HMV (LSE: HMV) is making a surprise announcement at its AGM today – it’s buying a 50 percent stake in the increasingly well-thought-of online music retailer 7Digital for £7.7 million, in a move that will finally kickstart its digital ambitions.
The deal means HMV Group will use 7Digital as its sole supplier for what it says will be “all of its existing digital operations”, though the announcement also says it’s its UK and Canada operations which will benefit from the acquisition. HMV will also use 7Digital to build a new e-books and audiobooks store for its Waterstones subsidiary, a new area for 7Digital.
The sell-off is being made by management and their venture backers Balderton Capital and Sutton Place Managers. CEO Ben Drury, CTO James Kane and other managers are staying aboard, but HMV will appoint its own, three-strong JV board. The announcement revealed privately-held 7Digital is forecast to make a £1 million EBITDA loss this 2009. Drury, who spoke at our EconMusic event last year, told me: “It’s a pretty cool deal.” See our full interview.
While physical entertainment sales for many categories other than games and gadgets dipped for HMV, early in 2008 it began trialling GetCloser.com, a social network that would let users share their entertainment libraries, but it’s gone predictably limp. It’s been the conversion of its digital offering to DRM-free MP3 and the addition of web streaming in September, on top of its £5.99-a-month HMV Jukebox plan, that has started to move downloads for the retailer – Q1 HMV.com sales were up 16 percent from last year while Waterstones.com, which has an exclusive deal to push e-books to Sony’s E-reader, was up 60 percent.
It’s not as though HMV needed to splash out £7.7 million on 7Digital if it just wanted to improve its ecommerce channel. But we saw how the collapse of Woolworth’s physical and online entertainment distributor Entertainment UK in December killed off those stores online and on the high street – by taking control, HMV mitigates against losing its increasingly important digital distribution channel, and also gets to benefit from 7Digital’s own prospects. Drury’s five-year-old company sells through 7digital.com but is better known for powering other sites’ stores on a white-label basis.
The outfit was already doing nicely with white-label – powering downloads for the likes of Last.fm, Bebo, Last.fm, ITV.com, Five and the major labels – but, after going all-MP3 and making its backbone available via API in September, it’s been motoring, winning deals to downloads for Spotify, Songbird, AOL’s WinAmp and others, each of which gives it a slice of affiliate sales.
The forecast loss may not look promising but, with a range of deals in place, 7Digital looks able to profit from ongoing MP3 consumption as long as 7Digital’s a la carte downloads can stave off the rise of the unlimited jukebox model.
HMV on Thursday said UK & Ireland sales in for the 18 weeks to August 29 were up 1.7 from last year, but group-wide sales dipped 1.8 percent.