Deezer Raises $109 Million From Warner Music Parent and Mobile Telecom Giant

Music subscription service Deezer has raised €100 million ($109 million) of funding from lead investor Access Industries with participation from mobile telecommunications company Orange. The amount was about a third of what Deezer hoped to raise last year through an initial public stock offering. The company plans to use the capital for customer acquisition and product development.

Both Access and Orange already owned equity in the Paris-based service. Access led the previous round of $130 million in 2012. According to Deezer's 2015 prospectus, Access held a 26.9 percent fully diluted share on June 30. Warner Music Group, owned by Access, had a 3.8 percent fully diluted share. Early investor Orange held 10.7 percent.

The company abandoned its plans just days before the IPO was to take place, however. The poor margins of the music subscription business easily deserves at least some blame. Weak third-quarter earnings from Pandora, the company potential investors had used as a reference point, didn't help, either. Deezer's previous funding round was $130 million in 2012 from Access Industries and existing investor Idinvest.

CEO Hans-Holger Albrecht says the "vast majority" of the funding will address Deezer's biggest challenge, customer acquisition. This requires marketing and communication, but Albrecht believes the key, and the difficulty, is simply getting people to use the service and getting an opportunity to explain its features. "Consumers don't even know what streaming is. They have to experience it. They have to go through it. They have to play with the product."

Subscription services have looked to mobile and broadband providers for many of their customers. Indeed, telecommunication companies have driven Deezer's customer acquisition. France, helped by a partnership with Orange, accounted for 52.3 percent of Deezer's 2014 revenue. In Europe, which accounted for 28.7 percent of 2014 revenue, Deezer has been helped by partnerships with Telenor and T-Mobile. Albrecht says Vodafone is a partner in Germany, currently Deezer's fastest-growing market. About 15 percent of 2014 revenue came from Latin American, where a partnership with Tigo in Brazil has accounted for most of customer acquisition.

But Deezer is attempting to lure standalone customers that pay directly without a telecommunications company acting as a facilitator. Not only do standalone subscribers require less reliance on telecommunications companies, their €5.50 average monthly revenue is substantially higher than the €4.30 of bundled subscribers. Deezer had 1.5 million standalone subscribers as of June 30, up about 60 percent from 931,000 a year earlier, that accounted for half the company's revenue.