To understand the 7digital story you need to realise just how rapidly the tectonic plates of the digital music industry are shifting.
Only then does it become apparent the scale of the opportunity offered by the music streaming and digital radio business – and the mismatch between this and the firm’s current stock market valuation.
The company we see today was born after UBC Media was reversed into 7digitial just over a year ago.
The rationale was to bring together 7digital’s streaming know-how with UBC’s expertise in Internet radio.
There is a convergence between the two musical media that makes this look a very sound strategy.
“People who are time poor need something that is a lot more like radio from their streaming services,” said 7digital chief executive Simon Cole.
“Radio is moving towards being streamed music and streamed music is moving towards radio.
“So that was the rationale of putting two companies together to create one company that can offer customers a back-end supply service - a platform as a service business – whether you simply want a radio station online or an all-you-can-eat music streaming and download service.
“Our advantage over the opposition is we have the skills of radio and of music. More importantly we have curation skills.”
The past year has seen the management steer the acquired 7digital operation away from low profit digital downloads, which used to be the bread and butter business, to focus it on the aforementioned streaming market, which generates gross margins of 95%.
This ‘pivot’ – a term used in the US when a tech business takes a new direction – appears to have been largely successful, based on the latest financial results.
The task now is to get the new, reformatted 7digital to break-even (scheduled to occur by the end of next year) and then on to profitability.
Where the two titans of online music are consumer-facing, 7digital is business-to-business.
In very simple layman’s terms, it white-labels streaming technology to other companies, charges to set up the music interface and picks up a monthly or annual fee.
For instance, grocer Sainsbury’s recently brought it on board to provide a music service for its customers.
Panasonic-owned hi-fi maker Technics and the Japanese firm Onkyo are also plugged into the 7digital system.
And here’s the opportunity, as electronics firms such as TV and speaker makers start bundling music into their offering, or SIM-only telephony specialists use streaming to add value to a basic call package - 7digital will pick up new clients.
Followers of the group will already know that The Voice judge Will.i.am is a customer and that 7digital will be the streaming service for his wearable device.
“The answer is we supply the people that want to compete with those companies.
“So if you are Sainsbury and decide you want to be in digital music, you want to be there to offer customers something extra.
“You don’t simply want Spotify on the website. You want to have a Sainsbury music service.
“But you don’t want to set that up from scratch, which means call us in and we white-label what we do.
“It just plugs in. We have a very robust platform.”
7digital will grow and hit break-even as it garners new customers for its business-to-business services.
But as Cole points out it has barely scratched the surface of its existing relationships. For instance, it is working in two geographic jurisdictions for Technics, Panasonic’s upmarket audio brand, yet the firm operates in 36 different countries.
So if the product works in one market, why shouldn’t it be rolled out into the rest?
The chip designer Imagination Technologies and Dolby, the sound technology group, are aware of 7digital’s potential, which is why they are significant shareholders in the group.
They probably recognise that 7digital is one of only two business-to-business streaming companies with global reach. The other is a privately-held London firm called Omnifone.
This is a powerful position to be in as the market evolves and grows – so long as, of course, 7digital can keep ahead of the technology curve and doesn’t have to pivot again.
The broker Investec is predicting the company will make underlying earnings (EBITDA) of £2.1mln in 2017, and values the business at 37p a share or £40mln.
7D’s current market capitalisation is £18.5mln. Analysts estimate it is sitting on cash of around £4mln, enough to see it to break-even, and it owns a stake in Audioboom (a UBC spin-off company) worth £4.5mln at current prices.
Taking both of these into account, the firm’s enterprise value is a paltry £10mln, or 9.3p a share.
Cole said: “The music streaming business is going to be a huge industry and we sit right at the heart of it.”