October 14, 2009
Still Hoping to Sell Music by the Month
By BRAD STONE
SAN FRANCISCO — The idea of selling monthly subscriptions to a vast catalog of online music has met with only limited success. That isn’t stopping a new batch of entrepreneurs from trying to make it work.
The latest and perhaps most surprising entrants to the field are the European entrepreneurs Niklas Zennstrom and Janus Friis. In 2001, they created and financed Kazaa, one of the original peer-to-peer file-sharing services that hurt the music industry. The two have created and financed a secretive start-up called Rdio, with offices in Los Angeles and San Francisco.
Rdio and similar start-ups are reinventing a concept pioneered earlier this decade by Rhapsody, a service majority-owned by RealNetworks, and the tamed version of Napster, now owned by Best Buy. A few hundred thousand Rhapsody and Napster subscribers pay monthly fees of around $15 for the right to stream an unlimited number of songs, at any time, from their PCs and mobile devices.
But with modest membership growth at best, neither service has managed to challenge iTunes, with its many millions of users — or enticed music lovers from pirating music. Moreover, Yahoo, AOL and MTV Networks have abandoned their own music subscription efforts.
But as CD sales continue to plummet, and the music industry searches for a profitable future, entrepreneurs with various approaches say they believe they can finally make music subscriptions work. Rdio is hoping to introduce a music subscription service by early next year that offers seamless access to music from both PCs and cellphones. The big challenge will be to get licenses from the major music labels, which have not viewed past digital music efforts by Mr. Zennstrom and Mr. Friis favorably.
“The ironies are very interesting,” said Drew Larner, Rdio’s chief executive, who says talks with music labels are continuing and confidential.
Since they started and sold Kazaa years ago, the founders “have shown they understand content and they have always been up front with the labels about what they are trying to do.”
Mark Piibe, the head of digital business development at the EMI music label, confirmed that talks were under way with Rdio and said there was no reluctance to deal with the pair. “They’re businessmen with a real track record of innovation,” he said. “They are bringing a lot of new ideas to music distribution and there is no reason why we wouldn’t talk to them seriously.”
Two other new music subscription companies will most likely beat Rdio to the United States market. Spotify, a year-old company that offers a free, ad-supported service but tries to get users to sign up for about $16-a-month ad-free version, already has several million users in Europe.
Spotify says it hopes to bring the service to the United States early next year, but it could look somewhat different here. American music labels are increasingly resistant to the idea of licensing their catalogs to any new service offering free music with ads, because they have already backed free music downloading sites like MySpace Music and Imeem.
“We like Spotify as our partner in Europe, but we would like them to move more toward a paid subscription environment,” said Thomas Hesse, president of global digital business at Sony Music.
That raises the possibility that a lesser known company will lead the wave of new music subscription services — Mog, a three-year-old blogging network that recently raised $5 million, led by the venture capital firm Menlo Ventures. Mog has licensing deals with all four major American music labels: the Universal Music Group, Sony Music Entertainment, the Warner Music Group and EMI Music, plus thousands of independent labels through the digital distributors Orchard and Ioda.
Based in Berkeley, Calif., Mog is getting specific about its plans for its “All Access” service, which it says it will introduce by Thanksgiving. For $5 a month, members can listen to as much music as they want from their computer; for $12 to $15, users can access music on their mobile devices as well.
The service is a sort of cross between Pandora, the free online radio site, and music subscription services like Rhapsody. Users can listen to the songs of any artist and build a playlist with only that music. By manipulating a slide bar, users can also gradually add a smattering of tunes by similar artists, in effect customizing their own online radio station. People can then share their playlists from their site on the Mog service.
David Hyman, Mog’s founder and the former chief executive of Gracenote, calls it “radio without restriction.”***
KaZaA, Skype, Joost Founders Now Building A Music Service
They turned the entertainment world upside-down with KaZaA, revolutionized voice communications with Skype and eventually gave up on their web TV ambitions through Joost.
Now serial entrepreneurs and investors Niklas Zennstrom of Sweden and Janus Friis of Denmark are trying again to disrupt the music business. They have funded and are launching a new subscription music service dubbed Rdio, funded by Atomico Ventures.
NYT reveals the “secretive startup”, has offices in LA and San Francisco, “is hoping to introduce a music subscription service by early next year that offers seamless access to music from both PCs and cell phones”. Rdio is seeking label deals and even has a CEO, Drew Larner, who notes the disdain with which the labels regarded the once-renegade P2P app KaZaA in yesteryear: “The ironies are very interesting.”
No word on whether Rdio will re-deploy the same kind of P2P network that has made Zennstrom and Friis famous. The pair first developed the Global Index distribution system for KaZaA, then used a variant to underpin Skype’s communication backbone. Then they thought their could make online video delivery more efficient using Global Index, so started Joost under the codename The Venice Project.
But Global Index is currently the center of an acrimonious and complex legal dispute involving Zennstrom, Friis and Skype, now owned by eBay (NSDQ: EBAY), which licenses the distribution mechanism, which is key to Skype’s functioning, from the pair’s Joltid holding company. They accuse former Joost CEO Mike Volpi of pilfering the system’s intellectual property when he left Joost for Index Ventures, the VC house that is now becoming a part-owner of Skype in eBay’s sell-off.
Even if Rdio relies on Global Index, the legal mess won’t necessarily hold up the startup’s development. In fact, given that 90 percent of digital music consumption is illegal, Rdio may do well to embrace P2P even further, offering the service as paid access to a KaZaA- or Pirate Bay-like distributed file repository, in the same way the company behind the failed Bay buyout attempt had optimistically hoped.
Either way, with momentum amongst music labels clearly swinging behind the monthly subscription model, Rdio will find the space already populated by Pandora (which doesn’t offer on-demand), Napster and, most significantly, Sweden’s well-thought-of Spotify, which was planning a Q3 or Q4 U.S. launch and itself uses a form of P2P distribution.