eMusic CEO: Forget Spotify, Our Business Is Going To Be Huge Thanks To Music Nerds

adam kleinAdam Klein

eMusic is a digital music seller that has been a go-to spot for customers looking for independent and underrepresented artists. Operating somewhat quietly since 1998, it’s built its entire business serving a very specific group of highly discerning music lovers.Among its customer base, 90% are always actively seeking out music, 95% consider their musical tastes to be different from mainstream popular culture, and only 7% enjoy popular music on the radio.

We caught up with CEO Adam Klein to talk about the state of digital music, how eMusic serves such discerning customers, and what’s in store down the road.

BUSINESS INSIDER: About a year ago, you guys went from a credit system to a dollar amount balance. Why the change?

ADAM KLEIN: The credit system was a strategy that I inherited when I came here. The rate of growth of new members had just gone flat. The belief was that we needed to bring in a more complete repertoire of music, and that meant bringing in the major labels.

Bringing in the majors required a variable pricing strategy and we worked it out the best we could.

BI: Was that an easy transition or a rocky transition? Did you ultimately lose or gain members?

AK: We lost a few. We’d anticipated losing quite a large number but in fact we lost very few. We know that a lot of members mentally put us on trial, and the trial was “Are you going to remain an authentic independent voice that isn’t just doing the promotional work of the majors?”

We’re way past that. I think we’ve come through that with flying colours for our members. Our members made it quite clear that they understand that we’ve retained their independent voice, their authenticity, and a focus around both our audience and the genres we feel most comfortable in.

BI: Initially, eMusic was all about indie and offbeat genres.

AK: Our interest was not in bringing in the mainstream genres. We are still about indie rock. That is exactly who our members are and that’s all we target. It would be almost unheard of for someone who only cares about the Top 40 or who lives in the world of the mainstream to be a member of ours.

BI: As you were incorporating the larger labels, did you have any worries about becoming another me-too online service or losing any street cred? Was that a consideration?

AK: You’re always considering how your members perceive you. The group who we have historically served very, very well are those who are more interested in indie and offbeat rock groups, but we didn’t have a lot of consumer data about them. When I came on board, we went out to get it.

We did some extraordinary research, we commissioned an outside group, which absolutely clarifies that there’s a very large and very attractive segment in the US of people who spend a lot of money on digital music. They are very knowledgeable, very passionate, and are very committed to owning their tracks.

Over 70% of our members come from that group. And that’s who we serve.

Was I concerned about being a me-too service? We never were a me-too service. We never will be. We’re subscription-based. We’re download-to-own. We’re focused on that audience and probably know them better than anyone else.

BI: You guys consistently have better pricing than iTunes or Amazon across the board. How are you able to do that?

AK: Our members pay their subscription in advance every month. So from the music publisher’s point of view, it’s not a matter of IF the members spend their money — they’ve already spent it. It’s a matter of who they’re going to spend it on.

By virtue of us having a very attractive membership who are paying up front every month, we can negotiate very different deals. We’re not in the a la carte business. We never have been. We never will be. We’re not in the streaming or renting business. Those are completely different models with a lot of unpredictability. Ours has a lot of predictability in it.

And we share all of our revenues with the labels. The artists benefit no matter what goes on.

BI: eMusic probably seems off the radar to a lot of people — why not promote or advertise more in general?

AK: We were very much off the radar. I was brought in last August to help take the company through a transition to protect the values we have with our existing members and to grow our membership. To do that, we couldn’t just go rushing in. We had to take a step back to understand what are the things people really value about us. Why do they come to us and remain members for so long?

Let’s be clear. 75% of all the music they buy from us are full albums. There’s not another single service out there that even touches that. We’ve got a very special group, but we had to understand them a little more deeply.

Then we had to focus on building the next generation of services that they want. That takes time. We spent four months on the consumer research and to make a strategic decision based on that. We’ve been investigating and developing new products and services, not the least of which are around new member acquisition.

We used to be a paywall. If you wanted to come and learn about eMusic and weren’t a member, you kind of bumped your nose into a window. Unless you gave us a credit card, you weren’t invited in. We’ve changed all of that.

Philosophically I’m not one of those who spends a lot of time out there saying, “Look at how great we are and what we’re going to do.” I’d rather do it and show it. That’s what we’re doing at the moment. We’re reestablishing that we can best serve the members who care about their music, want to own it, want to learn more about it. That’s who we’re focused on. No one else is focused on that group. I’m delighted to be under the radar until I feel we’ve got what’s required for this next generation of consumer expectations. I think we’re building it.

BI: Any consideration to other business models? Will video play a role at some point?

AK: I would imagine you’ll see video down the road, but not in the short term. The easiest way to use video is to use YouTube, and a lot of people learn about new music through YouTube. 90% of our members say they are ALWAYS looking for new music. That’s a number that’s off the charts. That means they’re looking for advice on what they might read or listen to. They don’t give two hoots about their friends’ playlists because often times they don’t respect their choices in music. These are people who are much more sophisticated, much more discerning. They were music nerds at school. These are the people who you used to go to and say, “What are you listening to? What’s good?” And they have a lot of self confidence but they want to read respected reviewers, they want to listen to new groups, and they want to watch it. All of that is part of our future.

Historically we focused on the written reviews. Now you’ll be able to listen to stuff, view stuff. We have a very nascent YouTube channel that we’re going to beef up quite a bit. Probably sometime early next year we’ll have our own soundstage here for intimate interaction with artists.

BI: What’s your take on ad-supported business models in the music space?

AK: Ad-supported is unsustainable. That I say very assertively. I’m an adjunct professor up at Columbia Journalism School and I teach about the business models of media. No one can show me an ad-only supported business model in the digital space that’s sustainable by itself.

If you think about the digital environment, there is an infinite amount of advertising inventory available. Economics 101. In a world of infinite inventory, prices will come down. And that’s what has happened. Unless you have other sources of revenue, that’s not sustainable.

We have built eMusic on a very different model. We are targeting the consumer segment, the offbeat music lover in the digital space. We charge a premium, they get huge economic advantages by paying for a subscription, and they were going to buy the music anyway because these are people who want to buy music. If they get it at a lower price, they buy more music. But they also want it from people who are knowledgeable and share their values on music.

It turns out there’s actually quite a big community in America like this, over 30 million people like that. That’s all who we care about, and if we service them and they feel that their monthly spend is, on average, pretty well-spent, they stay and spend more. We create promotions so you can sometimes get albums at $4.99. It’s a curated list. We’ve added value by saying if you’re interested in this theme, here’s some stuff you might want to consider.

We don’t preach to our members. They’re too smart. We’re not just a transactional site. A lot of those freemiums are just transactional sites. Our members really don’t care about most of their friends’ playlists. They won’t learn anything from them. You go to a lot of these freemium sites and one of the big value propositions is to look at your friends’ playlists. People don’t care about it. They want a much more sophisticated conversation, so that’s who we target.

BI: What’s your take on the Pandora IPO?

AK: Like everyone I was so completely blown away by the blip in its price in the first day when you’re running a losing business built off primarily a freemium model. Off of advertising. And not a particularly
focused audience strategy.

Having said that, I always have incredible respect for anyone who’s built a business that’s been around for a while and developed a brand, a following, some sort of identity. You can only admire that. I just don’t see that business model as sustainable.

BI: What does it mean for eMusic now that Spotify is in the US?

AK: We serve very different audiences. eMusic caters to independent-minded music lovers, and the experience we offer is geared towards that unique consumer segment. Spotify, like iTunes, caters to mainstream pop-culturists.

BI: What does the future hold for digital music?

AK: I’m very bullish on digital music. But you’ve got to know who your audience is and who you’re targeting and what the value is. What they value. And then super-serve on that.

I have absolutely no doubt that there’s an audience out there who wants streaming and rental service. It’s not our audience. Our audience wants to own. Over time, they too may be interested in streaming stuff. It’s kind of fun to have new stuff. You don’t have to own it.

We talk about streaming in a different way here and we will have streaming services later this year, built around two issues. One is to listen to the music that you own. You bought it, you want to listen to it everywhere. You it on your phone, tablet, wherever it might be. You have to be able to stream that. That’s very different.

The second is that a lot of our members look at our 30-second clips and think, “That’s ridiculous. I pre-paid, I’m going to buy stuff. I just want to be able to hear a full track.” We’re going to be offering services along those lines and that will be streamed, but that’s very different from the Spotify-ish streaming service where you’re renting to stream. For our members. I’m not saying other people won’t like that, provided you don’t do that and a premium ad-based service and think it;s going to pay for itself. It’s just not going to. So do I think audiences ultimately are prepared to not own all of their music? Sure. Of course I do. But I certainly think for our audience, for our members, that’s not in the immediate short-term.

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