mSpot Opens Up Freemium Cloud Music Service in a Bid to Pre-empt Apple and Google; In-Depth Q&A with CEO Daren Tsui

MSpot might be the biggest mobile music service you’ve never heard of. The Palo Alto company has been profitable since shortly after its launch in 2004, and its streaming music service has six million users across 10 different wireless carriers in North America. But it white-labels that service, meaning it shows up under names like “AT&T Radio.” But pretty soon you may be hearing a lot more about mSpot—and through it.

In May, at the Google I/O conference in San Francisco, the company launched an invitation-only beta test of the first major mSpot-branded service, a system that uploads the music users have bought for their PCs to the cloud and then streams the songs to any Android phone or any Web-connected Windows or Macintosh computer. And today mSpot is opening that service up to everyone, in a bid to “amass millions of users,” in the words of CEO Daren Tsui, before UK-based Spotify can bring its own freemium streaming music service to the U.S., and before Google and Apple can launch their own widely-rumored cloud music systems.

The service doesn’t yet work on non-Android phones such as iPhones or BlackBerry devices, but Tsui hints that mSpot apps for those platforms are coming. For now, the service will allow Android users to access the music on their PC wherever they go—and, if they wish, to progressively sync that music to their phones. The company says its proprietary streaming technology can detect, and compensate for, holes in data network coverage, so music streams flawlessly.

What distinguishes mSpot from other streaming music services like Napster or Rhapsody or San Diego-based Slacker is that it’s free, at least for the first 2 gigabytes of stored music. (Users can reserve 10 gigabytes for a monthly fee of $2.99, and up to 100 gigabytes for $13.99.) And what distinguishes it from Lala—which Apple purchased in December and recently shut down, perhaps in preparation for a relaunch as part of iTunes—is that it plays copies of your own music files from a cloud-based storage locker. Lala first checked user’s PCs to see what music they owned, then played master copies from the cloud—a process that required it to pay license fees to music labels.

Daren Tsui, CEO of mSpotOf course, this is all untested territory. Tsui says mSpot firmly believes that its approach to cloud-based storage and streaming constitutes fair use, and that it will owe no additional royalties to labels. But in a long interview, he acknowledged that this belief hasn’t been tested yet, and that the labels might come after the company at any moment. “I hope that doesn’t happen…but if they are going to come after us, I can’t stop them,” Tsui says.

And mSpot will need to run fast if it hopes to collect those millions of users—whom it Tsui envisions as a natural market for other selling opportunities—before competing players in the turbulent digital-music market make their own big moves. My talk with Tsui, transcribed below, covered “the G question” (Google) and “the A question (Apple), as well as mSpot’s origins as a service provider to the wireless carriers, the inner workings of its streaming and synchronization services, and Tsui’s hopes for smooth legal sailing with the music labels.

Xconomy: Can you give me a 30-second history of mSpot?

Daren Tsui: We started out in 2004 and have always focused on rich, multimedia entertainment on mobile devices. In early 2005 we launched our first live service, mSpot Radio, which stramed radio stations as well as branded content like NPR and Marketwatch. The concept was a little like satellite radio, but it was available on mobile devices by monthly subscription. It did very well, and we are on all the major carriers, white-labeled as AT&T Radio, US Cellular Radio, and so forth. We also have a music video service that we launched about six months after the radio service, and we have a video-on-demand movie service that’s pay-per-view or as a monthly club. We’re on 10 different carriers in the U.S. and Canada and have around six million users on those services.

X: So you’ve never really had a directly consumer-facing brand?

DT: We initially started out more like a service provider, working with carriers and doing everything “on deck,” using the carriers’ marketing. But in the last 18 to 24 months we’ve been trying to grow our business so we can not only have a service provider model but also have a direct consumer component. Last December we extended our streaming movie service across 50 different smartphones in the U.S., including Android, iPhone, and WebOS, and three or four weeks ago we launched our cloud music service, which has been in private beta until now.

X: Why should music live in the cloud?

DT: Today and going forward, we think that users are going to carry multiple devices that can all play multimedia. I, for example, have an iPhone, and I bought an iPad, and I have my work laptop and my home PC, and synching media across all of those devices is going to require more and more work. We feel that cloud services are going to play an increasingly important role in this world of multiple devices. And we feel we are in a better position to address mobile devices because of our history. It’s very difficult to develop a seamless experience on the mobile platform. You have the problem of latency, with holes and lost coverage in 2.5G, 3G, and even 4G [data networks]. We add a lot of value in terms of masking all of the complexity in network coverage.

For example, the Android version of our cloud music service actually detects your network condition. It can sense whether coverage is spotty, and do the proper things [such as buffering] given the state you are in. It all works in the background, so users don’t have to know there is an issue.

X: Where do you see mSpot’s service in relation to other cloud music services such as Pandora, Napster, and Rhapsody?

DT: That term is used way too broadly. Folks sometimes lump in Pandora, which is streaming personalized radio, as a cloud service, but that is not my definition of a cloud service. You can’t tell what is going to be played next, and there is no true interactivity, in terms of being able to go backward. So there are real limitations in terms of how you can enjoy the music. On the other end of the spectrum are services like Napster and Rhapsody, which are subscription based, and let you pick any song you want, create you own playlist, skip or go forward, whatever. The downside to those services is that it requires $5 to $10 per month to enjoy.

We kind of sit in the middle. MSpot is a cloud service like Napster; it is absolutely interactive. You can do whatever you want with your songs. The difference is that you are playing songs that are your own, versus songs that you may own. We argue that you shouldn’t have to pay anything extra to play songs that you have already bought. Therefore we have a free 2 gigabytes [per user] in our cloud. If you have a very large library, you can pay a nominal monthly fee for more than 2 gigabytes.

X: You talked earlier about the need to simplify the synchronization of music across devices, but now you’re talking about music that streams from the cloud. How do those things fit together?

DT: The way our technology works is that we don’t stream only. We have created a proprietary technology where when you request a song from the cloud, it plays right away, like a streaming protocol, but in the background a digital copy is being downloaded to the phone’s SD card or memory. The next time you hit the same song, it will play from the local copy, versus going to the network. So think of it as an automatic sync that you don’t have to worry about. As you play more and more songs, they’re synched to the device, thus you don’t need the network as much. We also have an algorithm that pre-fetches N number of songs on the playlist or album you are listening to. We set N to 1 by default because we want to make sure we don’t burn up your 3G data plan, but you can set it to whatever you want.

Another thing that we are adding to the next version of the software, which will be available in mid-July, is that if you tap and hold on a playlist, a box will come up and allow you to tag it for a Wi-Fi sync. You can tag playlists that you want to download, and when you are in Wi-Fi range, we grab as much as we can, based on those tags. That will allow you to basically sync all of your music from your PC to your mobile phone.

X: This is starting to sound a lot like a full synchronization. Why not just jump straight to synching a user’s entire music collection?

DT: We did quite a bit of focus group research before we designed and launched this particular service, and one of the things we heard loud and clear was that a lot of consumers don’t want to eat up the storage they have on their phone. We tried to dig a little bit as far as why. Some of them want to reserve space for photos and videos. There is another camp of folks who feel that the more data they have on their phone, the slower the phone becomes. So as one option we offer streaming where we never eat up any of your storage.

X: You’re starting out on Android, but do you see mSpot as a service that would also appeal to users of Apple mobile devices? If you have all your music on iTunes, and you sync your iPhone or your iPad regularly, you’re likely already keeping your music synched across devices, so is there really a need for cloud-based access?

DT: I think there are a couple of reasons why even Apple users would want to use our service. One other thing we found through our focus groups is that there is a surprising number of people who never or seldom use the sync cable. We can help those folks. But the broader appeal is to people who have quite a large music collection on their PCs. If you have a 32 gigabyte iPhone and you add a few movies, you’re running out of storage. For that case, the cloud concept is very appealing.

The other thing is that people who own Apple products may own other products that are not by Apple. What if you have an iPad but also a RIM or Android phone? How do you synch those devices? For Windows Mobile, Android, and iPhone, we can become a one-stop shop.

X: You’re charging fees for online storage of more than 2 gigabytes. Do you plan to monetize the mSpot music service in any other way?

DT: Honestly, I don’t know what’s going to be the most profitable piece of our business. I think storage is going to be a component, but our strategy is that we could potentially be the iTunes not just for your phone but for all your devices. We want to offer a music cloud service that allows users to play the music they already own in a very easy way. We want to lower the barrier to entry so that there is a free tier, and amass millions of users who come to mSpot on a daily, weekly, or monthly basis. After we reach a certain scale, then you will see us launch up-sell opportunities. At the beginning of next year you will see a music subscription service. We already have a movie service [through mSpot’s carrier partners] so it wouldn’t be hard to light that up as well. But we’re not rushing to do the up-sell and cross-sell, because if we don’t get the freemium model right, if we don’t amass millions of users, we are not going to get to scale, and if we don’t scale, it doesn’t matter what we cross-sell.

X: With the iPhone and Android, Apple and Google have broken past the old on-deck model where the wireless carriers controlled what apps were on their phones. Do you feel that you have to start a direct-to-consumer service like this in order to survive as a business in the post-deck world?

DT: I believe we do. I think we have done a pretty decent job of growing the service provider business, and without that business we would have had a very difficult time reaching profitability. We’ve been profitable basically since the end of 2006. But a typical problem of a service provider is that at some point you are going to get squeezed, either by the carriers you work with, or by the content providers you get content from. So I think that we are going to continue to grow that business, but I believe we do have to expand beyond the service provider business to be a big, very successful company.

X: And presumably you feel that your experience running the carrier-mediated service puts you in a good position to run a consumer cloud service.

DT: Absolutely. I think we are farther ahead than any other competitor on the mobile side. When you get a chance to use the Android application I think you are going to see very clearly that this application is different from the typical mobile streaming application. The other thing is that the carriers still play a very relevant role; they are still a source of billing, for example. We have all these billing APIs, and we have relationships with these folks. So we are looking at partnerships where people don’t have to pull out credit cards when they want to rent movies. As well, I think we’ve got a lot of credibility in the industry and with media companies. When we launch a service, we are a known quantity.

X: I have to ask you the G question and the A question. What happens to mSpot when Google launches its rumored streaming music service? Or when Apple brings Lala back in some new form?

DT: Last month Google purchased Simplify Media, which allows you to stream music from your PC to your mobile phone. There are a couple of big issues with that. First, that is not a cloud service, it’s peer-to-peer. So if you shut your computer down, it stops. Second, it’s pure streaming. So what happens when your coverage is spotty or you’re on a plane? I feel that Google, with the purchase of Simplify, was looking for a stopgap solution—something quick and dirty so that they have a way for Android users to tap into the iTunes market. But I feel the right and ultimate solution is going to be a solution like mSpot. I hope there is still an opportunity to work with Google—as a matter of fact we deal with the Android team on a weekly basis and we are told our solution is superior to Simplify and that we should not worry.

On the Apple side, I think Apple is going to have a difficult time relaunching the Lala service as it was before they shut it down. Here is the subtlety between Lala and us: we physically move your MP3 up to the cloud. So if there is a skip on your computer, you are going to hear that same skip in the cloud. We feel that because you own the songs already, and we are basically just moving it to a storage locker in the cloud, that is fair use. The way Lala works, it first indexes all of the music on your computer, and if they can make a match, they don’t actually physically move your song to the cloud. They say “Wade has a song from Black Eyed Peas, and we happen to have that song, and we are going to play it from the master file.” Because of the way they structured it, someone has to pay the label for the song that’s being streamed.

It was okay for Lala because they never really reached scale, so the amount of money they had to pay the labels was nominal. But imagine Apple doing that. If it scales, they are going to end up owing the labels billions of dollars. They could try and negotiate with the labels, but I just don’t see [the labels] playing ball. Apple could redesign the service to something that is more like an mSpot architecture, but I doubt they are doing that. I can’t imagine them buying Lala just to scrap the technology and do an mSpot. So I think there are going to be a lot of issues. Meanwhile we are going to keep innovating and address the Apple base and hopefully we will reach escape velocity before Apple figures out what it wants to do.

X: You’ve said a couple of times now that you “believe” the storage-locker-in-the-cloud model that you’re building constitutes fair use, and that nobody will owe the labels any money, becuase users are just playing songs they’ve already bought. What’s the hesitation? Is this a question that’s yet to be resolved, legally?

DT: I think there is a lot of confusion in the market in terms of what falls under fair use and what doesn’t. Currently we are negotiating with the labels to try to figure that out. I think it’s yet to be determined how this whole thing is going to shake out. We are taking a very firm position, though, just so you know. The music file service, as it is currently architected in the beta program, does fall under fair use. We don’t feel like we need to apply any additional licensing to do this. That is our very firm position.

Your question may be, will the labels come after us once we come out of beta? That is absolutely possible. I hope that doesn’t happen. We have had a very good relationship with the labels. We take IP issues very, very seriously with all of the music services we have launched before. When we feel we need licenses, we go out and buy the licenses. But if they are going to come after us, I can’t stop them.

X: In terms of financing, does mSpot need to raise more money to pursue this vision of a cloud music service, or are you building it on top of revenue from the service provider business?

DT: We absolutely don’t need any additional investment right now. We raised a very small series A round back in 2005 and we have been profitable since, so we have a pretty nice little war chest, in terms of cash in the bank that allows us to experiment and do more projects that may not have near-term revenue. The only situation where I could see us possibly going out and raising some more venture [capital] is if we wanted to accelerate our growth even more. For example, we think the music cloud service has a lot of appeal overseas. When you want to go global, you want more resources. That would be one scenario. But with our current operation we don’t need to raise money.

Wade Roush is the producer and host of the podcast Soonish and a contributing editor at Xconomy. Follow @soonishpodcast

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