“I had a call with a journo late last night who was going ‘why are you going into the streaming market? You’re mad!’ Perhaps I am…”
Rob Lewis, whose latest startup Electric Jukebox has just launched in the UK, should understand the question better than most. He was the CEO and co-founder of B2B firm Omnifone, which launched (and shut down) music services for Vodafone, Sky, Sony and BlackBerry among others.
Omnifone went into administration earlier this year, but Lewis had left some time before when he spun out its Rara streaming service as a standalone company. After Rara was shut down, he began work on Electric Jukebox, informed by the challenges in the £9.99-a-month streaming world.
“The reality is that if you are yet another person wanting to do another £10-a-month subscription service that’s on all sorts of devices, then really you’re wasting your time. There are clearly some players there who’ve got immense traction,” he told Music Ally on the day Electric Jukebox launched.
“The number of subscribers you need to get to break even? Even Spotify are way off. There’s no point in trying that. But as in any tech market, if you can be sufficiently differentiated, so that you’re almost a different product or a different market, then there are always consumers around that you can track.”
In Electric Jukebox’s case, the differentiation is partly about hardware: a stick-shaped device that plugs in to a TV’s HDMI port, and a motion-sensing controller (like the one that came with Nintendo’s Wii console) to access music by pointing and clicking, or by speaking into its microphone.
The hardware costs £169 and includes a year’s ‘Premium Music Pass’ to access Electric Jukebox’s 29m-song catalogue on demand as well as its curated playlists. After a year, another annual pass will cost £52, or they can continue listening to the playlists for free, with advertising.
“Our competitors are as much a Roberts Radio as they are a Spotify. In many ways, we’re actually closer to a Roberts Radio,” said Lewis. “We are a permanent device that’s always there, that works out of the box, and that everyone can use. The difference is we offer full interactivity and voice control.”
The comparison to a maker of FM and DAB radios is no accident. At launch, Electric Jukebox only works on the TV, with no way for its buyers to stream from the service on their smartphones, tablets or computers. However, the company is already planning more devices of its own.
“This is the first in a range of products, because there are other parts of the home. We’re not announcing the product today, but if you imagine a Roberts Radio or something with a similar form factor, but with a big touchscreen on it and with voice [controls],” said Lewis.
“It would sit in John Lewis right next to those radios, and would have all the same radio channels. But on top of that it’s full on-demand, and roughly the same price as a Roberts Radio. That’s the kind of next product we’re looking at.”
Retailers are key to Electric Jukebox’s initial rollout: Selfridges, Argos and Amazon are all on board, plus a “major TV network” that Lewis declines to name or even hint at: for example, whether it’s a TV-shopping network, which may be a good fit for the company and its target customers.
Lewis compared Electric Jukebox to older format shifts in the music industry: the speedy adoption of cassettes and CDs when those formats made their debut. Well, relatively speedy, in his view, compared to the digital era.
“We’re 11 years down the road now with streaming, and although we [in the industry] all think – because we’re massively into it – that the whole world streams music and has Spotify subscriptions, clearly the vast majority of people out there on the street are not doing that,” he said.
“92% of the consumers here in the UK are not doing streaming. If you go to France it’s 95% or 96%. Fundamentally what we’re trying to achieve is the idea that, a bit like the CD player made CDs a format that was just plug and play, let’s create a device that does that for streaming, focused on the home and for the whole family to share.”
Launching that device has not been plain sailing. Electric Jukebox first announced its plans in October 2015, aiming to have its device on sale before the end of that year in the US and UK.
Christmas came and went, and the company set its sights on launching before Easter 2016 instead – but only in the UK, citing concerns about the mechanical royalties lawsuits that had been filed against Spotify in the US. Finally now, in November, it’s on sale a year late. Why the delay?
“Building a music-streaming service is just one part of what we’re doing here. We’ve obviously got manufacturing, industrial design, logistics, retail channels to support, TV shopping channels, and then layered on top of that getting the rightsholders on board with economics that actually make this a sustainable business,” said Lewis.
“There’s no point in doing something if you’re dependent on raising hundreds of millions of pounds every year in order to burn it. You’ve got to have some form of path to sustainability. With the £10-a-month subscriptions and the wafer-thin margins that you get after the labels and rightsholders are paid, you have to get to immense scale to have any hope of even making your first dime.”
“I wanted to build a business where we could make it affordable, have a good margin and be able to use the retail channel. That has taken quite a long time to make sure we have a comprehensive catalogue and to make sure everyone’s on board, but we are now there.”
In both its launch announcements, in October 2015 and November 2016, Electric Jukebox has cited a study that it commissioned from YouGov suggesting that only 8% of British consumers subscribe to music-streaming services, while pointing to the bigger popularity of radio and CDs for at-home listening.
Lewis said the survey of just over 2,000 people also found a strong dislike for monthly recurring subscriptions, which has influenced his company’s annual-pass strategy, with the first year included in the price of its device.
“When you ask people why they haven’t streamed they basically go ‘I think it’s going to be too complicated to use, and I really hate monthly recurring subscriptions. I’ve already got far too many of those things’,” he said.
“There’s always been this issue with the music industry where they think that £10 a month [for music-streaming] is undervaluing it. And actually it is if you’re in the music industry: if it cost £50 a month and you were massively into music, you probably would pay it. But in terms of Joe Public, £10 a month is an awful lot of money. Actually, that’s bordering on a TV licence isn’t it,” he continued – a TV licence in the UK costs £145.50 a year.
“If you look at the average family in the UK, 85% of them have income below £35,000 a year, and when you take tax off that, £10 a month starts digging in really quickly. The biggest market of all in our industry is the mass market who won’t pay £10 a month.”
As a digital service built for the TV, Electric Jukebox looks the part, with an interface that isn’t overcrowded or fiddly, and a slick combination of pointing and clicking with the remote to access playlists or favourite albums and artists; and voice commands to search for specific music.
That shouldn’t be a surprise: in its day, Omnifone did its fair share of building music interfaces for the television. The question is whether the company, backed by £7m of funding, can sell enough of its first product this Christmas to support its longer-term ambitions: those radio-style devices as a second phase, and perhaps other music-listening venues in the future.
Such as… the car? “You’re correct to say that looking at where we could go, although we’re certainly not even at prototype stage for this phase, there is obviously the car,” said Lewis.
“It moves in relatively long adoption cycles, certainly when you’re going through car manufacturers, but the volumes are obviously very substantial. I think the opportunity to go after the car market is a very interesting one, but it’s not something we’re doing next Tuesday.”
Lewis noted the success of US satellite-radio firm SiriusXM, which ended its last quarter with 31 million subscribers and – thanks to royalties based on a compulsory licensing system rather than direct deals – reported a $194m net profit in Q3.
“One of the other lessons in there is when somebody goes into a car dealership in the US, and if they’re buying a reasonable car, not only is SiriusXM embedded in the vehicle, but the person selling the car gets a kickback if they get the consumer to sign up to it,” said Lewis.
“It’s an ecosystem that works in a profitable way. And that’s why with Electric Jukebox there’s enough margin on the product to have other people – retailers and etailers – distribute it for you, as well as do above-the-line marketing, and still make money.”
Lewis suggested that many of those retailers have been shut out of the music-streaming ecosystem thus far, which he sees as another opportunity for Electric Jukebox.
“If you go down to HMV or any form of traditional retailer, how do they get involved? Okay, they can sell some speakers or a tablet, but they’re essentially locked out of the content. The ability to offer a physical device is something that brings retailers back on board,” he says.
“We have to remember that the music industry exists because of retailers. Music used to be entirely just live, and then somebody invented the vinyl and suddenly retail and the music industry was born. Now, the music industry has almost forgotten that retail is a market that is useful, and the very foundation of its original revenue.”
The year-long delay in getting Electric Jukebox launched in the UK will undoubtedly fuel scepticism from some quarters about its prospects.
There will also be concerns about the costs and complexity of a hardware/service business reliant on music rights, although Lewis gave those short shrift, suggesting that hardware may be “out of lots of people’s comfort zone”, but that it can be very successful.
“If you do a speaker, someone can knock off a cheap version of it with reverse engineering, but when you’ve got hardware with a connected service behind it, you can copy these devices in China but you’ve got no service to run with it: no licensing,” he says.
“Hardware per se is not risky: Beats headphones was a very successful business, and they made a lot of money from the headphones, not the streaming service. it does require a lot more competencies, and that’s one of the reasons why it’s taken this much longer to get to market than we were hoping.”
Lewis talked about the early days of digital music, pre-iTunes, when the first music download stores “had a 5% or 10% margin on the music that they sold, and worked incredibly hard to get an incredibly small number of people buying tracks occasionally”.
Then Apple came along and used hardware (the iPod) and a service (iTunes) as a key step along the path to becoming the technology titan that it is in 2016.
“Apple turned up with the iPod / iTunes combination, and the iPod was easy to set up and easy to use. iTunes had that too, but they made their money by having a reasonably decent margin on the hardware, and a relatively small margin on the content,” he says.
“That’s really what we’re doing here. We do have the ability to spend lots of money on marketing and still make a profit, and there’s a recurring revenue stream from our consumer after their first 12 months.”
“Ultimately we’re doing more than a pure streaming service, as a business, but we also do have a business which we believe can be sustainable and profitable, even at relatively low levels of adoption.”