Dialogue with eMusic CEO Pakman

Digital service topper touts DRM-free expansion

Editor's note: This is Part 1 of a two-part dialogue with David Pakman. Part 2 will appear Wednesday.

NEW YORK -- Privately held eMusic is the second-largest digital music service behind iTunes and the world’s largest retailer of independent music. In mid-August, it announced that it has crossed the 150 million downloads milestone. The Hollywood Reporter’s business editor Georg Szalai recently talked to eMusic president and CEO David Pakman about eMusic’s strategy and audience, how the company differs from iTunes and why it will soon expand into additional product categories beyond music.

The Hollywood Reporter:
Your business model is based on subscriptions. Why do you think this works for your audience and do you expect broader update of it over time?

David Pakman:
We are not a subscription service like some others, such as Napster, Rhapsody or Yahoo. Those are music rental or on-demand service. When you stop paying, you have nothing to show for it...With our service, even if you use it infrequently, you get to keep your music forever. The nice thing prepaying for a subscription is that you get a better (price) deal. Research shows that even at 99 cents a song, people are highly unlikely to experiment. The subscription model we have works really well to encourage more consumption and to encourage experimentation.

THR:
Do you have any data for that?

Pakman:
The average iTunes customer buys one song per month, spends about $10 a year on iTunes. The average eMusic customer buys 20 songs per month and spends $168. Is this model for everybody? Of course not. But we’re not trying to appeal to everyone.

THR:
Have you set any customer milestone targets you can share?

Pakman:
The number of people in our focus and demographic is at least 5-10 million right now. ... (But a current study of baby boomers who retailers don’t really cater to) shows that 33% of boomers spend $50 on music a year. That’s 25 million people, and they are becoming increasingly tech savvy. If you are focused on selling music to a teen audience, that market is shrinking. For 2007 so far, people 25 and younger represents only 27% of music sales. We’re focused on the other 73%.

THR: Do you see yourself competing with iTunes, Napster and other well-known music services since your offers are targeting mostly people 25 and older?

Pakman: We are pretty focused on what we do, which is very different from those guys. We have achieved becoming the No. 2 digital music store in the world, I think, because we focus on our customer base and make sure we really serve them. Our customer typically is looking for something other than what’s played on the radio. Our customers are a little more sophisticated. They are often looking to be reconnect to music they used to listen to. They have been a little bit out of touch and need some assistance in finding music they like. And the retailers who used to cater to adults are going away. In this country, Tower Records. If you are a 39-year-old father of two who is interested in a little bit of jazz and maybe some classic rock, you go to iTunes and see Ne-Yo and Jay-Z and Pussycat Dolls on the homepage, you think this is for my kids. So, we don’t see ourselves as competing for the same customer.

THR: What’s your latest customer count?

Pakman: The last announcement we made (in mid-April) was 300,000, but we are now ahead of that.

THR: EMI Group has been leading the big labels in offering digital rights management-free music. What’s your take on DRM?

Pakman: Customers don’t want to buy music that doesn’t play everywhere...There is no way that consumers in mass will sacrifice interoperability for the laung haul. EMI totally understands that now. I think they made a courageous move. Obviously, the indies have done this since the beginning, and the indie market share has grown considerably in the last five or six years, while the majors have declined. They must be doing something right. I think another major will take the same approach this year, and then the other two will do it next year. DRM in downloaded music will be gone. Its days are numbered. There will still be DRM for subscription rental services.

THR:
Are you ever considering doing deals with major labels?

Pakman:
Absolutely. There is a huge amount of music owned by the majors that we would love to carry. Classical, jazz, blues stuff, a lot of the classic rock. Basically, anything that doesn’t sell well anymore. The stumbling block has been DRM. Now with EMI’s decision, hopefully this stumbling block is removed. We have been growing fast. And majors like everyone else need retailers that are successful at selling music.

THR:
Do you need any new financing to take the company to the next level?

Pakman:
The mission here has been to build a highly successful standalone digital entertainment retailer. Standalone being key. There are really no others. iTunes is very successful, but it’s not standalone. It’s subsidized by the iPod business. Rhapsody is a great service, but it’s not standalone...And Napster has had its challenges. ... So, eMusic stands out as a standalone retailer of digital entertainment. We’re getting there. We don’t need any additional financing. We are 100% owned by a fund (JDS Capital Management) that has plenty of capital. We do want to grow very quickly. We do look at acquisitions from time to time. I think that’s a good way to grow.

THR:
Are you considering an initial public offering?

Pakman:
It’s a financing option that is open to us. It’s just not one we’re pursuing right now. 

THR:
Any plans to build or acquire a business outside of music?

Pakman:
Music is not going to be the only thing we do. We’re really a direct marketing entertainment retailer. We fine-target markets, we figure out what their needs are, we serve them really well. So, I think we can serve the same markets with other products beyond music -- all under entertainment. I think that’s where our future lies.

THR:
What product categories are you likely to add to your offerings?

Pakman:
We look at all the other downloadable entertainment categories, particularly if they appeal to a segment, an audience. I don’t know that selling blockbuster movies would be big business for us, because noone has any trouble finding them. But there are a lot of content types where the long tail exists. I think that Sundance and IFC have done a good job at really branding independent film as a niche to become a lot more popular. We look at that market as an interesting market. There is a long tail. There is even a long tail in games.
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