Smule Has Changed The Music Industry Completely: Here’s How

It’s no question that Smule has become one of the world’s most powerful social media tools. Four percent of the world’s population –350 million people — have used Smule, and its numbers are growing every day. But beyond that, Smule is a testament to the intrinsic human love for music, especially when the power to share and collaborate is placed easily in our hands.

Jeff Smith, co-founder and CEO of Smule, is a bit of a magician when it comes to music and technology. With his expertise and vision, Smule has grown close to 70% year-over-year for seven years, attracting and keeping users who create and share authentic, engaging content. Millions of users are sharing, and thus marketing, Smule, but that’s not the greatest accomplishment Smith has brought about. Smule has been integral in bringing the masses from a musical dark age defined by possession and litigation into one where everyone is a creator and sharing is the norm. Singing and collaborating are available to anyone who wants to participate, from strangers to friends to the biggest pop stars.

I had the opportunity to connect with Smith and have an enlightening and hilarious conversation with him about Smule, the music industry as it stands, and what’s next for music and technology.

Tell me a little about how you got into this industry.

I’ve been running businesses I cofounded for 24 years. I sold one to Google; I sold one to Novell; I took one public. For the past eight years I’ve been running Smule, a leading social platform for music. I have a degree in computer science from Stanford University; I started my career as an engineer more than 24 years ago, and later in life, I went back and got a PhD in music at Stanford.  My field is data science –- using statistics and data to understand statistically why people engage in music. It’s a fascinating time, because we have a lot of data that ten years ago we didn’t have. I teach a class, a seminar, each spring in the Stanford computer music department on data science and music. That’s me.

What’s happening in the music technology industry right now?

It’s an amazing time, because through technology we’re opening up the experience of music. Not just listening, but also creating music together — we’re opening this up to the masses. It’s really a magical time if you think about the broader spectrum of music. It’s one of those things that’s intrinsic to who we are, it’s been fundamental to who we are for a long time, but since the era of the recording — call it the past hundred years — it’s become more of a passive activity because of technology. And perhaps because of technology again, there’s an opportunity to bring music back to its roots as more of a participatory and expressive medium. Nothing against recordings, they’re amazing, but there’s more to music than just the lean-back experience. There’s also an opportunity to open up the creation and the discovery of music to a much wider audience, so it’s really almost giving music back to the people. Music is not controlled by a handful of people in the industry anymore. It’s truly an open platform. That’s our hope.

How do you see the future of technology and business? For example, Apple Music with its 17 million subscribers is now a huge revenue stream, and yet some of the streaming music services are still trying to find a business model, it seems. How do you see this interchange coming about?

Well, that’s another reason why I think right now is an interesting time in entertainment and specifically music. All of these forces are coming together and changing how music is consumed, distributed, and perhaps even licensed. All of the streaming services haven’t really changed the model; they’ve taken recorded music and they’re redistributing it. The packing used to be CDs, then downloads, and now streams.

At Smule we’re changing the model. It’s not just packaging something that came out of the recording studio. Instead it’s giving everyone the recording studio in the palm of their hand, or allowing people to have a recording studio together in the Cloud. It’s inverting the entire equation of how music is created, and in the process it also inverts the equation of how music is distributed and licensed.

For example, because our community is creating the music, we’re not using that master recording, and we’re not licensing the master recording from the label. Instead, we’re licensing the copyright to the composition from the publisher, from the writer. And we pay royalties out to all the writers. In fact, we have contracts with 300 publishers across the globe. But because we’re not dealing with recorded sound, because it’s the copyright and we’re allowing our community to create the recording, we don’t have those same issues.

When I speak to investors in a broader sense about the music industry, they will look at me and say, “There’s no money in it. Are you a crazy fool to go into that market?” Now, you’ve had multiple successes, so that probably helps you with funding or getting funding. What do you think the opportunities are for building technology businesses within the music industry?

That’s a good question. I’m thankful that music has that bad reputation because none of our competitors were able to get funding before we’ve gotten to scale! Most investors just won’t touch it with a ten-foot pole, which is fine by us.

The way we look at it, though, is that if you really want to think about the music industry, you could argue Apple is the largest provider. They’ve done quite well. They control, to some extent, the distribution, and they also control the high-end authoring tools: Logic is the number one studio tool for creating recordings. I use this analogy, which is somewhat hyperbolic, to make a broader point, and that is the music industry isn’t what we thought it was anymore. We’re close to 200 billion a year in music sales, but the music industry, the labels only control 10% of that. It isn’t that the artists aren’t getting a significant share of it, it’s that the business model has moved from streaming and passive engagement to active engagement. Where most of the dollars are going is to concerts, merchandise, or engaging with the artists through brands. Or Smule, which is a new platform for engaging with music and with the content.

Music is intrinsic, it’s massive. The music industry that we traditionally characterized is only 10% of the overall industry, and more and more of the money and dollars are moving towards engagement.

Here’s an analogy: if you look at one of the top 100 brands in this world today, certainly Apple and Google and Clorox will make that list, but you know what else is going to make the list, and will be the biggest proportion of the top 100 brands? Artists. Artists have these giant brands and massive audiences across social media, and now also Smule. Certainly there’s engagement with this taking place, and if there’s engagement, then there’s an opportunity to build a business and monetize.

You’ve successfully sold three businesses. You’ve been in this one for eight years. Why haven’t you sold it? And who’s going to buy you?

This one’s kind of special! We have investors; we’ve raised $75 million from some really smart people. But the good news is that this business is continuing to chug along. We have a vibrant and growing community approaching 50 million monthly users. We crossed a $100 million run rate in sales. Our sales have grown 70% every year for seven years. We have 1.5 million paying subscribers to our service, so it’s primarily a subscription-based business model. On a typical day, our community will sing and play 20 million songs through their mobile phones, and will upload and share 20 terabytes of data in music, videos, and audios to invite other people to join and listen to their songs. That’s one of the core aspects of our value proposition: we’ve built, in essence, the world’s leading social network for music. One of the principal mechanics for people engaging is to collaborate, to create music together through mobile phones.

Back to the statistics: our business is chugging along at a pretty good clip, and I think that will create options for us, perhaps one day, to go public, depending on market conditions and how we’re doing. But from a financial standpoint, maybe that’s where it’s headed.

So I’ve got to ask, given the Pandora stories, et cetera – are you profitable?

No.

Okay, because you’re growing?

No, no. But I have a good answer to that. We were profitable in 2013. But there are a few areas where we’re using a bit more cash. One area is our data centers. I mentioned earlier that our community is performing 20 million songs a day. Well, they’re also uploading over 2 million of those songs a day to share and invite others, so it’s pretty massive. We have 2,000 servers running up in the Cloud. We just brought our third data center online in Singapore. We put $3.5 million of iron into Singapore, literally shipped it across the Pacific and put it into our new colocation centre there in Singapore. We’re spending that money in advance of some of the growth because we anticipate that it will drive more growth. That’s one area where we’re using, say, cash in front of revenue.

The other area is marketing. We’re getting a pretty good return on our marketing investment, but because we have a subscription business, we’ll spend that marketing dollar in advance of the subscriber renewing. About a year in we’ll begin to see a profit from the subscription, but for that first year it’s negative cash. Because of that, we have raised money to invest in those two areas, and also in our R&D. We expect that we’ll start generating cash next year as we did in 2013. We’re not using a ton, but we are investing a bit more in ops marketing and R&D.

I read somewhere that the cost of data storage halves every year, so you have the dynamics in the right direction there.

I think so. By the way, it’s interesting that we did roll our own there.

We do use AWS — and perhaps maybe Google in the future — when we’re bringing up a new region to cache it. When we start to see a lot of traffic in a region and we don’t have local hardware there, then perhaps we’ll cache it short term with one of these cloud providers. But what we’ve found is that at our scale, it’s much more cost effective for us to buy our own hardware and roll our colocation facilities.

Any tips that you’d have for anyone thinking about starting a technology business in the music industry? Except “Don’t,” you’re not allowed to give me that answer.

Well, I was mostly joking when I said that. Mostly.

I would say it’s an amazing and special time, and there’s no longer any reason to be afraid of jumping in. One point is music engagement has never been higher, and if revenue follows engagement, then you should certainly be looking at the music medium as a core medium.

I think another interesting point is that the labels aren’t as litigious anymore because they’re making money now. I think they’ve understood that these new business models are accretive. They don’t cannibalize their core businesses, but in fact, they are accretive, so what you’re finding is the labels are being much more supportive of new business models today than they were ten years ago or even five years ago.

But the most important thing is this, with respect to music: don’t you think this world needs more music? We have a lot of other things. We certainly have no shortage of violence. Maybe more music wouldn’t be a horrible thing, and if we had more people investing, participating, and bringing music to this world, then that would be a good thing.

As long as it’s good music! A lot of people would argue that more Kanye West is not a good idea.

I kind of like Kanye, to be honest! But your point is well taken. On the other hand, it’s still fun, and not everyone has to be perfect because there’s just something endearing about music. Here’s one analogy for you. On Facebook, the social graph is friends. On Smule, the social graph is strangers. If you think about it, if I sent a photo to someone I don’t know, that’s weird. But I could sing a song with somebody I don’t know. That’s actually safe, that actually is fun. And in fact, maybe people are even a little less inhibited about performing with strangers versus friends. It’s one of those peculiar things about how our social graph has developed; it’s mostly people who don’t know each other.