Zvooq closes $20m funding round to fight piracy in Russia (interview)


zvooqRussian digital music service Zvooq has closed a $20m Series A funding round, led by local retailer Ulmart, with Finnish private equity firm Essedel Capital chipping in.

Zvooq plans to spend the money on developing its service, which offers a mixture of paid downloads and subscription-based streaming music, while also striking distribution deals with mobile operators, handset makers and internet firms.

The company says it has a catalogue of more than 15m songs, and is hoping to capitalise on the growth of streaming music in Russia, citing IFPI stats showing streaming accounted for 56% of the country’s overall music growth in 2013.

Its funding announcement comes as music rightsholders hope for a turning point in their ongoing battle to reduce online piracy in Russia – and particularly as the three major labels duke it out in court with local social network vKontakte, which they’re suing for facilitating piracy on its platform.

We talked to Zvooq co-founder Victor Frumkin to find out more about the company’s plans, and how it sees the Russian market. “We’ve been in beta for a couple of years, but we had a launch of our fully-featured app in June this year, and we have over half a million installs already,” he said.

Zvooq is based in Russia, but is also targeting countries from the former Soviet Union – including the Ukraine, which is obviously a sensitive area for Russian companies to do business at the moment.

“It’s a target market of 300m people,” said Frumkin. “What we’ve been doing recently to start to commercialise the service is negotiating and launching with channel partners, including mobile operators, leading mobile device manufacturers and e-commerce platforms.”

One of the latter is Ulmart, obviously. “It’s kind of an obvious fit: any large e-commerce platform needs to have a digital goods offering, and that’s what we’re responsible for,” said Frumkin.

More intriguing, though, is his claim that Zvooq is also negotiating with “the leading social networks in Russia” as well as messaging services, to provide them with a digital music component.

The obvious name that springs to mind is vKontakte – a longtime villain in the eyes of many music rightsholders for what they see as an unwillingness to tackle piracy on its service, and/or strike licensing deals to offer music legally. If Zvooq could strike some kind of partnership to offer legal music through vKontakte, it would be welcomed with open arms by labels. Frumkin declined to comment on the likelihood of this, however.

He had more to say about Russia as a legal digital music market, after a long period where it’s been seen as a haven for digital piracy. “Politics aside, it’s still one of the largest markets in Europe, and telcos – operators – are fighting each other tooth and nail, looking for value-added services to differentiate from each other,” said Frumkin.

“Meanwhile, the e-commerce platforms like Ulmart understand that digital goods need to be part of their offering. The market is moving forward, and anti-piracy legislation is also being put in place. It’s not being enforced as much as we’d like, but the ball is rolling. We feel that it’s going the right way.”

Frumkin stressed that Russia is not an easy market in which to sell music – whether downloads or streaming access – suggesting that like other ‘BRIC’ countries (Brazil, India and China) there is still a resistance to paying for music.

People are still not prepared to pay for content, but they are prepared to pay for a service that provides convenient access and relevancy to their activity around music,” he said. “That’s one of the main assumptions that we’ve made in building the product mix that we have, which is basically an ecosystem of apps.”

Zvooq is very interesting in this regard: it’s doing what many labels would like to see more streaming music services doing in the western world: finding tiers of service between free and £10/€10/$10 a month.

Zvooq has a free app, and a full on-demand service, but in between that there are other options. One is modelled on old-school CD-changers, charging the equivalent of a couple of dollars a month for users to download three albums at a time for offline listening.

Another focuses on Pandora-style personal radio in the $3-$4 range, with the full on-demand app costing around $7 a month. “The idea is to have the lowest possible initial friction, with apps that are targeting the main music listening habits, then upselling through to the full-featured app,” said Frumkin.

“In western markets, the streaming services have simplified their job for themselves [by offering a binary choice of free or full on-demand]. In markets like ours where there’s low ARPU, functional challenges like ‘why do I have to pay for content?’, infrastructure issues and piracy, you have to work harder to get a user to pay, and then upsell over a period of time.”

Frumkin added that Russia is predominantly a prepay market when it comes to mobile phones – people don’t tend to be signed up to pay-monthly contracts – which makes “hard” bundles with operators much more difficult. “You cannot have the guaranteed revenue from a telco partner, because there are no contracts to bundle with,” he said. Zvooq users can choose to pay by the day rather than by the month – another example, he said, of maximum flexibility with pricing.

What is Zvooq going to do with its $20m funding round? Mainly R&D: developing that family of applications, although Frumkin admitted that payments to rightsholders will also account for a “significant proportion” – no surprises there, in this market.

But he stressed that product development is the primary thing it’ll be spent on. Zvooq hasn’t yet spent much on marketing, so that may become more of a factor in the coming months too.

He was enthusiastic about the opportunity in Russia and surrounding countries, for labels as well as for digital services. “It’s only up from here. This is a completely untapped opportunity, if this game-changer of the shift to legitimate use of licensed content is happening, which we think it is.”

Will Zvooq face stiff competition from the global players in digital music though? Spotify and Deezer, for example, or Apple – iTunes is available in Russia, but there’s no sign of Beats Music or iTunes Radio launching there yet.

“We think one of our unique selling points is that we have this very bespoke ecosystem-of-apps approach: we’ve unbundled the music app, you can say,” said Frumkin.

“Deezer has been around for two years but hasn’t done much in Russia generally, and it’s challenging for Spotify: they work on a hard bundle basis typically, and that’s very difficult to do here. They would have to really work on their product, and they may prefer to focus on another market like Australia, or somewhere more familiar.”

He continued: “This is the case with many sectors in Russia: search, social networks… We see that with local market expertise, the local companies are the incumbents, and it’s difficult even for the Googles and Facebooks to make a real impact.”

What about musicians in Russia: how do they see the new world of streaming? There’s a high-profile debate going on in the western world about streaming payouts, but how does that translate to Russia, if piracy has been an even bigger factor there?

Artists are monetising in Russia via events and concerts, that’s their main source of income. I think they’re super-psyched about a domestic service coming online with all of their songs, because they’re not making many sales outside of Russia,” said Frumkin.

Zvooq is actually working on an app – called Fanatic – which will focus on “the fan-to-artist connection” – a way for musicians to communicate with their fanbases. It sounds like it’ll fulfil the role that Facebook and Twitter do in western countries, on that score. “It’s activity that is untethered to rightsholders, enabling that fan-to-artist connection,” said Frumkin.

But the conversation turns back to the idea of “unbundling the music app” – a strategy with echoes in what Facebook is explicitly doing in the west in what CEO Mark Zuckerberg calls “unbundling the big blue app” – see separate apps for messaging, photo-sharing, news-reading and so on.

“We’re doing it simply because we’re trying to address the payment friction, and also the listening habits of casual listeners,” said Frumkin. “In principle, 90% of music listeners are casual listeners: they just want to listen to something. Discovery around music is not their core concern. We’re trying to widen the funnel as much as possible.”

Written by: Stuart Dredge