for common shares and 20 million in preferred shares. Access Industries is a conglomorate who owns..a major record label - Warner Music! According to the Securities Note published by Deezer (remember the website in my introduction) Warner Music is now the main shareholder (33.8%) of the Paris-based music streaming platform..Warner Music, the same company who is asking for generous advances (23M euros in total) in order to pay their Artists (who complain about getting nothing valuable from music streaming platforms)..A little bit ironic, don't you think?
Deezer Collagen Peptides
Main shareholders of Deezer as of 6/30/2015 (source: Securities Note, p.11)
Access Industries (Warner Music): 33,8%
Orange Participiations (Telco): 11,7%
DC Music SARL (Pixmania): 10,4%
Indivest Partners (Private Equity): 10,3%
Conclusion
What if the real problem of Deezer does not come from bad market conditions..but from a bad assessment made by the investment bank in charge of the IPO? After all, Deezer is not the only 'unicorn' to postpone an IPO: the luxury retailer Neiman Marcus and Albertsons, the supermarket chain, for example, have recently delayed their public offerings. 'IPO is more art than science,' says David Ludwig, a managing director at Goldman Sachs Group Inc. It seems that Deezer has not found the right Artist for its IPO. A little bit ironic, don't you think?
PS: you can read this article while listening Ironic by Alanis Morissette (1995) - who is produced by..check the logo..