Deep Think: Joey Flores of Earbits on the Challenges of Building a Music Startup

Guest post by Kyle Bylin of sidewinder.fm, a music and tech think tank.

In 2011, several headlines asked this question, “Can Turntable.fm save music?” It didn’t, as it turns out, but that’s okay. Songza has become the next
savior. Group listening is out and playlist curation is in. In 2013, a new pack of music startups will emerge with equally cool apps. Media outlets will
fawn and another savior will rise.

As hyperbolic as it sounds, this is generally what happens. The fetishism of music startups has as much to do with their sheer abundance as it does with
the willingness of users to abandon the old for the new. But why does this migration happen, seemingly, year after year? And is there anything that startup
founders can do to prevent it?

At first glance, this seems like the classic hedonic treadmill problem. We humans can be rather ungrateful creatures, because we tend to discover
Turntable.fm or Songza and become overwhelmed with happiness only to quickly return to a relatively normal state of satisfaction. Soon after, we seek out
another service to be excited about.

Joey Flores, a reformed ad network guy, and co-founder and CEO Earbits, an online music service, doesn’t buy this logic. In his essay, “Why Music Startups and Ad Networks Suffer from Flavor of the Month Syndrome,” Flores argues that users flee from services around the same time they start interrupting their free music streams with ads.

Pandora, after all, sounds great when it plays music customized to your taste. But when it recommends that you attend the latest movie or drink the newest
beer, the honeymoon grinds to a halt. Flores believes this sentiment to be true across the sector. You’re a king until your investors start looking for
money, you insert ads, and your users forsake you.

After that, you’re just another schmuck trying to make a business and it’s an uphill battle. Flores tells sidewinder.fm
his thoughts on what it takes to win this battle and why startups must align their revenue streams with their product.

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Why does the media have a fetishism for music startups? Does the accelerated hype-cycle often do more harm than it helps? How might it fuel the
migration of users away from a service?

Joey Flores: The media has an enthusiasm for music companies because they’re fun products to test out, simple and relatable to talk about, and will appeal to the
majority of readers. It’s also part of a disrupted industry, which makes it good fodder for both technology and business press. That being said, the state
of technology and consumer press in the world of click-driven headlines is that long form content and ongoing coverage have given way to short attention
span hype and controversy. This definitely has a big impact on the life cycle of startups in an environment that requires ongoing, minor iteration.

What I’ve seen in terms of the press is that getting coverage of an early launch can be relatively easy if you have a solid product, a big name tied to
your company, or some other sexy talking point. But almost no companies have a product on launch that is fully refined, highly engaging, retains users, and
experiences natural, sustainable viral growth. These things come only after months of trying out new product features, and making incremental improvements
to unsexy things like customer communication.

"What you end up with is a press that has no
interest inwriting about the small wins that create
great companies, and instead spend most of their
time talking about the next big thing."

What you end up with is a press that has no interest in writing about the small wins that create great companies, and instead spend most of their time
talking about “the next big thing”. That means that solid companies with evolving products take a back seat in the media to new companies or industry
scandals, and that makes it hard for solidly-run startups to get the ongoing coverage they need to be introduced to new users at the times that their
service has become good enough to keep them.

Kyle Bylin: Advertising, you suggest, can be the death-kneel of a service, because users strongly dislike it. They attempt to avoid being exposed to ads — sometimes
by signing up for a service under a new email address — and show little interest in paying for a premium tier where ads are removed or less prevalent.

This can be troublesome, because if a startup develops a service that becomes popular, they must determine how to generate revenue to offset costly
licensing fees and provide returns to their investors. Oftentimes, new startups will pursue advertising as a business model without realizing how tangled
of a web it can be.

Turnkey ad integration exists through Google and other networks, but to get Pandora-level rates requires tremendous scale, a promotions team, and constant
app optimization. Worse still, some users appear to have such a gag-reflex to advertising that they just stop using a service and switch to another one at
first sight.

Will advertising ever be a sustainable business model for music startups? Does the model force you to forgo features in favor of optimization? Why does
advertising push users away?

Joey Flores: The only thing stopping advertising from being a sustainable model for music startups right now is royalties. If royalties were more equitable, companies
like Pandora would be profitable and sustainable now. People can argue all day long that what Pandora pays is a fair rate for artists, but there is little
arguing that it reflects the value of music content online.

For better or worse, users can get their music from a million different sources, many of which are free, illegal and don’t benefit content creators at all.
In that environment the industry needs to be realistic about what kind of revenue is appropriate for a streaming provider to pay. Right now, what they’re
paying isn’t realistic, and there is really no basis for it being a fair rate to all parties concerned. Keeping the rates at unsustainable levels forces
companies to split their focus far too early between figuring out how to build a product that will keep consumers happy for the long haul, and covering the
spread on high priced costs for content. Startups in other industries get to focus 100% on building a product that their users will pay for, and the
majority of founders will tell you that singular focus is necessary for startup survival.

"Since consumers are mostly unwilling to pay
for streaming music, focusing 100% on building a
product that consumers will pay for isn’t possible.
Instead, music startups have to split their focus
on  building a great productover here, but on
building a monetized business over there."

Since consumers are mostly unwilling to pay for streaming music, focusing 100% on building a product that consumers will pay for isn’t possible. Instead,
music startups have to split their focus on building a great product over here, but on building a monetized business over there. Splitting your focus like
this early on is pretty much guaranteed death for startups.

As for why advertising pushes users away, the problem with advertising on streaming music services is that it’s intrusive. Advertising on regular web
properties certainly annoys some people, but it doesn’t stop you from getting out of the service what you want, which is to read an article, find a
business listing quickly, and so forth. With music, because most people are not looking at their screens and the value of non-intrusive display advertising
is minimal, companies are forced to play audio advertisements that significantly impact the user experience. With so many options for where to listen to
music, audio advertisements are a barrier consumers aren’t willing to overcome for an experience that is only marginally better than the next one.

Kyle Bylin: In your essay, you argue that no major online music service has figured out how to align their revenue streams with their product.

Pandora, for example, has a massive audience that uses their service, but their actual customers are advertisers. So their product, while incredibly simple
and compelling, is optimized to deliver ads and maximize click-through rates. The company can’t solely focus on developing features or promoting music,
because users and artists don’t generate revenue.

An alternative route, as you’ve demonstrated with Earbits, is to forgo premium, ad-free tiers, because users don’t pay for them, and focus on marketing an
inventory of artists over advertisers. So an artist can sign up with Earbits and buy spins on the service, which puts their music in front of listeners.

This makes you beholden to the needs of your customers (artists) and enables you to be creative in how you connect them to their potential customers
(fans). If you develop a great feature that converts your users into passionate fans, you can release it immediately, rather than holding out to sell your
users to brands.

What’s the hardest part of making the artist a customer? When did you fathom that chasing band dollars might be better than brand dollars? Why don’t
major services take this approach?

Joey Flores: There are several challenges to making the artist a customer.

1)
The first is that the lifetime value of an artist as a client is lower than it is with Pepsi, so you can’t afford to invest in heavy touch sales. Everything you do to reach out to bands has to be through smart marketing, and you’re going to need hundreds of thousands of clients to be a
venture-backed business.

2)
The second is that bands are already being over-marketed to by horrible services that take advantage of them constantly, and they’re cynical about it. You’ve got to break through that barrier and you have to do it with short, concise messaging. That isn’t easy to do when you’re offering something new
and complex.

3) The third hurdle is that many of the best artists don’t own their own content and can’t legally license it to a service like ours. So,
even if the artists are forward thinking and excited about our service, we’ve got to convince their record label that it’s a great opportunity.

Most record
labels are very narrowly incentivized. Even though what we’re doing is a great overall opportunity for their bands, who are interested in awareness for
their shows and other monetization, there are an unfortunate number of labels who don’t care about a band’s overall success and just want to know how a
service translates into album sales.

"Our goal has always been to help high quality artists
find the right audience and turn them into devoted
fans and customers. That is a multi-billion dollar
problem. We just believe that the best way to achieve
that goal is through a streaming music experience."

Despite those hurdles, we knew from day one that Earbits could be a big business because we’re solving a real and massive problem. Unlike other companies
we get compared to, we never got into this to solve the monetization problem of streaming music. Our goal has always been to help high quality artists find
the right audience and turn them into devoted fans and customers. That is a multi-billion dollar problem. We just believe that the best way to achieve that
goal is through a streaming music experience.

Other companies seem to look at the idea of charging artists for inclusion in their streaming service as a bad thing, and I would generally agree. If all
you’re looking to do is figure out how to solve the revenue problem of your streaming service by charging bands, you’re going to fail. When you wake up
everyday focused on how to get people to engage with your artists, the fundamentals of building a big business are different. They’re much more sound than
trying to monetize expensive content through unrelated sources.

Kyle Bylin: Everyone is trying to create a better widget, but few have developed a better experience. The major services offer a marginally improved
means to play a Rihanna song and share it with your friends. They all have the same library of millions of songs, but most of their users have no idea what
do with them. The innovative services enable new ways to experience and discover music, mostly by emerging artists, but most people have no idea that these
services exist.

We Are Hunted, Songza, Shuffler.fm, 8Tracks, Aweditorium, and Exfm, among others, have created fantastic web and mobile apps, but none of them seem to have
crossed over into the mainstream market. Some might say that that reason for this is that casual listeners only want to play a Rihanna song and share it
with their friends. The appeal of experiencing and discovering music is lost on them, because these are largely fanatic constructions that require more
time and effort than they have to invest.

Will any of these innovative services reach the mainstream market? Will we see them transform how casual listeners experience and discover music? What
might it take in order for this to happen?

Joey Flores: I don’t know enough about the vision for these services to tell you for certain whether they’ll become mainstream. What I do know is that services won’t
make music discovery an ongoing, important part of their service unless they are financially incentivized to do so. You may have some of these services go
mainstream, but whether they will still focus as much on discovery is another question. The incentive for focusing on discovery on a large scale could come
through running a service like ours, or it could happen through innovative contractual agreements that trade promotion of new artists for cheaper access to
legacy content, among other ways.

Kyle Bylin: I’d certainly consider Earbits as one of these innovative music services. You have continuously evolved the product to make the
experience better and pursued partnerships that would align you more closely with artists. No one is quite doing what you’re doing, perhaps, because
running a music startup is harder than it looks and your approach is harder to copy than it seems. It’s still the early days for online music and it seems
like you are just getting started with what you want to do.

What does the future you’re trying to build look like? What is the ultimate Earbits experience for fans and artists? What major developments and
feature additions may debut in the coming months?

Joey Flores: The future for Earbits is a one-stop, listen and shop experience that lets users consume music how they want while giving them countless ways to give
value back to artists through support, promotion, and commerce. Right now you have one service to listen to mainstream music, another to listen to emerging
music, another for engaging with bands, one for keeping up to date on live shows, and yet another for buying music and merchandise.

"When our listeners can get nearly all of the music
they can elsewhere, plus easily buy an album, concert
ticket, t-shirt or other product from any band they
hear, not only will it be a huge differentiator in terms
of consumer experience, but it will also provide far
more value to artists and the industry than the
lackluster royalties they’re getting now."

The long-term vision for Earbits is to bring all of these things into one platform. When our listeners can get nearly all of the music they can elsewhere,
plus easily buy an album, concert ticket, t-shirt or other product from any band they hear, not only will it be a huge differentiator in terms of consumer
experience, but it will also provide far more value to artists and the industry than the lackluster royalties they’re getting now.

In terms of upcoming releases from us, right now, we already produce significant value for the artists on our platform. The number one thing they all want
is more of what we already provide, which is targeted exposure and high quality fan acquisition. So the features we’ll be debuting in the coming months
are all about listener engagement, retention and acquisition — i.e. audience building.

You’re going to see more ways to access the music we have, an even
stronger focus on personalization for listeners, and some viral marketing techniques that put Earbits on the fast track to widespread consumer adoption.
When the scale of our audience is meeting the demand from our bands, we’ll be shifting to more partnership integrations and better tools to help the bands
maximize the value of their airtime, including a greater focus on album sales and live show awareness.

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