view7Digital Group PLC

7Digital showing there's more than one way to profit from the digital music revolution

The company has gobbled up its main competitor and expects to be in profit by the end of next year

echo dot
Echo demonstrates what happens when devices like this come online

Ask a retail executive what they want for Christmas and Amazon to go bust might be one answer.

It’s not going to happen, of course, but how to cope with the online retail giant’s seemingly unstoppable rise is now almost spawning an industry in itself.

Music streaming specialist 7Digital PLC (LON:7DIG) has seemingly just put itself in pole position to benefit from this trend.

Simon Cole, chief executive, said the circumstances surrounding the recent acquisition of 24-7 Entertainment, previously its main competitor in Europe, are indicative of the growth of Amazon.

Cash and shares deal

The AIM-listed group bought 24-7 Entertainment from MediaMarktSaturn (MMS), Europe's largest consumer electronics retailer, for £2.2mln in shares and a cash adjustment.

MMS became 7Digital’s largest customer following the deal, which also included a three-year, £1lmln contract to provide the ‘Juke’ streaming service in the Netherlands and 15 other countries - and a further contract to develop future services worth £6mln.

In short, it will be transformational for 7Digital, says Cole, who expects the group to move into profit in the second half of 2018 and to start to generate cash shortly thereafter.

But why would MMS sell to its main rival on such good terms?

The answer comes back to Amazon, explains Cole.

Technical back-end

24-7 is the technical backend and catalogue provider for MMS’s digital music service but it did not have the scale to deliver what is now needed in a rapidly changing retail world.

MMS is comfortably the largest retailer in Europe (think more than double Dixons) with sales of €22bn and it has only one competitor - Amazon.

So anything the US giant does, MMS has to do better.

It wants its loyalty card members to have its branded free music or for its own version of a home, assistant to have its own brand of music streaming, not an Apple or Spotify bundle.

To get there, a new music streaming system flexible enough to meet its bespoke requirements is required.

That’s where 7Digital come in, which will provide the infrastructure and access to the music library for MMS.

But it’s not just MMS that is facing this problem, according to Cole.

Wal-Mart has no digital offering 

Wal-Mart, the world’s largest retailer, has virtually no digital offering to speak of.

Companies at the cutting edge of technology too, electric car group Tesla, for example, are also exploring how to incorporate streaming into the new smart dashboards being developed.

And that is the opportunity for 7Digital says Cole, which is already working some of the fastest growing groups such as Playster in the US or a new range of wireless equipment being developed by Voice presenter will.i.am.    

Streamed music is becoming a mass market proposition rather than the playlist or specialist end of the music market catered for by such as Spotify or Apple.

“Services such as Amazon Echo, which plays what you want when asked are much more like radio rather than music streaming services,” says Cole.


Echo demonstrates what happens when devices like this come online.

It’s been a harbinger of change in the US, believes Cole, and like iPhone, which sparked a boom in e-commerce and mobile advertising, it is developing in ways perhaps not originally foreseen.

7Digital, meanwhile, has positioned itself as a white label provider of the software and music catalogue necessary to set up a streaming service.

Revenues are earned from a setup fee and a monthly recurring fee for access.

For the library, it is up to the customer to agree on fees with the record labels.

“We provide the middleware and don’t take any risk in whether the service sells lots of songs,” says Cole.

“We just provide the machinery that delivers it all.”

Record companies provide referrals

He adds that record companies are among its best sources of referrals.

Investors have bought into the story and the potential.  An (oversubscribed) placing, subscription, and open offer has just raised £8.5mln and brought sixteen new institutional investors onto the shareholder register.

It was a strong vote of support, especially as progress has been uneven since the company was established in its current form three years ago.

With hindsight, Cole says it might have been easier if all of the shaping and redirection undertaken since 2014 had been carried out a private company.

At an inflexion point

But that’s in the past now, with the 24-7 Entertainment deal providing a major inflexion point.

“That is why we did such a big fundraise and brought in 16 institutions,” says Cole.

“This should be a really interesting year.

“We’ve built an F1 car and we are now on the starting grid ready to hit the track.”

At 4.5p, 7Digital is valued at £15mln.

Quick facts: 7Digital Group PLC

Price: 0.215 GBX

Market: AIM
Market Cap: £5.28 m

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