In this interview from our industry knowledge partner StrategyEye, Steve Purdham, CEO of We7, the Peter Gabriel-cofounded ad-supported free music service, talks about profitability, pirates and how to succeed in the treacherous online music sector. He also pulls no punches with much-hyped rival, Sweden’s Spotify

Why are ad-supported music services such as Imeem, Lala and SpiralFrog all suffering at the moment?

It’s a combination of things. In some situations it’s just bad execution, but in other situations it’s timing. If you look at SpiralFrog – that was a bad model and bad execution. The big debate in the music world was about how consumers didn’t want digital rights management (DRM) music. The consumers just wanted the freedom to move music from their iPod to their PC. SpiralFrog was a download model with DRM that was only limited to a small number of labels, so it had all the ingredients of failure.

The one that surprised me was Imeem, because I think they executed very well. I think it just shows that the timing on that was wrong. The one who has been very strong, in the US in particular, is Pandora. They withdrew from markets when the economics were wrong, they focused upon the economics and they didn’t get too carried away. They’re expected to do about USD40m this year and break even.

Are any ad-funded models working at the moment?

No. Most of them are working off the back of venture capital. That includes We7. But can they work? The answer is yes. Given the right time, the right costing base, the right advertising infrastructure, it can actually work.

A lot of people look at this and say, the idea is flawed, because the amount of money that the music industry is expecting to get for the music is different to what the advertising inventory industry is prepared to pay for accessing the audience. But that is just a point in time based upon where those two industries happen to be and there are a lot of changes going.

What is We7’s business model?

We7 is an online jukebox, which basically allows people to listen to as much music as they want for free. But in addition we’ve also integrated an MP3 download store so if you want to put it on your iPod then you can download and pay for MP3 files. So it gives people the choice of both environments.

The business model really is a bit like Google for music, in the way Google uses search to build great audiences so they can sell advertising. It’s a case of how do you use something that people want, who are not necessarily prepared to pay for the music, and get to the situation where you can create a high-quality revenue stream by creating targeted advertising capacities in that environment.

With the prevalence of music piracy, how do you compete with free?

The way you combat free is with a better free. If you look at things like BitTorrent, Limewire, those type of deliveries, there are some fundamental flaws. One is there is a perception that they are illegal. There is a perception that they are unsafe – you are not too sure what are you going to get. There’s also a perception of quality. And for mere mortals, not highly literate technical people, like a 34-year-old who wants to listen to the latest Coldplay album, it’s not an intuitive way of operating.

The competition to that is actually creating a better free, and that’s why with We7 the simplicity’s important – you come to the site, you search, you click and you instantly play. The economics is the same, so it’s free. The quality is better.

Back in the 1960s in the music world there was a big thing about pirate radio stations. They existed because there was no other way for teenagers and young people to access the music that they wanted. Everybody got on their high horses and said, “we’ve got to ban this, we’ve got to send the coastguard after them, we’ve got to build regulations”, but actually it was never the regulations that killed the pirates, it was doing better free. It was the formation of Radio 1 to 4. It was the new commercial radio stations.
How much does it cost to deliver music streams?

An on-demand stream costs around about GBP0.01 in the UK, about EUR0.01 in Europe and about USD0.01 in the States. Those seem to be the common numbers that most people bandy about. The PRS (Performing Rights Society) rate was 0.22 of a pence for every song that was delivered. That is now 0.085 of a pence, so it’s reduced the overall delivery cost by about 12% to 13%.

How do you, and rivals such as Spotify, make convincing ad revenues from music streaming?

We’ve built the service from the ground up, incorporating advertising. We now know, after four or five month’s real usage, we have between three and four ad impression opportunities for every song that you hear. That moves the CPM rates into a viable rate.

You have to say, what are the realms of reality for advertising? With three to four ad opportunities per song, that gets us into the realm of GBP0.16 (USD0.26) in costs for an hour of music, if you listen to 16 songs. That actually works out to be about GBP2.50 (USD4) in CPM if you’ve got four ad opportunities per song. That’s actually not frightening. That’s actually not a high-premium rate.

So the CPM you are currently looking for is around GBP2.50 (USD4)?

No, because we won’t make money on that. That will pay for the music. But that’s much better than say, Spotify for example. Spotify announced that when it first launched, it would only do one audio ad for every 15 minutes. It doesn’t add up. On the same criteria, that equates to GBP40 (USD65) CPM to cover the music costs. You aren’t going to get that. So what does that mean?

It means they are ignoring the advertising. What they’re doing is actually going after audience growth to the expense of the advertising, and that’s what Imeem did. There are too many examples of people who have proven it’s not the size of the audience. It’s actually the size of the audience that gets paid for.

Spotify is making a lot of headlines at the moment. Don’t you worry that Spotify could dominate the music-streaming space?I’m 52 and I’ve built technology companies before and there are two ways to go forward. One is the bullshit way, which is going out, doing lots of PR, collecting the audience and hoping somebody comes along and buys off on the valuation that you actually have. There are people that can do that, and it has happened, but usually it’s in a much more economically positive environment. We saw companies like this back in 1999, 2000, even 2001. Then the technology bubble burst. Once they run out of money and run out of investment then it starts to fail.

Can We7 survive in the long run?

We have as much chance as anybody else. At the beginning of 2007, I was told we’d be dead in three months. Here we are into our third year with approaching 1m users, with 4m songs in the jukebox, with advertiser revenues starting to form. Can we do it? Yes. Can we die? Yes. There are challenges but there aren’t challenges which are insurmountable.

Coherence check! Click here for MIDEM(Net) Blog’s October 2007 interview with Steve Purdham…


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James Martin

James Martin is Head of Social Media for Midem organisers Reed MIDEM. This includes defining and rolling out Midem's social media strategy, editing midemblog, influencer outreach, developing Midem's fanbase of 75,000+ music professionals and more.

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