Are music streaming services overvalued? Deezer's initial public stock offering, planned for later this month, provides a rare glimpse into ways these companies and their investors view their valuations.
Paris-based Deezer is a music subscription service available in about 180 countries. It had revenue of $106.1 million from 6.3 million subscribers in the first half of 2015. Revenue was $161.6 million from 6.9 million subscribers in 2014.
Deezer is hoping its sale of 8.2 million shares at its initial public stock offering on the Paris stock exchange later this month at $41.44 to $56.05 per share will raise at least $342 million. That price range would value the company at $1 billion to $1.25 billion. A valuation of $1.25 billion may be large for a company in the cutthroat, low-margin business of music streaming, but Deezer can partially justify the valuation by pointing to its largest competitor.
Spotify last raised money at an $8.5 billion valuation, a figure that has dismayed some people in the music industry. At the time, its latest public figures were 20 million subscribers and 55 million monthly, free users (for a total of 75 million active users). At those numbers, Spotify's ratio of valuation to subscribers is $425. (These and the below calculations do not account separately for advertising revenue. Advertising accounts for about 9 percent of Spotify's revenue and under 4 percent of Deezer's revenue. Very little of both company's value can be attributed to advertising.)
There are two ways of looking at Deezer's subscriber numbers. One is the total number of subscribers. This is the figure Deezer has long given publicly. At the end of June, Deezer had 6.3 million subscribers, according to its IPO filing. Using Deezer's range of IPO prices, this scenario's valuation-to-subscribers ratio ranges from $162 to $197.
But Deezer isn't undervaluing itself. The company had only 3.0 million revenue-generating subscribers, the remainder being inactive subscriptions from mobile carrier bundles. Counting only subscribers that generate revenue, Deezer's valuation-to-subscribers ratio ranges from $270 to $330. Relative to their sizes, the high end of Deezer's target IPO price range is close to Spotify's $425 per subscriber valuation.
It would be hard to argue a Deezer subscriber is more valuable than a Spotify subscriber. Spotify is growing quickly while Deezer's subscriber numbers actually dropped from the end of 2014 to the end of June due to a shift away from mobile carrier bundles and toward standalone subscribers. Spotify's strategy of targeting fewer markets (quality over quantity) appears to have been more successful than Deezer's strategy of launching in both valuable and developing markets (quantity over quality). And Spotify has more brand awareness than Deezer.
Why would one company have a higher multiple than a similar company? Growth rates, efficiency of sales and brand quality all play into a company's value. Higher growth rates, more efficient sales and greater brand quality command a higher valuation. In the case of subscription services, technology and talent are also factors. Investors may want to pay more for a company with the better of these characteristics.
With that in mind, what does Jay Z's purchase of Aspiro say about the company? Aspiro's WiMP subscription service, the predecessor to Tidal, had about 515,000 subscribers when acquired by Jay Z in March. Jay Z paid only $56 million. At that price, Jay Z paid just $109 per subscriber. Either Jay Z got a bargain or WiMP didn't have the growth or brand quality that drives value of these companies. Both are probably true.
Subscription services and their private investors certainly have an opinion on the services' value, and Deezer's IPO will provide some insight into what the market thinks. The music industry might have to rethink it's future if those opinions differ greatly.
Correction, Oct. 19: The original version of this article incorrectly had Spotify's subscribers at 25 million and its monthly free listeners at 45 million. At 25 million, Spotify's valuation-to-subscriber ratio is $340. The ratio using the correct number of 20 million is $425. The earlier version of the article also calculated Deezer's valuation-to-revenue generating subscriber ratio using an incorrect number of revenue-generating subscribers as of June 30. The actual number is 3,794,026, according to page 14 on Deezer's IPO filing. The number used in the original version was 2,998,171, which is the total of Deezer's standalone and monthly active users. The difference is the number of revenue-generating monthly inactive bundled users, and can also be found on page 14 of the IPO prospectus. These new numbers put Spotify's ratio of $425 above the high end of Deezer's range of $330. The main thrust of the article is unchanged: although their numbers are comparable, a Spotify subscriber is more valuable than a Deezer subscriber.