Analysis

Omnifone CEO sees bright future despite falling revenues and loss of big clients


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Is Omnifone in trouble? The business-to-business digital music company has lost two of its biggest clients, BlackBerry and Sony, while its latest financials reveal a decline in both revenues and profit in its last fiscal year.

Unsurprisingly, Omnifone’s chief executive Jeff Hughes disagrees with any doom-mongering around his UK-based firm’s future prospects, telling Music Ally that it has signed six new clients as part of a drive to reduce its dependence on a few big customers. Meanwhile, the company is also planning to sell off its Rara B2C streaming service, as it doubles down on B2B opportunities.

Let’s start with those financials for the year ended 30 April 2014, which were published today through Companies House in the UK. They reveal that Omnifone Group’s turnover fell from £46.9m in its fiscal 2013 to £38.5m in its fiscal 2014, while its gross profit fell from £21.8m to £14.8m in the same period. The company reported a loss after tax of £6.9m in 2014, compared to £6.1m in 2013.

Omnifone takes a more positive view in its results filing, which notes that “underlying continuing gross profit grew from £14.2m in 2013 to £14.8m in 2014”. According to Hughes, that represents “repeating customer revenues” once one-off payments in 2013 are discounted – or “the non-recurrence of contract early termination fees recognised in 2013” as the results put it.

The filing adds that after the end of Omnifone’s 2014 financial year, the company secured a three-year loan from Clydesdale Bank, drawing down £2.95m in May 2014 as a result. Shortly after that, in July, Omnifone reeled Rara back in, acquiring its former spin-off “in consideration for the release of £3.1m of debt owed to the group”.

So, what will 2015 bring, given that Omnifone has lost its two most high-profile clients in recent times: BlackBerry when that company “imploded” in 2013, and Sony now as it shuts down its Omnifone-powered Music Unlimited service in favour of a partnership with Spotify.

“We’ve known about that for about a year now,” said Hughes of the latter development. He claims that Omnifone was already rewriting its digital music platform and moving it “all into the cloud” – Amazon’s Web Services cloud, specifically – to open up the kind of customers it could work with.

“We knew there was a lot of concentration of revenue with our big partners, so we started trying to lower the cost of entry and build everything into the cloud so it’s scalable. And the Sony news was an incentive to push down the accelerator,” he says.

We have signed six new clients in the last six months, and two are companies larger than Sony in their size and ambition in the music space: massive global companies that fit the type that Omnifone is known for serving. Those revenues will come online as we launch, and will more than replace what we need to replace from the losses of Sony and BlackBerry.”

Those will sit alongside Omnifone-powered services for Guvera and SiriusXM, as well as its role running the downloads store for Neil Young’s PonoMusic, which launched earlier this year.

“I’ve always feared the concentration of our revenues in a few big customers, and there was a realisation that we needed to fix that a couple of years ago,” he says.

“We’ve focused on diversifying our revenues. Guvera has grown a lot, SiriusXM, and we have Pono now as well. But there are also a lot of opportunities for us with different kinds of customers.”

Hughes admits that for some big companies like Sony and mobile operators, the “pendulum is swinging violently” between their desire to have own-brand digital music services where they “own” the customers, to the kind of partnerships seen with Sony/Spotify, and also with Cricket Wireless’ recent deal with Deezer to replace its own Muve Music service.

“It has swung from ‘I have to own the customer, why would I let someone else have that customer?’ to ‘this is really hard, it costs me a lot of money so I’ll just bundle Spotify’,” says Hughes.

That pendulum swung from one side to the other, but it will swing back. For us, as a B2B company, either way is fine. As it gets easier to deliver content, that pendulum will swing back to the middle, and as pendulums do, it will settle.”

Guvera devices copy

While Hughes is wary of discussing the specifics of Sony’s changing digital music strategy, he suggests that the company has had a major rethink about how it offers music to its 64 million active PlayStation Network users, as well as owners of its Xperia Android tablets and smartphones.

“It’s clear that Sony have all the tools they need: a record label, and the PlayStation platform that has very loyal users. Sony understands very well that the way to win in this space is through bundles: so they have to make a decision whether they want to make that investment into bundles, or focus their capital on other things,” he says.

“I’m not in the inner circle there and I don’t speak for Sony. I think that’s the decision they’re trying to make. I certainly would have preferred them to make a different one, but that’s part of being a B2B operator: you have to be willing to help them into the business, and have to be willing to help them out of the business if necessary.”

For now, Omnifone is focusing on a wider range of customers, including smaller companies or larger firms for whom music is not their core service, who might want to pay for specific parts of its platform, from licensing and media reporting through to payments and settlement.

“It is very exciting: there are whole areas of the industry that aren’t currently monetised: everywhere people are listening to music, and the industry is waking up to that,” he says.

“These might not be ‘music services’, but rather services that use music. You might not get as much per customer, but the artist who wrote the music is going to start getting paid. And the only way that can be monetised is through a company like Omnifone.”

What about Rara? It span out of Omnifone as a separate company in late 2011 as a direct competitor for D2C subscription streaming services like Spotify and Deezer, but it has been very quiet in recent times. Does it have a role to play in helping Omnifone return to growth? In a word: no.

“Rara’s still going today, but Omnifone took control of Rara about a year ago, mainly to make sure that we could run it at break-even or at a small profit. Previously, it was a completely standalone company with separate management which ultimately wasn’t able to fund it. We took back control, and it now runs at about break-even,” says Hughes.

We’re trying to sell Rara, to be perfectly honest. We’re a B2B company, so we don’t want to run it: it’s not our thing. We’ve nurtured it along and kept it going, and hopefully we’ll find a buyer. If we don’t, we won’t keep it going forever, but it’s a good service and I’d like to see it in the hands of somebody who can market and grow it. That’s not us.”

Something Hughes is far more interested in is working with content providers within the music industry: rightsholders. Not so much in terms of helping labels run their own streaming services, but rather getting involved in their back-end systems and – perhaps – helping rightsholders provide long-called-for greater transparency around digital income.

“A lot of technology that was written was not properly thought through. You’ll now those problems in the whole industry around reporting, finding the owners of tracks and so on. There are problems with the whole infrastructure: the fabric of the industry from a technological point of view is not ideal,” says Hughes.

Any industry that has this much technological fragmentation is by definition inefficient. I know for sure that the technology is all going to have to be rebuilt in the next five years to sort out some of these issues. There’s no reason for multiple companies to do things that are undifferentiated heavy lifting. Given that we’ve done more of the heavy lifting, and have a catalogue that’s bigger, broader and more localised than anywhere else in the world, that puts us in a position to sort some of these issues out.”

Hughes is also bullish about Omnifone’s ability to compete against companies like 7digital, whose B2B business has picked up a number of new clients in recent times – Samsung most notably, but also clients like Onkyo and Technics and (in some territories) Guvera, which really seems like parking tanks on Omnifone’s lawn.

“I think when 7digital tried to swallow Samsung, it essentially bankrupted them, then they were bought by UBC and renamed as 7digital again. They typically have gone after smaller partners than we do, although now we’ve got the ability to target those companies, we see them a little bit more often,” he said.

“But we don’t tend to compete with them much directly still. Of all the people in the B2B space, they’re the only ones that haven’t pretty-much petered out yet, so they must have some idea of what they’re doing, and some sharp people. I wouldn’t mind them not being there, but they are, so… Our revenue base isn’t threatened by them.”

Time will tell on that score, but Hughes is keen for the BlackBerry/Sony shutdowns and downbeat financial results to not be seen as the start of a slippery slope for his company. “We’re in this for the long haul, and we have the ability to withstand the losses of customers, and grow by making sure our revenues are diversified.”

Stuart Dredge

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