music-2013

When you think of a music streaming service, what pops into your head first? Spotify, with its fast-growing popularity? Beats, with its celebrity cachet and Apple association? YouTube’s upcoming service, with its offensive, tone-deaf attitude toward independent musicians?

If you’re as serious about your technology products as you are about your music tastes, you might think of Rdio, the beautifully-designed but comparatively under-used music streaming site that’s always played the role of the cool, quiet, mysterious high school kid, sitting in the back of the class with headphones on while the jocks trade high-fives over their latest conquests.

Yet from an outsider’s perspective, things have certainly been a little mysterious, but not always so cool for Rdio over the past 12 months:

Last June, the company’s CEO, Drew Larner,* stepped down despite claiming to have increased the number of new users eightfold since 2012. Then in November, there were layoffs. December comes, and Rdio shuts down its video-streaming service Vdio only six months after launching it. All the while, unlike competitors like Spotify, Deezer, and Rhapsody, Rdio has been keeping its number of subscribers secret. And competition for these users is fierce as ever, with 800-pound gorillas like Apple, Amazon, and YouTube all releasing or planning their own subscription streaming music services.

In the face of these challenges — not to mention the fact that no one knows if subscription streaming music is even a sustainable business model — and with its biggest startup competitor Spotify continuing to grow, is there any chance Rdio is still standing when the dust of the streaming music wars settles?

There’s always a chance. And after speaking to Marc Ruxin, the CEO of the social music discovery startup TastemakerX, which Rdio will announce it’s acquiring today, that chance might be bigger than you think.

Ruxin, who will become the COO of Rdio and have his entire team absorbed by the company, says his new employer has two big advantages over much of the potential competition: Being early and being independent.

“We’re not even at the beginning of the first inning when it comes to the global demand [for subscription music services],” Ruxin says. That leads him to believe two things: One, that the market opportunity is so large that there can and will be multiple winners, and two, that with only one toe dipped into the potential global user pool between all entrants at this time, the difference between, say, Spotify’s 10 million paid subscribers and however many Rdio has doesn’t seem as stark.

Which brings us to the elephant in the room: Why is Rdio practically the only high-profile streaming music startup that doesn’t share its user count?  Are the numbers that bad?

“The number’s in the millions, but it’s just been a different approach here,” Ruxin says. (For comparison Rhapsody says it has 1.7 million paid subscribers and Deezer says it has 5 million). Publishing user metrics isn’t just about vanity, Ruxin says, it’s about attracting ad dollars. And as a service that for most of its existence only offered a paid subscription model, and which now still focuses its efforts on a user-paid model, Rdio saw little upside to sharing those numbers.

“Rdio hasn’t had a free product. It hasn’t been publishing those numbers just to get ad deals. If Spotify didn’t care about proving out a scaled audience for ads they wouldn’t be giving out those numbers.” (Perhaps not. But when growth is good, why not tell the world?)

The concern over ads leads to another major difference between Spotify and Rdio: Spotify has the users, the ad deals, and over half a billion dollars in funding. And yet it still isn’t profitable. Of course neither is Rdio, but reports show that despite impressive growth Spotify has lost $200 million since it was founded. Rdio has only even raised $17.5 million. This calls into question the entire model of free unlimited ad-supported streaming — it isn’t profitable for the companies involved and it certainly isn’t a good deal for artists.

As I’ve written before, the revenue generated by paid subscription streaming, which for Spotify’s part only comes from 10 million of its 40 million users, far outweighs the revenue generated by free ad-supported streaming, both on a per-user basis and in aggregate. That is frankly stunning considering that there are generously only around 25 million people in the entire world who actually pay for these services, whereas hundreds of millions of people stream music for free, mostly on YouTube.

That’s perhaps why the newest (and biggest) entrants, like Apple’s Beats, Amazon Prime Music, and YouTube’s upcoming streaming service have taken a page from Rdio and focused their efforts on attracting paid customers as opposed to advertisers. Spotify may continue to boost its user counts by offering a free unlimited option, but as long as the percentage of paying customers continues to hold steady at around 25 percent, it’s difficult to imagine how it can survive as a sustainable business.

So Spotify may be facing an existential crisis. But that still leaves Rdio up against those three 800-pound gorillas. Here’s where Rdio’s second advantage comes in: Its independence.

Apple, Google, and Amazon are fighting for the hearts, minds, and pocketbooks of the entire Internet. And with the stakes so high, the competition is cutthroat. Google’s YouTube, for example, has allegedly bullied labels into accepting below-market deals by threatening to remove their artists’ songs from YouTube.com. And according to one music trade organization, the terms aren’t just below-market — they restrict labels’ freedom when it comes to special releases, like exclusives.

Why would YouTube do this? It’s likely to prevent Apple or Amazon from scoring exclusive rights to an album during the first week it’s released. Beyonce, for example, released her latest record as an exclusive download on iTunes before making it available to streaming services. In a phenomenal windfall by today’s standards, both for Apple and the Queen Bee, she sold 1 million copies in that first week. Meanwhile, we already know that Amazon has a history, especially in recent weeks, of putting aggressive dealmaking over providing customers the best service it can. It stands to reason that these priorities may carry over to its content deals with music publishers.

Rdio, however, is far less entrenched in the high stakes gamesmanship of the biggest players. “People like the independence and neutrality of Rdio,” Ruxin says. “The pure independence from labels’ and promoters’ and festival folks’ point of view is really appealing. For whatever reason, if Google was live-streaming Coachella, clearly Apple would have a problem with some of that. That’s a corporate standoff between Apple and Google. If we were involved, there’d be no embedded bias.”

Finally, Rdio is a damned beautiful product to use and look at. Yes, this is a subjective determination, but almost every “Rdio vs Spotify vs Beats vs Rhapsody” article gives Rdio the edge when it comes to design and user interface so I’m not alone in thinking this. Rdio has also been early and effective at capitalizing on the network effects of social media to help users discover new artists. That’s a huge part of why TastemakerX and Rdio have teamed up — TastemakerX was designed to incentivize early adopters and discoverers of new music who share collections and playlists with friends and strangers.

As opposed to algorithms like the one Pandora uses, Ruxin thinks communities made up of actual humans are a far more organic and effective way to unearth good new music for users. It remains to be seen just how many of TastemakerX’s features will be incorporated into Rdio, but Ruxin certainly believes his startup’s spirit of social and contextual music discovery will live on.

***

With an eventual global market for subscription streaming that could be billions strong as 4G and smartphones continue to spread all over the world, what’s the key to unlocking it? Will it take a company like Apple with the resources and name recognition to penetrate far-flung corners of the world? Or will multiple players carve out little geographical fiefdoms to dominate, like what’s happening in the mobile messaging market? Finally, will a significant chunk of the population ever be willing to still drop cash on music, which is the only way any of these services, whether they’re owned by Apple or a startup, will survive?

“I don’t think anyone’s done a good job educating the public on the extreme value these products represent,” Ruxin says. “It took a long time for the Netflix proposition to become obvious, and I think for streaming services in general it’s taken a while.”

As for whether Rdio can beat out or at least coexist with fellow startups like Spotify, Deezer, and Rhapsody, not to mention giant tech companies like Apple, Amazon, and Google, remains to be seen. But as anyone who remembers high school knows, the weird, mysterious kid in the corner was often the next millionaire or rock star in waiting.

Either that, or he ended up flunking out of college and moving back in with his parents. You never can tell.

[illustration by Brad Jonas]

*An earlier version of this post mistakenly referred to Rdio’s former CEO as Michael Larner, not Drew Larner