HMV buys 50pc of 7Digital for £7.7m, VCs get a 'positive' exit

Laggard UK music retailer HMV announced at its AGM today that it’s buying a 50 percent stake in the online music retailer 7Digital for £7.7 million. The move looks set to give HMV a ‘great leap forward’ in digital, since 7Digital has been fleet of foot in pushing non-DRM MP3s, open formats and signed deals with tech rock stars like Spotify. CEO Ben Drury, CTO James Kane and other managers are staying on and will be joined by three more from HMV on the JV board.

The purchase creates a neat exit for 7Digital’s VC backers Balderton Capital and Sutton Place Managers. CEO Ben Drury told me that the VCs got a “positive return on investment” – though terms have not been disclosed. In January last year it took £4.25 million in a round led by Sutton Place Managers that included original investor Balderton Capital. 7Digital will make make a £1 million EBITDA loss in 2009 according to HMV’s statement today.

HMV Group will now use the five year-old 7Digital as its sole supplier for “all of its existing digital operations” in the UK and Canada. HMV customers will have access to a six million strong MP3 catalogue. 7Digital will also be used to build a new e-books and audiobooks store for HMV’s Waterstones subsidiary, an area previously untouched by 7Digital. HMV’s own effort, GetCloser.com, has bombed, so this deal probably couldn’t come soon enough.

7digital.com will continue to sell thought it’s own site but it is its white label and API business which will be the focus from here on, driven by affiliate sales. It currently powers download sales for Last.fm, Bebo, ITV.com, Five TV and the major labels, as well as Spotify, Songbird, AOL’s WinAmp and others.
Drury went on to tell me how excited he is to be working with Simon Fox, HMV’s CEO. Fox actually turned down the job to run ITV. Smart move. HMV is transforming from a staid seller of CDS into something quite different, and now sells Netbooks in store, for instance.