Man-with-headphones

The digital music business model has been sliced and diced in every way imaginable. But in nearly every case, the listener is left with the choice of paying for access to music, or suffering through ads. And rightfully so, musicians and label execs need to eat too, right?

Y Combinator alumni Earbits has created a third solution, one that doesn’t requires the listener to pay or tolerate ads. In fact, artists actually pay Earbits to play their music, and they do so happily as a way of engaging new fans and driving music downloads. There is currently more demand from artists than Earbits has listener airtime to fill, according to its founders.

Over the last three years, the Pandora-like online radio platform has grown to feature more than 130,000 tracks from 12,000 (mostly indie) bands across 630 music labels. With this level of scale and diversity, its finally a compelling alternative to more mainstream digital music platforms. The company has been building its platform for three years and is just now getting to the scale where it offers a meaningful alternative to those who are looking to discover new music around their areas of interest.

This week, Earbits launched its first ever iOS app that brings the full Earbits experience to mobile. By contrast, the company’s nine-month-old Android app delivers a very limited experience and is due for an update. Mobile is a crucial component of any successful digital music platform. For example, more than 50 percent of all Pandora’s listening time comes through mobile devices.

So how does this free, ad-free platform actually work? Users can browse the platform’s 380 channels or receive recommendations based on existing music preferences. If the user has music downloaded to their iOS device, then the app scans that content, extracting artist and genre information and makes subsequent listening recommendations based on that information. Recommended channels then mix in music from the listener’s on-device library with new music from the company’s participating artists. The average listening session spans more than 24 tracks (more than 60 minutes), a number that’s grown by 25 percent in the last eight weeks.

The key to the Earbits economic model is that users are invited to engage with the individual artist in exchange for a social currency called “Groovies.” Actions like following an artist on Twitter or Facebook, sending out a tweet or Facebook message mentioning the artist, recommending the artist to a friend, joining the artist’s email distribution list, or checking in at a live show earns the listener additional Groovies, which can be spent to unlock additional features like playing tracks and albums on-demand, rather than listening to a topical streaming channel.

“Other platforms seem like they’re built around the question, ‘How bad can I make the listener experience without losing audience?,’” says Earbits CEO Joey Flores. “We think we’ve found a way to align the incentives of the artists and the fans and the platform. For us it’s all about driving fan engagement.”

There’s a risk to this model. As my colleague and resident PandoDaily music aficionado David Holmes pointed out, people hate ads but at least they can tune them out. They hate being the ad even more. Look no further than the time people had to tweet about the new Jay-Z album to get the lyrics to it for evidence of this fact. Earbits will need to walk a fine line and give users options for engaging with artists that are subtle and not overly intrusive.

Fans are incentivized to engage with the artist and artists have proven plenty willing to pay for this kind of interaction, Flores point out. On average, Earbits artists have generated 19 new fans for every 1,000 spins (times one of their tracks is played). One artist in particular has generated 30 track downloads per 1,000 spins, meaning $30 in revenue. (The downloads in this instance were directly from their website, not through iTunes.) By comparison, this artist would have generated just $1.30 in royalties from a traditional music streaming platform.

Given this level of performance, it’s little surprise that artists are willing to pay for airtime. Similar to sponsored search results on Google, Artists pay Earbits to appear more frequently in the rotation in a particular channel. (They’re only charged if a listener gets through the first 30 seconds of a track.) More spins, in theory, equals more fans and more downloads. With the above engagement metrics, it’s  just good business.

Since it appears that Earbits works for both fans and artists, what’s the biggest challenge? Without question, it’s awareness on both sides of the equation. Major music labels are just beginning to become aware of Earbits and even once they’re aware, it takes a significant amount of “education” (aka, selling) to get them comfortable with the concept and the results, according to Flores. Fans too are still discovering Earbits and the company is slowly expanding into a more mainstream audience as its music catalog expands and features some more well known artists.

The company finds itself stuck in a bit of a chicken and egg scenario where it needs more paying artists to attract additional listeners, but also needs additional listening volume to satisfy all the demand from artists for airtime. Earbits has largely avoided paid customer acquisition, instead relying on word of mouth and organic discovery. The site ranks No. 1 in terms of search for “commercial free online radio” and in the Top 10 for “free online music.” The company also has a highly popular Chrome Web app and was one of the earliest participants in the Facebook Open Graph, debuting alongside Spotify.

Nonetheless, earbits receives just 60,000 monthly unique visitors today and has 230,000 registered users – where registration is optional.

“We could generate Pandora’s revenues with only 5 percent of its user base,” Flores says. “We’ll be profitable at 1 million users, and we’re also legal and value added.”

The company has raised $1.6 million to date from Charles River Ventures, Start Fund, Y Combinator, and other angel investors. The company spent its first two-plus years focused on building out its platform and its catalog, Flores says. Now it’s shifting its focus to fan acquisition, engagement, and retention.

Earbits may never have the Rolling Stones or Taylor Swift music on their platform. That may be a problem for some listeners, but that doesn’t preclude it from offering fans one of the best music listening experiences on the Web or mobile. If the company is able to continue growing its content catalog while maintaining the level of fan engagement that it offers today, it could grow into a large and sustainable platform for both music lovers and artists.

[Image via Earbits]