EMusic’s Pak Attack

If iTunes is the online equivalent to a brick & mortar music superstore stocking today’s hits on prominently placed display racks, eMusic is like that independent store down the street.

You know the one. The store where music fans gather to browse through old releases, search for obscure songs and discover new music.

When it comes to online music stores, eMusic is a different kind of animal. No 99-cent-per-song price tags here. Instead, you buy a subscription. At eMusic, $9.99 per month gets you 30 downloads per month, $14.99 gets you 50 and the "premium" subscription is 75 songs for $19.99 per month. We’ll save you from having to do the math. That’s about 33 cents, 30 cents and 27 cents per track, respectively. What’s more, eMusic tracks are MP3 formatted, are not copy-protected and play on all players. You won’t find that at iTunes or Napster.

EMusic is headed up by a man who definitely believes in what he’s selling – president and CEO David Pakman. He was more than willing to share his views on the current state of digital music, what consumers want from online music stores, and how eMusic is different from "those other guys."

 

What’s wrong with the other online music stores?

I don’t think there’s a lot wrong with them, per se. I think there’s some problems with the industry that make those services less than they should be in a consumer’s mind.

I think iTunes has done a phenomenal job. Two billion songs sold. They’ve created the digital music retail industry. But I think they’re selling consumers a bill of goods that most of them would rather not have. Inter-operability, we think, is a requirement to grow the digital music industry much more aggressively than it has grown today. That’s what’s holding it back.

With iTunes you don’t get any inter-operability outside the Apple ecosystem. And the other services, I think they’re also pretty good services, but they’re burdened with the notion that the songs and music they sell, you can’t play on the device that’s used by nine out of 10 digital music consumers today – the iPod.

So, we just don’t think that’s a good picture for the future of the music industry. We think if you want to sell a lot of music, and this is self-evident to anyone who speaks with customers, they want to buy music and not have to worry about whose device it plays on. Just like they’ve done for the last 50 years.

We’re just a big believer that inter-operability is a requirement in order to be a successful digital retailer. And that’s all we are. We have to sell music on terms that our customers want. We sell music on different terms than everyone else. I think we’ve been rewarded with some success for that. We’re No. 2, we got somewhere between 10 to 15 percent of the market, and we sold 100 million songs in three years. So, I think that vision has been borne out a little bit.

 

EMusic only sells music on independent labels. Have you talked to the major labels recently?

We have been talking to all four majors for more than two years. And their offer has been pretty simple and consistent. We’ve said to them, "We’re really a Long Tail music retailer. We focus on people who are 25 to 60 years old that like music beyond the commercial mainstream. We’re a strong retailer among all genres except mainstream pop and rap."

So, we said our notion is that there is a portion of your catalogs that are probably in those genres that are underperforming. Why don’t you give us all the songs in your catalogs that have sold one or fewer times on iTunes. And maybe even the stuff that isn’t available physically anymore. A deleted title. Wouldn’t that be a good place to start? License that to us in MP3 and let’s see how well we can sell it. And any sales we do would be incremental because you’re not selling it anywhere else.

That pitch has been pretty consistent for some time. You can sort of call it the "back catalog and up-and-coming artists who haven’t yet broken." And we have not been successful in convincing any of the majors to abandon the DRM requirement. But we keep trying.

So even if their songs are not selling, they’re not willing to go that route.

 

That must be frustrating.

Well, yes and no. We certainly haven’t been penalized as a result of it. We’ve enjoyed, by most measures, some really great success in the last three and a half years. We’ve doubled the business every year. We’re well north of 250,000 subscribers. That’s more than five times what the business had when we bought it. The growth rate has increased. We’re the unquestionable No. 2 in the world of digital music. We’re larger and more successful in music sales than numbers 3, 4, 5, 6, 7 and 8 combined. I don’t think we need the majors to be successful. I do think the majors need us and many other people like us to be successful in order for them to be better. Day to day, the majors sell all their music daily through a single retailer. That can’t be good for a growing business.

 

Since you sell music from indie labels, do your customers consider eMusic to be similar to an independent record store where they can find up-and-coming artists? The next Nirvana, for example, or the next Dylan?

A very large percentage of our sales are from people looking to discover. But discover not only up-and-coming, but also discover artists that person doesn’t know.

Not everyone knows Johnny Cash’s music. They’ve heard of him. But we’ve done a really good job, I think, of reintroducing him to a lot of people. So there’s an artist that isn’t up-and-coming.

I would just broaden your definition of discovery and then I’d agree with you. We certainly have to be a service focused on music discovery because we don’t have the hits everyone hears on the radio. Unless you are already a serious muso with very deep and broad tastes, quite a bit of the stuff we carry is going to be stuff you haven’t heard before.

I think we’re a good discovery service, and I’ll give you a statistic that I think bears that out. Our catalog is now over 2.2 million tracks from 13,000 indie labels. And each quarter about 67 percent of that entire catalog sells one or more times. That’s a remarkable statistic when you consider that we are the tail. We don’t have a head. There are no major hits in our catalog. Yet, two-thirds of our catalog sells at least once per quarter. And we have some really obscure stuff.

 

Aside from obscure tracks, eMusic also carries earlier material from bands and artists from before they reached a more mainstream audience, like Arcade Fire.

Arcade Fire is a good example. That’s a band that everybody knows about now. We’ve been pushing Arcade Fire way before they became nearly as popular as they are now. And Arcade Fire is a band whose core fan base definitely came out of a non-mainstream, indie music fan group. And you might argue that they are now starting to cross over. They’re certainly a critics’ darling and they’re getting a huge amount of media attention. And I think we’ve been contributing to their success for many years.

And there are a lot of bands like that. The Decemberists, Bloc Party, even Belle & Sebastian, and Beirut, Cat Power, Of Montreal. There are a lot of core indie bands that I think we’ve been a helpful mechanism to grow their base.

 

What kind of customer research do you do?

We’re a highly analytic company. A lot of our understanding of our business is quantitative and is based on some pretty robust analysis of the business cycle and customer behavior. So we’ve always been pretty focused on data.

One thing we have been doing more recently is customer visits, or what we call customer gatherings. It’s kind of an informal focus group where we travel to different cities and bring a bunch of people into a room. Some are current customers, some are former customers, some are not yet customers. Just to learn more about what customers care about, what their interests are.

I have to say, and we just did this again a couple weeks ago in three cities, I think we come away from these emboldened that we are on the right path. We hear the same thing consistently. One, that music needs to be interoperable. And two, at even at 99 cents per song, it’s too expensive for some music.

In other words, the question we ask is "iTunes is a pretty great experience. Why aren’t you buying more from iTunes?"

And we hear consistently, "I only buy stuff there that I don’t have a long-term appreciation for, because I don’t know if I’ll always use Apple equipment. So I’m only going to buy throwaway songs there." Secondly, "I don’t want to pay 99 cents per song for something I’m not so sure about yet."

In other words, they don’t use [iTunes] as a discovery tool. They only use it when they absolutely know that it’s something they want. And our price allows them to discover. They’re paying 25 to 33 cents per song, but they are committing to $10, $15 or $20 per month. So it’s interesting to note the average iTunes customer only spends $7 to $10 per year at 99 cents per song, while the average eMusic customer spends $14 per month.

Now, you could argue that we attract customers who, by their very nature, are interested in consuming more music. But people spend more dollars with us and consume more music from us than other digital retailers.

 

Was there anything in those discussion groups that really surprised you?

Yeah. These are very Web-savvy people, generally. They’re pretty digital technology savvy. But when they buy CDs, and many of them do, only a few buy them online. They still go to record stores. Either a specialty indie retailer they love to patronize, or a larger store that just happens to have the record they’re looking for. The physical buying experience is still important to them.  

You have a pretty good relationship with Barenaked Ladies, and the band’s manager, Terry McBride of Nettwerk Management, has been pretty outspoken in his views on DRM and MP3s. You two seem to be birds of a feather. Do you deal with McBride and Nettwerk more than other managers and management companies?

With Nettwerk? Certainly. The label part of Nettwerk licenses us their catalog, or at least the part of their catalog that isn’t licensed to majors. So they’re a label client of ours. And Terry is a very forward-thinking executive who is very outspoken in his views but who is also very adventurous in his business dealings and is willing to try all sorts of things. We do find a kindred spirit in him.

An example is that Barenaked Ladies promotion we just did for our 100 millionth downloader. He was all game for that and very supportive. We have a good relationship with him.

 

How about other artist managers? Are you finding other managers coming around to the eMusic way of doing business?

To be honest, the focus is on labels. We have 13,000 labels, and we manage all those relationships personally. There are very few indie labels that haven’t come around. There is Sanctuary, which is one of the few that haven’t licensed to eMusic. And labels that are owned or distributed by the labels, have many times had restrictions imposed on them by the majors that prevented them from working with us.

EMusic was once owned by Universal. Do you see eMusic remaining independent? At least in the short term?

Our focus is on building the business. We are very bullish that this is a model that is working. We count the number of subscribers we can reach in the millions. We really do believe there are 3 million to 5 million potential eMusic subscribers just today, as digital becomes more a part of people’s lives.

We’re very focused on building this into a big business. Music is the first category. We have a very supportive fund behind us that has not necessitated us to go out and raise any additional capital. That’s been the focus for the last three and a half years and I don’t see that changing.

 

So, life is good at eMusic?

It is. It’s been a very fun time. We’ve got a great group of employees that share a knowledge of non-mainstream music. When we go out and meet customers, we find that they are very much like us. They’re frustrated with normal exposure channels for music. They don’t like terrestrial radio. They certainly don’t watch MTV or VH1. They read some obscure music magazine and spend a lot of time on blogs. They make it their passion to find good music. And I think we find some kindred spirits in them.