Memoria episódica

4.1.1.1 Deezer’s business depends on increasing and continuing acceptance of on-demand streaming as a music delivery format.

Deezer’s success and continued growth depends on increasing acceptance of on-demand music streaming services by consumers, content producers and distribution partners. While analysts predict significant growth in this market (as described in further detail in Chapter 6.4,

“Industry and Market Overview”), their predictions may prove to be erroneous. Consumers may prefer other methods and formats to on-demand music streaming services. If consumers migrate to the music streaming format more slowly than expected or decide to access music in other formats or through other delivery methods, it could make it more difficult for Deezer to grow its subscriber base, license attractive content, grow revenues or achieve profitability.

Moreover, even if streaming achieves increasing acceptance and penetration, there is no assurance that this will continue. New music and audio delivery formats, including formats that do not exist today, may prove to be more successful and attract more listeners than on-demand audio streaming. If Deezer fails to anticipate changes in music delivery formats it may lose subscribers, in which case its business, results of operations, financial condition and prospects would be adversely affected.

4.1.1.2 The market for on-demand audio streaming services is new and rapidly evolving.

The on-demand streaming music market is new and rapidly evolving, and its characteristics as it matures are uncertain. There is uncertainty regarding future developments in service pricing, service offerings, potential for differentiation of services, and potential consolidation of the streaming entertainment market. Deezer’s business model was initially based mainly on subscription services offered in bundles through partners and has evolved towards being more focused on its standalone subscription offerings. The market may move toward advertising-supported models or other formats, or combined offerings of audio and video streaming. If the other models gain in prominence there can be no assurance that Deezer will be able to adapt its business model accordingly.

Moreover, certain features may emerge in the streaming market that may prove disadvantageous to Deezer. For example, if it becomes more prevalent that content rights are permanently or temporarily granted by rights holders on an exclusive basis to one or a small number of providers, the attractiveness of Deezer’s services will depend on its ability to secure such exclusive rights. Even if Deezer is able to do so, the resulting costs may impact its margins and make it more difficult for Deezer to achieve profitability. Deezer plans to make substantial investments in marketing in the coming years, but those investments may

not provide the anticipated return, or may not be fully recovered, if Deezer fails to anticipate the manner in which the streaming market develops in the markets in which Deezer operates.

4.1.1.3 Deezer operates in a highly competitive industry, and competitive pressures could affect its revenues and growth.

Deezer operates in an intensely competitive industry. It faces significant competition from both established and newly-formed competitors and may face competition from new entrants in the future. Deezer competes in the market on the basis of a number of factors, including price, quality of user experience, amount, quality and relevance of content, brand awareness and reputation, accessibility, and features such as content recommendations. Deezer may fail to establish or maintain a sustainable competitive advantage in any or all of these categories, which could have a material adverse effect on its business, results of operations, financial condition and prospects.

Deezer directly competes with other providers of on-demand streaming services. Its principal competitor in the on-demand streaming market, Spotify, is larger and better known than Deezer in most of Deezer’s markets. Apple has also recently launched Apple Music, an on-demand audio streaming service that offers similar content to Deezer’s flagship Premium+

service and competes with Deezer’s subscription offering. Apple’s service benefits from a large potential subscriber base through iTunes and Apple’s mobile devices, which include the Apple Music app preloaded as part of their operating systems. Based on a public statement from Apple, as of August 2015 Apple Music had approximately 11 million users who had registered to use its services on a free three month trial basis since its launch on June 30, 2015 (source: USA Today, August 6, 2015). It is too early to predict the ultimate effect of Apple’s new service on the on-demand streaming market. Deezer also competes with the streaming services of Rhapsody, Rdio and Tidal (an artist-owned streaming service), among others.

Deezer’s competitors also include online radio services, digital and satellite radio (such as Pandora and Sirius), terrestrial radio broadcasters, digital downloads, traditional physical music sales, and broader entertainment subscription services that offer television and films, such as Netflix and pay TV, as well as other forms of entertainment. Deezer’s competitors may have greater scale and geographic coverage, more subscribers or listeners, longer-established relationships with rights holders, better access to content or more favorable pricing and economic arrangements, better subscriber data analysis and processing capacity, greater market penetration, greater financial, technical, marketing and personnel resources, more developed logistical and technological capabilities and greater brand name recognition.

There can be no assurance that Deezer will be able to adapt its business or service offering to compete effectively with its competitors, particularly if the competitors offer similar services at a lower price, develop new added value features or services to improve subscriber engagement, provide enhanced financial opportunities to rights holders or if they achieve market penetration in key geographies more quickly than Deezer.

Deezer also competes with video streaming platforms such as YouTube, which offers uploaded music and video clips along with other forms of entertainment, and is highly popular with younger consumers and has many more users than streaming platforms. Large e-commerce, internet service and consumer electronics goods companies such as Amazon and Google either currently or may in the future offer music streaming or digital download services that compete directly with Deezer (e.g., Google Play Music and Amazon Prime Music). Moreover, new market entrants may appear with different competitive advantages or new music delivery formats, or Deezer’s content providers may choose to expand their operations into music streaming and compete directly with Deezer. The recorded music market is also vulnerable to music piracy, and consumers may increasingly prefer free pirated

content to music streaming services. If Deezer fails to compete effectively in the market for any reason, it may fail to grow its subscriber base, may lose market share and may fail to grow revenues or achieve profitability.

4.1.1.4 The audio streaming market may not develop in certain large markets where it is not yet widely accepted or where streaming rights are not available.

Streaming penetration is currently relatively low in most markets. So far, streaming has achieved its greatest success in Sweden and Norway, where IFPI data shows that penetration rates (meaning the percentage of total recorded music revenues that are generated from subscription and advertising-based streaming) are 70% and 63%, respectively, but where Deezer does not have a significant presence (source: IFPI Digital Music Report 2015 (IFPI 2015)). Streaming penetration rates are only in the range of 3% to 19% in many other large developed markets, including France, the United Kingdom, Germany and the United States (source: IFPI 2015). These penetration rates must increase in order for the anticipated growth of the streaming market to occur. In addition, streaming is not widely accepted and streaming rights are only available to a limited extent in certain large geographic markets like Japan, India and China. There can be no assurance that streaming will achieve significant acceptance in markets where penetration rates are currently low. If streaming does become available or widely accepted in these markets, Deezer may be required to make very substantial investments and to adapt its service offerings in order to achieve success. If Deezer enters these markets and fails to provide an offering that is suited to consumer tastes, it may not earn a sufficient return on or recover these investments. If so, given the potentially substantial amounts involved, the impact on Deezer’s results of operations may be particularly significant.

4.1.1.5 Economic downturns in the markets in which Deezer operates may adversely affect demand given that spending on streaming services is discretionary.

Deezer’s performance depends on global and regional economic conditions, which have historically shown significant volatility. Adverse economic developments typically have a negative impact on discretionary consumer spending, and spending on entertainment services that Deezer sells may be particularly sensitive to this effect. In economic downturns, free streaming and music entertainment services (such as YouTube) may attract more users than paid subscriptions offerings, which could adversely affect Deezer’s business and results of operations given that its revenues are generated principally from paid subscription fees. In addition, economic downturns may negatively impact Deezer’s partners in the telecommunications, internet, mobile and consumer electronics industries, which, in turn, may have an adverse effect on Deezer’s revenues from distribution partnerships. Any of these developments could have an adverse effect on Deezer’s business, financial condition and results of operations or negatively impact its ability to implement its business plan or achieve its performance objectives.

4.1.2 Risks Related to Content

4.1.2.1 If Deezer is unable to negotiate and maintain license agreements with rights holders on terms acceptable to it, or fails to comply with its obligations under its license agreements, its business could be adversely affected.

Deezer’s ability to provide its subscribers with musical and other audio content depends on reaching agreements with a large number of holders of copyrights for the sound recordings and the musical compositions (including the lyrics and musical scores) of its content. Deezer generally licenses rights through direct bilateral contracts with the relevant rights holders in

its various geographic markets, including major music labels, large and small independent music labels, music publishers, copyright collection societies and artists. The terms and conditions of such licensing agreements vary for each category of rights holder and among rights holders of the same category and are different from one geographic market from another (see Chapter 6.5.4 “Content Licensing” for further information). In many instances, different terms and conditions apply to the content streamed as part of Deezer’s free, paid subscription and promotional offers, and varying terms apply in different geographic markets.

Deezer must devote significant resources to negotiating, establishing and monitoring its various licensing agreements and maintaining good relationships with rights holders, and such efforts may not be successful. Deezer is currently operating under ad hoc arrangements with some of the labels pending signature of a definitive agreement. If Deezer is unsuccessful in negotiating and maintaining licensing agreements with one or more recording rights holders on terms acceptable to it, it could have a significant adverse effect on Deezer’s ability to provide quality content to subscribers. In addition, a failure to comply with the terms of the license agreements, including for example, a failure to accurately calculate the royalties owed for music streamed on Deezer’s platform, may result in the cancellation of the agreement or an imposition of penalties or other liquidated damages pursuant to the terms of the contracts.

See Section 4.1.2.5, “Payments under Deezer’s licensing arrangements and partnership agreements are subject to adjustment following audits”. Similarly, disagreements over the interpretation and application of the terms of the license agreements, or an inability to reach agreement on terms and conditions of the licenses, could result in legal claims being brought against Deezer by rights holders. The occurrence of any of the foregoing could adversely affect Deezer’s business results of operations, financial condition and prospects.

4.1.2.2 If Deezer does not maintain licensing relationships with the major music labels upon favorable terms or at all, its business, financial condition and results of operations would be materially and adversely affected.

Deezer has historically maintained licensing arrangements with each of the three major music labels, Universal Music Group, Sony Music Entertainment and Warner Music Group. These agreements typically have terms of one to two years on average. While the content controlled by the major labels represents only a small percentage of the number of songs in Deezer’s catalogue, it is responsible for a majority of all of the songs streamed on Deezer’s platform globally. If Deezer is unable to renew agreements with the major labels on acceptable terms or at all, the loss of content could cause a disproportionately significant decline in the perceived value of Deezer’s service and damage its ability to attract and maintain subscribers and could adversely affect Deezer’s business, results of operations, financial condition and prospects.

Given the relatively short terms of its licensing agreements, Deezer sometimes operates under ad hoc arrangements with some of the music labels, pending the signature of a permanent renewal agreement. These ad hoc arrangements can be terminated, or their terms can be revised, at any time. If Deezer does not finalize the negotiation and signature of permanent agreements with the major labels, it may lose access to content or be subject to varying terms that could impact its costs and margins.

4.1.2.3 Certain content licensing agreements are subject to “most favored nations”

clauses.

Deezer’s license agreements with certain rights holders also contain so-called “most favored nation” clauses that entitle such rights holders, upon request, to review the terms of Deezer’s agreements with other similar rights holders and (under certain circumstances and in certain jurisdictions) to demand that the most favorable fee and other arrangements under such other

agreements are also applied in such rights holder’s agreement with Deezer. Certain agreements may feature this type of right with respect to specific terms in the contract arrangement, which may permit the party to demand more favorable terms that were initially granted to other parties in exchange for concessions. Such a revision of commercial terms could increase Deezer’s costs and reduce its margins.

4.1.2.4 Royalty payments to the content rights holders comprise most of Deezer’s cost of revenues.

Royalty payments to rights holders represent the large majority of Deezer’s cost of revenues.

In 2014, Deezer’s Cost of revenues – music rights were €112.5 million, or 79.3% of revenues.

Royalty payments for content rights holders are typically calculated on the basis of each holder’s “market share” among holders of the same type of rights, or the relative weight of the rights holder’s content as a percentage of total content streamed on Deezer’s platform. An increase in the “market share” of a given rights holder could result in an increase in royalty payments due, especially if that rights holder has particularly favorable royalty payment terms under existing arrangements or insists on more favorable terms in the future. Such an increase could adversely affect Deezer’s business, results of operations, financial condition and prospects.

4.1.2.5 Payments under Deezer’s licensing arrangements and partnership agreements are subject to adjustment following audits.

Deezer, its partners and certain content rights holders are granted audit rights under the relevant partnership and licensing agreements, respectively, to ensure the accurate reporting of the elements needed to calculate compensation under such agreements. Under the terms of the licensing agreements, Deezer may be required to pay penalties for the late payment of royalties or the late reporting of information needed to calculate royalty payments, which could result in increased operating costs and jeopardize Deezer’s relationships with key content providers. Deezer has been subject to two such audits from content rights holders, which resulted in Deezer being required to pay limited amounts in respect of underpaid royalties and, in one case in 2009, the rights holder’s expenses related to such audit. An overstatement of royalty payments could result in Deezer paying higher royalties, which could also adversely affect Deezer’s margins. Similarly, an understatement or overstatement of the number or category of subscribers and the distribution channels through which they subscribe (partner’s or Deezer’s website and mobile application) could also result in Deezer receiving higher or lower fees from its partner, which could have a material impact on Deezer’s revenues. Audits may also result in legal disputes as to the accuracy of underlying reporting systems.

4.1.2.6 Deezer’s content providers generally must approve its service offerings.

Deezer’s service offerings, including the scope and marketing of the offerings, typically must be approved by content rights holders before their content can be included in that offering.

This limits Deezer’s flexibility to provide new and innovative offerings to existing and potential subscribers, or to tailor offerings to particular subscriber segments. Deezer may also fail to obtain approval for offerings that are economically favorable to it, may be forced to forego advantageous business opportunities or content providers may share information on offerings with Deezer’s competitors, each of which may adversely affect Deezer’s revenue growth. Content providers may also seek to discourage music streaming services from offering free streaming options in the future or grant more advantageous terms to services that exclusively offer paid subscription services, which may require Deezer to adjust its service offerings or discontinue its free advertising-based service. Deezer may be unsuccessful in

convincing content providers to approve strategies and offerings that could increase its subscriber base in new or existing markets, which could adversely affect its subscriber and revenue growth.

4.1.2.7 If Deezer does not secure licenses for popular local content in key geographic markets, its business and growth prospects may be adversely affected.

Access to local content is important to Deezer’s ability to attract subscribers in many geographical markets, particularly in those where local artists are the most popular.

According to IFPI’s report for 2014, 70% or more of the top 10 albums in Germany, the Netherlands, Denmark, France, Sweden, Italy, Brazil, Japan and South Korea are by local artists (source: IFPI Recording Industry in Numbers 2014 (IFPI 2014)). In those markets, obtaining licenses for local music content is vital to the perceived value of Deezer’s service and subscriber engagement. Negotiating rights for local content may require reaching agreement with numerous rights holders, requiring Deezer to devote significant resources to these efforts. In addition, the terms offered by holders of rights to local content may be less favorable than those that Deezer obtains for international content. If Deezer is unable to negotiate agreements for local content on acceptable terms or at all, it could adversely affect its growth and market share in the relevant jurisdiction, which could have an adverse effect on its business, results of operations, financial condition and prospects.

4.1.2.8 Licenses from publishing rights holders may be difficult and costly to obtain because publishing rights holders tend to be a dispersed and fragmented group, and Deezer may have limited information on publishing rights holders and royalties.

Holders of copyrights in musical compositions tend to be dispersed and fragmented, and in some cases it can be challenging for Deezer to establish and maintain the necessary license

Holders of copyrights in musical compositions tend to be dispersed and fragmented, and in some cases it can be challenging for Deezer to establish and maintain the necessary license