Napster exec says labels ’short-sighted’ for creating YouTube's music power

Sheet Music Yejun Kim

Napster was the first truly global digital music brand.

Just not a legal one. The peer-to-peer music downloads company was sued and shut down by labels in 2000, after a brief but intense period of popularity.

Napster as a brand didn't die: it went through a few owners, ending up with US subscription music service Rhapsody as its non-US arm. In mid-April, the pair announced they had 1.7m paying subscribers between them. Today, they updated that figure to 2m.

“We’ve had an impressive growth of 300k just in the last quarter,” Napster senior vice president and general manager for Europe Thorsten Schliesche told The Guardian, citing Rhapsody's partnership with mobile operator T-Mobile US and Napster's expansion in Latin America as key factors.

“With these numbers and the growth, we have finally established ourselves among the top 2-3 streaming services globally. We see ourselves in this for the long term,” said Schliesche.

In April, Napster said that its 1.7m subscribers was up 63% on the previous year, which suggests it had been adding around 54,000 paying subscribers a month. Since April, then, that has nearly doubled to 100,000 a month.

That's still outstripped by some rivals. Spotify averaged around 286,000 new subscribers a month as it went from 6m paying customers in March 2013 to 10m in May 2014. Deezer averaged around 167,000 new subscribers a month between May and November 2013, when it went from 4m to 5m.

How does Rhapsody/Napster plan to fuel more growth outside the US? Something called unRadio, which it launched in the US in June with T-Mobile as a service streaming traditional radio stations, as well as "personal radio" stations based on favourite songs or artists, created on the fly.

In the US, the latter concept is well established through services like Pandora, and more recently Apple's iTunes Radio. In Europe, it's a newer idea, although the UK has seen it with Tesco's Blinkbox Music and the now-closed Bloom.fm, while personal radio is also now a feature in services like Spotify too.

In France, unRadio will launch with mobile operator SFR under a new name, Napster Découverte, costing €3.95 a month. It'll be available in other countries too, as an alternative to the company's full €9.95-a-month streaming service.

"Every person has used radio in their life, so we’re basically using that as the common anchor, and giving people the ability to listen to their favourite radio stations, but then giving them premium radio – additional channels based on genres, decades, or certain occasions like barbecue, sitting in the park or doing a workout," said Schliesche.

“It’s a very interesting product for people who are not 100% convinced that streaming is something they would like to pay for. It’s something I feel could move the needle again a little bit.”

Mobile is already very important to Napster, with Schliesche saying that in Europe, around 60% of its listening happens on mobile devices – tablets included – rising to 90% in some countries where the company has a strong partnership with a mobile operator.

He is also bullish about Napster's chances of continuing to compete with bigger rivals, whether the likes of Spotify and Deezer, or streaming services owned by technology giants like Apple, Google and Amazon.

“The advantage that Napster and Rhapsody have compared to the competition is that I see ourselves more as a Switzerland: we are neutral,” said Schliesche.

“We do not belong to a big hardware manufacturer or a big ad agency, and we are not trying to sell stuff other than music. It is easier for us to work with carriers like we have done with SFR. If a carrier wants to work with Beats, it’s not a decision to work with a music service any more: it’s ‘would we like to go into a relationship with Apple?’”

He added that since Rhapsody launched in 2001, and Napster relaunched in 2003, "we have seen a lot of services come and go, even big ones", suggesting that rivals owned by the richest technology firms may struggle for boardroom support.

"When you talk about customer experiences, algorithms, following trends… things are changing so fast, you have to basically reinvent your service and certain features every 8-12 months. So it’s highly important that you have a team focused on doing nothing other than music," he said.

“With a Google or an Apple or an Amazon it is really hard to get this kind of attention, especially at the senior management level. Especially if the revenue you are providing is more or less a rounding error in their overall service. It’s a threat, just their size and the money they have, but it’s nothing we should be afraid of, sitting like the rabbit in front of the snake.”

How many pure streaming services – or Switzerlands – can survive in the music industry alongside this big snakes, though?

“Overall, 4-5 music services per market is something like the maximum size I would expect in the future. If you have 2-3 global companies, there will be room for 1-2 more local or more regional services,” said Schliesche.

“If you look at Germany today, where we have 17 music streaming services. But if you look at the market share, basically three services own more than 90% of the market. How can the other 14 ever survive? It’s not very different for all other markets.”

YouTube is one of the most intriguing rivals already, with its free music videos service that's used by many young people in particular as their main way of listening to music, not just watching it.

Google's online video subsidiary is now planning a full music subscription service, and while it has been strongly criticised by independent labels over its approach to licensing their music, it could be a powerful competitor in the future. But Schliesche takes a different angle when asked about it.

“I’m getting a little frustrated with the labels and YouTube. For a long time a lot of artists have not given their music to legal streaming services like Napster, Deezer or Spotify, saying ‘we don’t earn enough’. But the same artists have promoted their videos on YouTube,” said Schliesche

“The labels have more or less created the power YouTube has for music promotion, without a real need. They have been very short-sighted.”

Schliesche added that he gets an insight into how teenagers are accessing digital music from watching his youngest child, aged 14, and their friends. “They are using YouTube not as a video service: they use it to listen to music, and as a stream ripper to convert it to MP3s,” he said.

“The majority of the young audience is doing this on a very high frequency. If we now look forward at YouTube entering the streaming market, it’s some kind of a threat because of high user numbers, but in my mind, a lot of those users made a very explicit decision to use YouTube because it’s free, and because they can easily translate it to MP3s.”

In other words, he thinks YouTube may struggle to persuade large swathes of its keenest users – teenagers – to start paying for a music subscription option. “Selling into this group of users a new subscription service? Now that’s a challenge! Maybe more of a challenge for YouTube and Google than for the rest of us,” he said.

Schliesche also has strong views on a defining question for streaming music in 2014: how much (or how little) money musicians – including songwriters – make from streams of their work, via the royalties paid to labels, publishers and collecting societies by the streaming services.

A number of prominent artists – Thom Yorke and David Byrne being two of the most high-profile – have spoken out publicly about their distrust of the model: Yorke's famous "last desperate fart of a dying corpse" broadside at Spotify, and Byrne's wider concerns about streaming's ability to fund creators of all kinds. Byrne also returned to the subject in a recent interview with Billboard.

The Napster view? "It’s definitely getting better. If you see the amount of paid subscribers, globally we are somewhere close to 20-30m, and the money which is distributed to artists is getting bigger and bigger,” said Schliesche.

However, he also suggested that there needs to be more discussion within the music industry about the revenue share being paid out in royalties by streaming music services – usually around 70% of their income.

Despite the heated debate about artist payouts being too low, Schliesche believes that the streaming services should perhaps be keeping a greater share of the money they make.

“The whole licensing model is built in a way that the licence owners – labels and publishers – say that ‘the customer is paying €10 a month just for music, and out of that €10, we want to have a defined share,” he said.

“Yes, the customer is paying for music, but not every cent is for music. A certain amount is for convenience, recommendations, discovery, ease of use… something we as Rhapsody/Napster and others have to put a significant amount of money into research and development to keep our services up to speed and innovate.”

It's a risky argument to make: Rhapsody and Napster's rivals may share these views, but they don't tend to talk about them in public, for fear of another backlash from musicians. But Schliesche would like to see more debate on this score.

“Is it really fair to say that the customer is paying 10 Euros only for music? Should the music industry admit that there is a certain value that the music services provide as well, so either the share for labels is smaller, or we can keep more margin? Then we can continue to invest in marketing and innovation,” he said.

“I would like to see the whole discussion going down that little-bit different route. It’s funny, when you find the music industry globally shouting for respect for intellectual property, but at the same time they do not seem to value innovation on their partners’ side. It has to become a partnership on a more fair level.”

In the meantime, Rhapsody and Napster are focusing on more growth in their paid subscribers, seemingly with no plans to add a Spotify or Deezer-style free version – supported by advertising – in the near future.

“We do not strongly believe in this kind of ad-funded model. If you look at the size of Spotify, they have become really big. But if you look at their financial statements for their last two years, they have lost around 90m Euros,” he said.

“Do I see this as proof that ad-funded music is working? No, I do not! Is it proven that ad-funded music is sustainable? I would say no, not at this point in time. Maybe Spotify could do it this year or next, but we will see.”

Five big challenges looming for Spotify and streaming musicPowered by Guardian.co.ukThis article was written by Stuart Dredge, for theguardian.com on Tuesday 29th July 2014 06.13 Europe/London

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