As giants like Spotify and Apple Music clash on the streaming-music battlefield, hard financial details about the business of digital music are difficult to come by. That’s why so many in the industry are looking closely at the prospectus that was recently filed by Deezer, the European music service that is going public. And the main reason it is doing an IPO? To finance a business that is still swimming in red ink.
Deezer isn’t as well known to North Americans as Spotify or some of the other streaming music services, mostly because the Paris-based company has focused on markets in Europe and the rest of the world. It expanded into the U.S. last year, however, and is targeting growth outside Europe as one of its goals for the IPO. The offering would value the company at about $1.1 billion.
Compared to Spotify, which has about 20 million paying subscribers, Deezer is still relatively small. It says in its securities filing—which Billboard magazine and others have gotten hold of—that it has about 6 million subscribers, out of a total monthly user base in the 16 million range.
Unfortunately, only 3.8 million of those 6 million subscribers actually generate any real recurring revenue, because of the way Deezer’s licensing deals work. The company got much of its early growth through bundling deals with telecom carriers, which means that in some cases the service got paid up front, but many of these so-called “subscribers” have never actually used the streaming network at all.
In other words, less than a quarter of the people who use Deezer’s service (which like Spotify has a free streaming tier) are actually generating revenue for the company. As terrible as it sounds, this is roughly consistent with the numbers Spotify has provided: The company claims a user base of around 75 million per month, which means paying subscribers work out to about 25% of the total.
And how is revenue going at Deezer? It is growing strongly, according to the prospectus: It rose by more than 52% in 2014 to about $160 million, faster than the growth rate of the overall subscription-music business, and also faster than the company grew in 2013.
The bad news, as Billboard points out, is that Deezer’s costs—the bulk of which come from paying record labels royalties—consumed more or less all of that revenue. Last year, the company’s cost of sales was 84%, although that was an improvement over 2013, when it was over 91 percent.
As is likely the case with other music services, onerous terms for record deals are the bane of Deezer’s existence. The prospectus notes that the company has been hit by some of the same terms Spotify has, details that leaked out when a Sony contract was made public. For example, deals often involve minimum guaranteed payments—payments that in some cases exceed what the company is paying in royalties. In 2013, for example, Deezer says it paid $14 million more than it otherwise should have.
To make matters worse, music companies often demand “most favored nation” clauses, which require services like Deezer to provide details of its contracts with competing labels, which leads to an escalating game of one-upmanship, with each successive deal exacting even more onerous terms than the previous ones.
The result has been—not surprisingly—an ocean of red ink: In 2014, the company lost $30 million, which was even more than it lost in 2013. For the first six months of this year, Deezer said its losses were $10 million. That means it is going in the right direction, but it also confirms the impression that the streaming music business currently involves pouring billions of dollars into the internet and hoping it will someday pay off.
You can follow Mathew Ingram on Twitter at @mathewi, and read all of his posts here or via his RSS feed. And please subscribe to Data Sheet, Fortune’s daily newsletter on the business of technology.
