Tales From the Dredging of the River of Music

If you’ve ever felt grateful for the list of titles and track lengths that appear when you pop a CD into your player, David Hyman’s Gracenote is the company to thank. It enters all that data so you don’t have to. After Hyman helped expand Gracenote from a tiny metadata venture into the world’s largest database of CD titles and track lists, Sony bought the company for $250 million in 2008. That delivered nice returns for early investors, including Jones and Simon. “I showed them a good time. Then I brought them to Mog,” says Hyman.

Now Hyman has a new vision: fusing portability, social networking and unlimited music streaming at a single site. Mog will deliver this in a new music medium–the smartphone–expected to soon overtake PCs as the prime gateway to the Web. In March Hyman unveiled Mog’s mobile app at the South by Southwest music conference in Austin. With a couple of commands a phone user can segue to a screen offering access to 7 million songs spanning a century. All this to chase an elusive dream: technologically uniting a fractured music market.

His backers are betting Hyman, can succeed in a business that has ruined many a provider of capital. A decade ago a dozen labels dominated an industry drawing $40 billion in annual revenue. It is now half that. Streaming services with cryptic names like Spotify and Pandora now vie for users who listen to music not on CDs but PCs. And what happened to that $20 billion? Some of it was lost to music pirates; some of it to newcomers like iTunes, which takes in $2 billion a year.

Digital disruption of the music industry seemed to offer plenty of entree for new music distributors. Offering its own player and music store, iTunes thrived. But MTV, Yahoo and AOL all tried, then abandoned, selling music online (they now mostly stream it for free). Squeezing profits from online listeners turned out to be dicier than imagined. Smaller operators like Pandora carved out a niche following among “passive listeners.” Type the name of a song into Pandora’s search engine and it instantly produces an entire station around the track. It does this by mapping songs using 400 characteristics, from melodies to orchestration. This musical fingerprint associates one composition with another.

Hyman’s brainchild is a clever hybrid inspired by scrappy competitors. Like Pandora, Mog’s slider bar can be moved to add artists similar to ones you like, building your own playlist. Like Microsoft’s Zune player, it delivers ultrahigh fidelity. Hyman has taken a page from Twitter, too, running feeds from like-minded music fans, allowing users to find new music through “social discovery.”

Can Hyman triumph where bigger brands have failed? He has one edge: Mog’s blog network. Hyman built it by hiring the former top ad salesman at mtv.com, Alex Brough, who integrated content from other blogs with RSS feeds onto the Mog site. Hyman sold ads against this content and split the revenue with bloggers. The site now hosts 1,000 of the largest online music blogs in the U.S. Hyman will tap into this network, mostly using ad inventory, to build Mog’s brand.

To win, Mog will have to score a steep trajectory of subscriptions at $10 per month ($5 more than his PC-based subscription). Mog will also have to deliver “interoperability.” That’s the means by which music in disparate locations, say your laptop and home office, can be married and live together in Mog’s “cloud” (servers back at headquarters). “We’ll be able to add what’s on your hard drive to your Web-based library, grab your playlists and combine all of this legacy data in one place, along with new music from your Mog subscription,” he promises. The streaming service that delivers the best such interoperability should be a big selling point to music junkies.

Of course, if you stop paying, your cloud vanishes. How will that go down with music lovers? “The hard part for people to swallow will be that they won’t own the music they pay to hear,” says Kevin Burden, mobile device practice director at ABI Research. “It’s like leasing a car. You don’t have upfront costs, and you get a new model every two to three years. There’s value to that, but you don’t own it.”

Mog’s competitors think it’s worth the risk. Rhapsody, Catch Media and Spotify all have licensing agreements from music publishers for cloud-based streaming. So does digital music service Lala, bought by Apple last year. Apple recently announced plans to move every iTunes user’s music collection to Apple’s cloud this year. Death of the music download may be at hand.

One burden Hyman shares with his peers is the cost of content. The labels charge up to half a penny per stream per subscriber. European music giant Spotify, now with 320,000 paid subscribers, wants to bring its free service to the American market, but the labels want to be paid more than Spotify can likely afford. That won’t stop Mog’s coming showdown with its larger competitor. Watch for war clouds soon in Europe, as Hyman challenges Spotify on its own turf this summer.

Read more about the difficult work of creating the river of music at Forbes here.

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