Danish ISP TDC Preps IPO After Bundled-Music Success

Could it be that one of the most ground-breaking digital music models is coming from a telecoms operator in Denmark? In 2008, TDC launched a service called Play, which offers free, unlimited tracks to its broadband and mobile customers, for no extra fee. This was a first for the music industry: Other music services that get bundled with ISPs offerings, such as the proposed Virgin Media service, or Telia’s Spotify agreement, come for a fee.

Nearly two years on, 17 percent of its subscribers use Play and TDC is preparing to float on the Danish stock exchange. But the operator is trying to renegotiate its contracts with royalty agencies, according to Danish analyst John Strand of Strand Consult, who tells me other ISPs will likely follow with similar services…

It’s an interesting arrangement that TDC struck to offer the service. It approached the main Danish royalties collections agency, asking it how much it would be able to make from music downloads. The two agreed on a fee of 80 million Danish crowns annually, which TDC set as the flat fee.

It then divides this up between different labels and artists based on actual downloads. Strand says that the parties are now renegotiating the contract again. “Three months ago, TDC would have told you it was a very good business, although today it might be a bad business, which they would say because they are renegotiatng the deal.” He says he expects that the 80 million crown figure will go up, but that TDC is likely to get more as a result, too.

What’s the benefit for TDC? The company is effectively subsidising a free music service, but how does that translate to the bottom line? Strand says that offering the service has resulted in very low acquisition costs for TDC: you can listen to the files on a PC or mobile, but if you leave TDC as a customer, then you lose your whole collection of music. Strand says that churn at TDC has been 57 percent lower since introducing the service, compared to other broadband providers in the market. This cost saving, he says, more than covers the cost of paying 80 million crowns upfront to the labels and artists.

If this is so good, why isn’t anyone else doing it? Strand says that the labels are looking at this carefully and would potentially like to replicate the model in other markets, but it’s not so simple. “In Denmark, they know that they need to sit down and talk eventually. That’s the Danish mentality.” But there may be others on the way, he says. Yota, a WiMax operator in Russia, is already offering a similar service. And Strand says he’s involved with negotiations between “a number of other operators that are interested in doing this, too.”

These are surprising developments from a small-market incumbent that is currently owned by several private equity houses. “You tend to think of private equity owners as being not very imaginative,” said James Enck, a partner at MCCapital. TDC operates as a true, old-school incumbent, controlling the Danish market for broadband, mobile, cable and phone services. It has 160,000 customers for its IPTV service. Strand says that in Denmark 77 percent of the population have access to a minimum of 10Mbps broadband; 24 percent of the population has a connection of 10Mbps or more. TDC offer up to 25Mbps in certain regions.

The company has spent the last several quarters divesting itself of holdings outside the Nordic market, including the mobile operator Sunrise in Switzerland, while buying up and consolidating a number of more local players, such as fiber operator Dong.

TDC is currently preparing for an IPO, which Strand says should take place in August/September, depending on market conditions. International banks that have reportedly been lined up to handle it include Deutsche Bank, JP Morgan, Credit Suisse, Morgan Stanley, UBS and Goldman Sachs. Nordic banks include Danske, Nordea, SEB.

Strand reckons that ultimately there will be two international banks and two local banks selected for the process. Currently about six percent of the operator’s stock is trading on the Nasdaq-OMX Copenhagen. TDC shares on Thursday traded at 230 Danish crowns per share, according to Reuters, giving the company a market capitalization of 45 billion Danish crowns ($9 billion).