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Discussions to wrap online music retailer 7Digital in to HMV (LSE: HMV), which is buying half the firm for £7.7 million, began with their CEOs sharing seats on the Entertainment Retailers Association board, 7Digital chief Ben Drury told paidContent:UK.
“I asked Simon Fox: What’s HMV doing in digital? You’ve made several attempts and not really succeeded, you’re the biggest entertainment retailer in the UK’. Digital for them was a bit of a sore point.”
After the collapse of Woolworths’ Entertainment UK and Nokia’s OD2 entertainment distributors threatened entertainment retailers around Europe, the deal is about securing HMV’s supply of bits. “Because they wanted to power HMV, Canada, UK, Waterstones, they thought putting all their eggs in one basket was a bit risky if they didn’t have some kind of strategic value,” Drury says.
So why didn’t HMV just sign up for 7Digital’s white-label platform, as the likes of ITV.com, Bebo and Future Publishing (LSE: FUTR) have done? “HMV have tried that before. They had a deal with OD2, they paid Microsoft (NSDQ: MSFT) a lot of money and they’ve not been able to make that work … With Apple (NSDQ: AAPL) and Amazon (NSDQ: AMZN) MP3 out there, you need scale, you need the clout.” The new deal means the end of HMV’s relationship with MediaNet Digital.
“For us, obviously we’ve been backed by venture capital up to now and they wanted to get a return on their investment at some point. We achieved an awful amount on our own and with very limited resources. We were first with all-MP3 and all the European expansion we’ve done and the businesses we’ve won from opening up our API. It felt like the right time to team up with someone bigger – and there’s no-one bigger than HMV in the UK.”
But doesn’t the rise of unlimited music subscription services threaten 7Digital, which, whilst powering track downloads for services like Spotify, still relies on per-track, a la carte downloads? “I really don’t believe so. Those things can co-exist.
“The jury is still out on whether subscription can reach mass-market. Spotify is amazing but the premium product is still £10 a month, and that’s still more than I pay for broadband at home. People don’t listen to that much music that they need an unlimited jukebox – people are still happy to buy an individual track or CD.”
Drury and his management team have not given away control. Drury calls the relationship “arms length”, with no competitive restrictions on 7Digital continuing to operate s it was. “It came out logically that it would be good for them to become an equity holder,” he says of HMV. “Because they’ve had success with their Mama group venture, that structure worked for them and us – we didn’t want them having a majority stake or buying the company.
“We’ve done it in such a way that we retain our independence – they don’t have any special rights, it’s like a 50/50 JV type deal – 7Digital takes over their entire digital business, which gives us new opportunities in e-books and video.” A new area for the company, 7Digital had already been working toward distributing e-books (“We’re open to doing e-books with anyone”). With HMV, it will power a new Waterstones.com, which already has an exclusive deal to supply Sony (NYSE: SNE) E-reader books. 7Digital will use the .epub format, which Drury says is “emerging as the standard”, but “we never restrict ourselves to one format”.
One thing to emerge in the announcement was 7Digital forecasting a £1 million 2009 EBITDA loss. Is that a concern? “No,” Drury says. “We raised £4.25 million last year and we’ve got most of that still in the bank – our plan was to be investing that money per year to build our technology and platform, so that’s in line with our expectation. They’re not putting any new money in – there’s no need for us to raise capital because we’ve still got a lot of that left.”