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Leadership In a noisy music streaming market, Rdio CEO searches for profit

Anthony Bay, chief executive officer, Rdio Inc.

Rachel Idzerda/The Globe and Mail

One of the chief crusaders for the future of music is a failed bass player.

It's a sales pitch that might make music snobs cringe. "I realized it was not my calling," Anthony Bay, chief executive officer of Rdio Inc., says of his decision to give up the four-string in the sixth grade. "I wasn't good enough."

What he was good at, it turns out, was selling digital media. While he's steered clear of any more instruments, the business of consuming culture online has woven its way throughout Mr. Bay's career. The music-streaming service CEO's near-30-year career has landed him management and executive roles at some of the world's tech powerhouses, from Apple to Microsoft and Amazon.

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Being one of streaming music's biggest cheerleaders is a tough gig. Mr. Bay, 58, took the reins at San Francisco-based Rdio last November, inheriting a challenge few would desire: bring some black ink into an industry that's swimming in the red. While powerhouses such as Netflix have shown there's money in streaming video, sustainable profitability has yet to emerge in the audio market.

"The single biggest issue we have is awareness," Mr. Bay says over lunch at TOCA, a restaurant in Toronto's Ritz-Carlton. He was in town for the spring Canadian Music Week, an annual industry conference and festival where he spoke and rubbed elbows with labels. "The average person doesn't know what streaming music is, and what subscription music is."

But persuading the public to buy in to such a crowded, fractured market is no easy feat. Services such as Rdio, and its major competitors, such as Spotify, Beats Music and Deezer (only some of which are available in Canada), let users build their own libraries and playlists from catalogues of 25 million to 30 million songs. These what-you-want-when-you-want services can effectively replace the need to own a music collection. While Rdio doesn't disclose many numbers, other services have as many as 10 million paid users.

Other competitors include less-interactive, radio-like services such as Pandora Radio and Songza that offer playlists curated to listeners' tastes, which Rdio began to offer for free in numerous countries last spring to entice users into paid subscriptions.

To casual observers, the nuances that separate these services are minimal. Most, as with Rdio, have tiered offerings, ranging from free, ad-supported playlists to paid monthly memberships that allow unlimited access to web and mobile music streaming for $5 to $10. None of them has proved they can be profitable, save for publicly traded Pandora, which has struggled to maintain investor confidence.

The streaming market is growing – by one account, revenue grew 51 per cent last year, versus a 2-per-cent drop in downloads – but potential profits are dogged by royalty costs for the music they stream, keeping margins tight even as numerous companies fight to build scale.

"It's still super early," Mr. Bay says of the burgeoning marketplace.

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He is familiar with operating in the unknown. After starting his career with Apple Inc. in 1986, he moved to Microsoft Corp. in 1994, working on its Internet portal, MSN. Back then, he says, "the Internet was not built to stream. It was built to break streams into bits so that enemies could not disrupt them."

As it turns out, he explains, "putting Humpty back together was pretty hard."

So Microsoft tasked him with figuring out how to make streaming more broad-based in the age of dial-up, and he learned that digital adoption can take time. "We had 'Internet Commerce Day,' where we wanted to convince people it was safe to buy things on the Internet. Talk about quaint."

Mr. Bay left Microsoft in 2000 and helped run a handful of offbeat digital music companies, eventually landing as Amazon.com Inc.'s global head of digital video in 2011. He quit the company last March after just a year and a half. "I longed a bit more for the entrepreneurial part," he says. He took a break from work to travel, but companies quickly began to court him. A few months later, he wound up at Rdio after its CEO Drew Larner stepped aside to become executive chairman. The streaming company, which launched in 2010 and quickly became a dominant player in Canada, is funded by Skype co-founder Janus Friis.

Mr. Bay soon set up a personal account with a library that reveals his past as a seventies college radio DJ: The Doobie Brothers, the Eagles, Queen. Some classical for good measure. His modern favourites, which he thinks are influenced by Buckingham-Nicks-era Fleetwood Mac, tend to have a country flavour, he says, "much to the chagrin of my children."

His arrival heralded a series of tweaks to Rdio's free memberships, settling this month on curated playlists, similar to what Pandora offers in the United States, to attract a wider customer base. The "freemium" model is the foundation of his plan to make the company profitable: "You have to get scale, but with a cost structure that makes sense."

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Earlier this year, Rdio made a vague announcement that it had formed a "strategic partnership" with Shaw Communications Inc., but laid out few terms. A few weeks later, as we're eating, Mr. Bay elaborates: the global company is partnering with local media firms in the countries where it operates to sell local ads on the new free service. "Our relationship with Shaw is to take on more of a Canadian personality – so we have a Canadian face."

The company has similar partnerships in the United States and Brazil with media companies that can curate local content and have local sales teams sell ads to run on Rdio, which is available in 60 countries. The partnership gave Rdio boots on the ground to promote its offerings to Toronto International Film Festival crowds, too, including a free Ellie Goulding concert during the festival.

Such partnerships also advance public awareness of the company – particularly important in Canada, where a recent government agreement on royalty rates for digital streaming has encouraged more competitors to enter the marketplace. Just weeks before Rdio announced in August that it would be TIFF's official music partner, its chief global competitor Spotify soft-launched in Canada. "There are clearly alternatives" to Rdio, Mr. Bay says, but he'd rather focus on customers than competitors. "Our goal is to get as many people as possible to try us, and make them as happy as possible so they stick around."

Shuffling chicken cobb salad around on his plate, Mr. Bay reveals that he learned a lot of his management strategy from his old boss at Amazon. Jeff Bezos, he says, once told him that "We've never had a customer say, 'I wish Amazon had less selection. I wish Amazon shipped products slower. I wish you made it harder to find something.' So what do people want? They want more selection, more convenience," Mr. Bay says, finally taking a bite.

More selection may be an understatement. "Our goal is to get every song ever recorded on any device anywhere in the world. Not everybody's trying to do that, by the way. You get these debates about, 'Will people ever listen to that?' Which, I think, is not the point."

I joke about how many variations of John Cage's '4′33″' – an entirely silent composition meant to make the listener to tune into their environment – Rdio's listeners will want. Mr. Bay laughs, though it's unclear if he gets the reference; after all, the silent composition wouldn't have made his college radio station manager happy. Returning to Mr. Bezos, Mr. Bay says, he hopes to position Rdio as an industry leader with its customer experience.

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But unlike streaming video services, Mr. Bay doesn't expect a dominant player to emerge in music. "We don't have to get 100 per cent to be successful," he says. "There's no media company equivalent of Google or Facebook. So I doubt this will turn into that."

He also doesn't believe streaming music will cannibalize other ways people listen to music. "It tends not to ever be that black-and-white," he says. "Streaming enables new types of listening. Some people want to own a record – a physical thing. Some people want to own a DVD. Vinyl's coming back."

One of streaming music's chief selling points is its potential for discovery, making it a crucial companion for other types of music consumption. As with Twitter, Rdio users can follow friends, celebrities and publications to see what they're listening to, which the service uses to serve up a library of suggestions. I mention that the night before our lunch, I saw Angel Olsen, a folky songwriter from Missouri with a country tinge, play a concert after I'd heard her on Rdio. After the show, I bought her record on vinyl.

Mr. Bay calls me "a perfect case study" for how streaming fits into music's future. "You heard an artist you would not have known about," he says. But still, he knows he needs scale: "How many of you does there have to be to make this work?"

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Personal:

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Born in the San Francisco Bay area, he splits his time between Rdio's headquarters there and Seattle, where he lives with his wife and three children.

Education:

Bachelor's degree in economics from University of California, Los Angeles, 1978; MBA from San Jose State University, 1990.

Old favourite artists:

The Doobie Brothers, The Eagles

New favourite artists:

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Luke Bryan, The Band Perry, Florida Georgia Line

In his own words:

On growing streaming music: "There's, I don't know, maybe 100 million people who listen [to streaming music] out of a billion and a half smartphones. If you look at the number of connected devices, on a global basis, most listening is pirated music. If you look again at streaming video, the piracy went down when there were good video services that were legal. … If we go out a few years, there will be hundreds of millions of people on streaming music services. So that's a huge opportunity."

On his favourite music today: "I have developed a lot more affection for country, much to the chagrin of my children – although my daughter actually likes country."

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