Pando

Deezer launches in the US. But will Americans pay $20 a month for streaming music?

By David Holmes , written on September 11, 2014

From The News Desk

When discussing the on-demand streaming music wars between Spotify, Rdio, Rhapsody, and Beats Music, one service Americans often fail to mention is Deezer. Launching in 2007, the Paris-based company has been in the game longer than any of the above services except Rhapsody and, in terms of popularity, is Spotify's closest competitor with 16 million users, 5 million of whom pay for the service. (Spotify at last count had 40 million free users and 10 million of those are paying customers).

The reason Deezer is often left out is that, despite reaching listeners in 180 countries, the United States wasn't one of them -- until now. Deezer has just announced an expansion in the US market where it will team up with the wireless audio company Sonos to bring its high-resolution streaming service into American homes.

The catch? The service, dubbed Deezer Elite, will cost $19.99 a month and for now is limited to Sonos users. Unlike Rdio and Spotify's paid offerings, which are also compatible with Sonos but cost only $9.99 a month, Deezer Elite will stream in 16-bit FLAC Audio at 1411 kbps. Rdio and Spotify only stream at 320 kbps.

Targeting Sonos users with higher-priced, higher audio quality offerings makes sense -- Sonos cofounder Thomas Cullen told Technology Integrator that the average household income of his customers is around $100,000. Furthermore, Sonos is designed to be listened to in the home, not on cheap earbuds, so the better sound quality will make more of a difference.

But will even the highest-end customers pay double the price for it?

A 2011 survey by the Consumer Electronics Association found that of listeners who claimed to have a "moderate interest in audio," 40 percent of them would consider paying for better quality electronics equipment. But that could mean anything from a nice pair of Sennheiser headphones to affordable external computer speakers that.

Moreover, many listeners, even avowed audiophiles, can't tell the difference between lossless FLAC sound-quality and 320 kbps MP3-quality. That said, Deezer Elite is clearly targeting luxury consumers, for whom the perception of having a better product is as important as reality.

There's a broader impact to this announcement that goes beyond how it affects Deezer's ability to compete against its rivals, however. With annual music industry revenues only now stabilizing after being cut in half over the past decade, and with more stakeholders than ever looking for a piece of the pie, artists, labels, and the tech platforms are struggling to shore up profits wherever they can. And there are serious doubts about the longterm sustainability of free, ad-supported, unlimited streaming models.

There are a couple schools of thought on how the music industry can increase its profit margins. One is that the only way to meaningful increase revenues is to convince more customers to pay for it. Customers who pay for Spotify's and Rdio's premium services create more revenue both per-user and in-aggregate than people who consume music on free steaming services, including YouTube. The numbers are staggering: A generous estimate puts the number of paid subscribers in this space at only around 25 million, while there are up to 400 million users who actively listen to the free ad-supported offerings from Spotify, YouTube, and others. Those 25 million listeners helped create $628 million in revenue last year in the US, while the free listeners, which outnumber the paying customers up to sixteen-to-one, only generated $220 million. Under this rationale, Deezer's high-priced premium service is one of many crucial steps in bolstering music industry revenues.

But despite the undeniable value of having access to tens of millions of songs for only $9.99 a month (or $19.99 a month for that matter), most users would rather suffer through ads than pay. For evidence of this, consider that as Spotify continues to grow, the percentage of its total users who pay for the service has remained more or less the same at around 25 percent.

The other school of thought argues that as the audience for streaming music continues to expand globally, and as smartphone adoption is poised to explode, the market will naturally catch up.

"We're not even at the beginning of the first inning when it comes to global demand," says Rdio COO Marc Ruxin. And indeed, Rdio just launched a major redesign that emphasizes its free radio offerings over its paid subscription service, suggesting that the larger market is settling on acquiring as many customers as possible, regardless of whether they'll pay for it.

That doesn't mean premium offerings like Deezer Elite won't play an important role in the reconfiguration of the music industry. This is literally a game of fractions of pennies, so every new revenue stream helps. But don't count on large swaths of customers suddenly changing their behavior overnight and paying $19.99 for something they won't even pay $9.99 for.

[illustration by Hallie Bateman]