Music Ally

Steve Purdham is CEO and founder investor of We7, the web-based ad-supported music streaming service. We talked to him for a feature in the latest Music Ally Report, which subscribers can read here – while non-subscribers can sign up for a free trial. The Q&A is after the jump.

Q: We’re hearing a lot about ad-supported or free services that are looking at ways to retool their model. Is the free ad-supported dream over?

A: If you start at the top level and ask ‘can ad funded streaming models work?’ the answer is yes. I suppose one of the real reasons why a lot of people have failed to deliver is that they’ve gone for scale before sustainability. When you go for scale – especially in the current environment where it’s pretty flat and restricted,  - all you create is a significant loss and liability to the music industry. That’s been the problem with iMeem – 27 million users in 16 months owing labels $32 million. If you take a stop back there is a natural desire to think that scale is the answer to everything. This is not true in the music world where there are multiple licence charges. Even if you might negotiate one of those away to a rev-share with a collection society, the fact is when you go from a million users to ten million users you increase your costs.

Q: Where does the market need to get to in order for free ad-supported music to work?

The equation is simple – you’ve got to pay for the music. What you have to pay for each music track is an issue so over time that will reduce but it still needs to be a reasonable amount so that when you go for trillions of streams times a small amount becomes a large amount.

The other side of the equation is advertising which is very flat at this time. But you need to look at the fundamentals of each business. We know we can get an ad ratio to number of streams of 3.6:1 so if the minimum stream was half a penny then at £2 CPM you can make the model work and pay for the music. Then at scale you can cover your operating costs.

When you can generate $40-$50 million then people become more relaxed because it’s no longer about a 0.5 p or 0.1p per stream, it’s multiple billions of revenue. That’s why the pricing models have been kept high because no-one has been able to show what happens if you allow music  to be paid for on a revenue share.

Q: What is your view on the freemium model?

A: Music in the current world cannot be a freemium model. It assumes the more you get, the cost of delivery goes to zero, so by having a large market if you get 1% or half a percent or 3% of those people getting to the paid part then that covers the cost of your free part. Music can’t do that – in the UK for every song there is a .085 p fixed cost just for the collection society. 100 million songs means 100 million times .085p plus 100 million times rev to labels and bandwidth for 100 million tracks.

Using ad funded to get your big subscription rates is completely wrong. Ad-funded or any free component has to be capable of being revenue generating of their own accord and covering their own costs. The percentage of people who subscribe will never generate enough revenue. If you look at Sky Songs is there with subscription, you’ve got Napster with £5 for, Spotify with theirs, We7 with their subscription. It’s going to become pretty crowded quickly.  So to have the idea that if you can find 100 million users and give them free music that the one million that pay for it will pay for that cost base… it’s an incredible dream that will never happen.

Q: So how is We7 succeeding where others are failing?

A: We7 haven’t left the UK yet and we haven’t gone after a massive amount of PR. We have enough users – 2.5 million monthly uniques; 1.3 million come to We7 and are heavily engaged – and that is all we need at the moment until we get the advertising ramped up to get the metrics right.

Q: This being the case, when will We7 start fulfiling its financial ambitions?

A: We believe there are enough indications that will allow that to happen towards the end of 2010…or if we don’t believe we can get there we’ll stop. But we’re confident with the talks we’re having and the support they’re giving us and the type of reaction we’re getting that there’s enough momentum to make it happen. The real trick is not about getting the number of users – that’s easy, anyone can give music away for free – the trick is making money so you can pay for it at a good rate and make money out of it.

Q: How supportive have the record companies been?

A: Pandora has millions of legal users that the music industry didn’t have before. We have 2.5 mil monthly users – these people haven’t just become music listeners from scratch, they’ve come from environments where the music industry didn’t get any money out of them before. But if you approached the music industry two years ago with the promise of great treasure if you gave away the golden egg that was a leap of faith. To be fair to the labels they’ve been supportive despite the fact it’s not clear how it’s going to proceed in future. If we believe we can’t get the economics to add up we would stop.

Q: Anecdotally-speaking, when using Spotify it seems that the quality of the advertising is fairly low – isn’t it hard to make money when the advertisers aren’t paying much?

It’s not low quality advertising, it’s the fact that We7 and Spotify have gone from zero adverts to a large number of ads in a short space of time. Most digital advert inventory is being bought from networks like MSN where the discounts are so for someone like us to insert themselves into the advertising process in six months is difficult – it was only July in our case we went through the million users mark which is the kind of number advertisers want.

Spotify are being disingenuous on you on as a customer because they’re allowing the experience to be better than it can ever be when they go to an economic situation. Slowly as they’re trying to get to a proposition your experience will increasingly get worse until you think ‘why am I listening to all these ads’ – again because We7 has focused on sustainability rather than more and more users, if you used We7 in November you’d have the same ad experience that you got 12 months ago. You’ll get an audio ad on the start of every song and you’ll get a visual ad on every thing you look at but the environment will never get any worse and that’s a massive difference. We get 3.6 ad opportunities on every song and that’s been consistent for six months.

Q: How important is mobile to We7?.

Any future music system or service has to be able to give people the choice of listening in either the computer or mobile phone or even in places like their TV, games console or car radio. So it’s part of our technology roadmap. The economics might change because at the moment the music industry rightly looks as mobile as a premium environment…so it will be subscription-based for two or three years until the economics change and everyone has smartphones and then it becomes a commodity. We’ve developed a We7 iPhone app so I can listen to my playlists on my iPhone but we’ve chosen not to launch it until we launch our subscription service.

Q: But looking at Spotify and Pandora, isn’t it the case that the iPhone apps have strongly boosted their health?

A: Will a subscription service on an iPhone be taken up by a large group of people in the UK? Yes. Otherwise we wouldn’t have developed one. It’s a natural requirement on a high end phone to have music, to walk out of home and all the playlists you really love. But you’ve got to be careful: when we say we’ve got x million users, you can look at Hitwise because we’re a web service and verify our stats. With Spotify you can’t, you only get what you’re told. I’ve heard they’ve had hundreds of thousands take up the iPhone apps.

Tags: ceo, freemium, Pandora, steve purdham, we 7, we7

This entry was posted on Thursday, December 3rd, 2009 at 11:00 am and is filed under Interviews. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.