Deezer's first American target was the audiophile, an underserved market that might be attracted to its high-definition service, Deezer Elite. A month later, Deezer acquired Muve Music from Cricket Wireless, giving it a toehold in U.S. market and a partnership with the prepaid mobile carrier. The effectiveness of the deal came into question in September, however, as information released related to Deezer's failed public stock offering suggested just a few thousand had migrated to Deezer by mid-2015. Was this initial push into the U.S. failing?
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For months Goldman was restricted by the quiet period required before a company's IPO. Now he can reveal Deezer has 300,000 subscribers in North America through its partnership with Cricket Wireless. Cricket customers can get Deezer for $6 per month, about half the standard monthly cost for a subscription service. (More subscribers -- he won't say how many -- have come from Deezer Elite.) That's where the interview starts.
At one point, there were over two million Muve Music subscribers -- and then Deezer's prospectus said there were 60,000 total U.S. subscribers as of June 30. What are you getting out of that acquisition?
That was one of the things we unfortunately couldn't talk about during the quiet period. It's a lot different than that. Let me give you the numbers so we can talk about it. The 2.3 million [Muve Music subscribers] was what we call a "hard bundle number" -- in 2013, I believe. That's when Leap Wireless was giving the service to a larger percentage of its overall audience.
Some things about that, before we even bought. One is obviously that we bought it quite a bit later. Number two, and more importantly, the genesis of our acquisitions was that AT&T bought Leap Wireless. Number three, prepaid has a high degree of churn. Number four, the Leap Wireless/Cricket product was on a different network than AT&T. So they had to migrate users from Cricket onto the AT&T system -- they had to get new phones, new plans. etc. When you put all those together, plus the number of users actually active in the hard bundle, it was a much, much smaller number of people that was actually consuming Muve Music when we bought it.
So a lot of those people were lost during AT&T ownership?
No, I'm saying before AT&T even bought it. When Muve launched it was a standalone paid product. It was not a hard bundled product. They offered it as a standalone subscription, and they built a subscriber base of over 600,000 subscribers. The reason why we bought it and partnered with AT&T was we felt it was an underserved market that had shown, historically, a huge desire for this kind of offering. At that time I think Leap Wireless or Cricket had 4 [to] 4.5 million subscribers.
The hard bundle greatly inflated the numbers, right? People didn't know the cost. They were getting it for free.
Right. But what we're aiming at is to get back that standalone market, the standalone users. The other part is the prospectus doesn't include the number of people that were in trials. Only the number of current, paying customers were reported in the prospectus. So today we're at 300,000 [subscribers through Cricket]. Our goal is to get back to the 600,000 plus by the end of the year.
What is the relationship between Deezer and Cricket right now?
We are their music partner. Like I said, we're growing quite well. Today we're at 300,000.
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Tell me about partnerships with mobile companies. There have been a lot over the years, going back to Verizon working with Rhapsody before smartphones. Is this a vital partnership not just to Deezer but the growth of subscription services?
I think it's incredibly valuable. The largest place to reach mobile users is obviously through mobile carriers. So it's definitely the right place to talk to your customers. Cricket has over 5,000 stores that we talk to customers every day about music services. Also the music has to be streamed to the phone, and data plans are really important. In the case of Cricket, we are selling it as a standalone product. In other markets there are hard bundles.
We've talked a little bit about the home audio market. We've talked about the Cricket market. How does Deezer push beyond those two markets and go out to the rest of Americans. What comes next?
I think you'll see in the coming months some new markets we're going after. As our product has evolved to be more valuable, at some point I think you'll see us target all U.S. consumers.
A lot of the value services are trying to add, outside of certain mobile carrier relationships, for example, is what we call curation or discovery. Is that something Deezer wants to do to make it stand out?
Positively. If you look at our market research, which I'm sure is consistent with the overall industry, the majority of consumers who could buy music services, who have an interest in music services, still haven't because they're not as interested in do-it-yourself products. They want highly programmed experiences. And they're willing to pay for highly programmed experiences.
I see Netflix as being somewhat analogous to music streaming services. In one aspect there's programming. Do you think Deezer and other subscription services need to get into the original content that Netflix and Amazon Prime are doing?
I think that's a route everyone will take over time. When [Netflix] built a large enough audience for them to invest against original programming they moved to that. What became a tipping point for Netflix was the introduction of television content and they found out the primary use case was actually not movies but was TV. You're starting to see the evolution of non-music audio content, which is why we bought Stitcher. And you can see the success we're having with non-music content.
Netflix starts as low as $7.99. Do you think that is a reference point that's a standard for a monthly service?
You may not like this, and I don't mean to be a contrarian, but I don't think price is the issue. Price is an issue for a music-only service. I think SiriusXM has done a tremendous job with marketing its non-music product. If you look at SiriusXM marketing, four of their five talking points have nothing to do with music for content. They don't publicly disclose this, but my guess is around 80-plus percent consumption is music, just from the data points I have. So they're consuming music, but if you ask them why they're buying SiriusXM -- we've done studies -- they're buying it for a whole host of other reasons. I think these music services are going to move to becoming more packagers. To your point about price, I think the non-music content is really important for creating a value proposition. I don't think it's about $7.99 vs. $9.99. I just think the problem is its all music at $9.99, with little programming value.
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At what point, if at all, do you integrate Stitcher into Deezer? [Deezer acquired podcast aggregator Stitcher in October 2014.] Can we expect non-music audio content to be bundled in the future?
We've done that outside the U.S. We've been experimenting with I would say really good success in certain places. An example would be audiobooks in Germany. It's done phenomenally well and represents a material point of consumption. We recently introduced Premiere League football, that's doing extremely well. For all the challenges you and I are talking about for music, talk has had even more challenges. Podcasting is even harder to use. The programming value of podcasting is even lower. We've got a large audience, but it's a largely a do-it-yourself, early adopter audience. So I think we are going to take that kind of talk content mainstream in Deezer in a number of ways.
I hate to go back to price, but is that something you can do while maintaining the margins you have now?
It's a really interesting question. The talk content is not prohibitively expensive. The challenge is the licensing issues with the labels. I think the rights holders are still holding to their percentage of revenue regardless of new types of content that are non-music content. But I think over time it's got to evolve. At some point I think these services will have lots of types of audio content and it would only make sense that the rights holder would get paid based on actually what's being consumed of their content, not of others.
So you're saying the percent of revenue deals with music rights holders are very rigid and don't account for non-music content that might be licensed.
Yeah, but it's a little trickier than that because these services have been all music content to date, right? It's not like there's been an issue, but my guess is over time it evolves in a way that benefits everyone. If the service can sell to more subscribers, it benefits everyone. But it's a hindrance today to investing in talk content if you're still paying the same percentage for music regardless of how much talk content is being consumed.
Pandora has a deal for the Serial podcast. Apple purchased a podcast app, Swell. Spotify has non-music content. It looks like everybody else is on the same page as Deezer, don't you think?
Yeah. Listen, I think everyone understands these audio services need to evolve. I think it's a question of who's going to do it the best. I think the DNA of programming -- to your point about adding value -- is different. And I think the DNA for talk content is quite different than it is for music. If you look at what Pandora has done with Serial you can see some of the limitations of addressing talk like music. If you look at Stitcher and the ability to "chapterize" things, just the way you consume talk content is different.
I don't think services will end up with the same offerings. Some will do it much better than others. But overall I think you're seeing a shift to not just non-music but to a highly programmed experience. If you look to research Deezer has done, the majority of consumers want a lean back experience and they're willing to pay for a better lean back experience.