Digital Music Service to Pose New Challenge to Subscription Model

Digital Music Service to Pose New Challenge to Subscription Model

By BEN SISARIOMAY 11, 2014

Adam Kidron, left, chief executive of Yonder, a music downloading service that will begin operating Monday, and Jim Heindlmeyer, chief operating officer, at their Manhattan offices.

To many in the music industry, Apple’s pending $3.2 billion deal for Beats Electronics, which emerged last week, suggested a watershed moment for streaming music by subscription. Once a marginal model, it is now being trumpeted as the future of consumption by Spotify, Rhapsody, Rdio and Beats’ own service, Beats Music.

But music by subscription also has doubters. Among them is Yonder, a small service opening this week with a very different model: selling specially licensed smartphones that allow users unlimited free downloads. Under this plan — sometimes called hard bundling — the cost of the music is hidden in the price of the phone.

Adam Kidron, chief executive of Yonder, said this has much greater potential than streaming by subscription, which despite becoming more prominent has remained a small part of the business. Last year such plans, which typically charge about $10 a month, attracted about six million customers in the United States.

“What we’re saying,” Mr. Kidron said in an interview, “is that we need a model that attracts the other 98 percent of people who are not paying.”

The hard-bundled model, however, has a checkered history. In 2008, Nokia’s Comes With Music offered free music downloads with certain phones, but the plan drew few customers and was withdrawn in most countries.

Blue-chip investors like News Corporation and Allen & Company later backed a similar effort by Mr. Kidron’s previous company, Beyond Oblivion. Yet the company fell apart in late 2011 before ever reaching the public, sinking $34 million in investment and becoming one of the most spectacular failures in digital music.

Now “humbled,” Mr. Kidron said Yonder is setting out with more modest plans, including raising less than 10 percent of the size of Beyond Oblivion’s investment. While that company employed about 70 engineers, for example, much of the work to build Yonder, which is made for Android devices, was farmed out. Seed money came from Cliff Burnstein, a powerful music manager whose company, Q Prime, works with superstar acts like Metallica and the Red Hot Chili Peppers.

In a further challenge to Yonder, a deal between Apple and Beats could mean a major marketing lift for subscription. Google has already entered the market with its own service, and Amazon is said to be trying to negotiate streaming licenses with record companies.

To prove its model, Yonder will try to sell just 10,000 devices containing its service, including unlocked models of HTC’s One phone, the M7 ($479) and M8 ($679). If the plan succeeds, the company hopes to make large-scale deals with manufacturers for phones around the world carrying licenses granted by music companies.

Yonder’s profit would come from a share of those music licenses, which Mr. Kidron said range from as low as $15 in poor countries to $80 in the richest markets.

As a way to link music to other kinds of expenses that people pay automatically, like phone service, bundling has wide support in the music industry. AT&T sells subscriptions to Beats Music, and last month Sprint announced a similar deal with Spotify. Muve Music, a download plan whose price is included in plans offered by Cricket Wireless, a prepaid wireless service, has attracted more than two million subscribers. AT&T, which bought Cricket’s parent company, Leap Wireless, is said to be looking for buyers to unload Muve.

Many analysts consider such collaborations with telecommunications companies essential to make any music plan viable on a broad scale.

“For this model to work, it really has to have a telco and a device manufacturer working in tandem,” said Mark Mulligan, a music technology analyst and consultant.

 

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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