CEO: Rdio's problem? Not enough people use Rdio (Q&A)

If you build it, they will come? Rdio's new Chief Executive Anthony Bay believes so.

Rdio, one of a myriad of streaming music services, launched four years ago by the billionaire founders of Skype and Kazaa. It's a subscription service with a catalog of millions of songs available on demand, and gets widespread kudos for its design and offline listening. But it has remained a relatively small player while Pandora grew into a colossus and Spotify jumped the pond to quickly outstrip Rdio in scope.

Bay has plans that prep Rdio for a future as a much bigger star. The question some outsiders ask is whether the company will last long enough to get there.

Rdio's recent past has been rocky. It made a short-lived play at becoming a more complete entertainment hub, launching pay-to-play video service Vdio last year, only to shut down the video arm eight months later. It trimmed staff late last year to save money. It raised $17.5 million in 2011 but hasn't disclosed any new funding since then. The company sold a stake to Cumulus Media, a terrestrial radio broadcaster, in September -- that brought Rdio on-air marketing on Cumulus stations and an ad-sales force that allows Rdio to finally offer a free ad-supported option. But the deal didn't bring in any cash.

Bay, who most recently was Amazon's global head of digital video, discussed Rdio's future with CNET in his first extensive interview since taking the company's helm. The following is an edited Q&A.

Q: Something I thought was funny and very telling about the Amazon culture, I was looking through your LinkedIn page and all your other resume points have lots of bullets and explanations. And then the Amazon section is simply "Amazon. This was my title." And then nothing.
Bay: I think I said "global head of digital video." And that was a lot, that's actually a lot.

Give me a sense of how your past experience makes sense for Rdio. What are you bringing to Rdio that makes sense for Rdio's future?
Bay: I have no comment.

This is going to be a very difficult Q&A then.
Bay: No, I have more freedom to say things now. I have worked for very big successful tech companies and I have worked for smaller companies. I worked for Apple first and then I worked for Microsoft, then some smaller companies, than I worked for Amazon, and each of those companies has a very distinct and quite successful culture, no matter what you might think about Microsoft. So there's the understanding of the importance of culture as companies get big and successful, number one.

Number two, I've been doing digital media since early 1996, when people were excited you could actually get something to stream. I understand the technology pretty well, I also have seen many many iterations of different business models -- a lot of things worked and haven't worked, and I have had a chance to be part of that. I have that history, for better, for worse.

And then Amazon is probably one of the most remarkable companies in the world. It always puts the customer first, and really means that. A lot of times companies talk about that stuff and it's just not real. At Amazon, it's embedded in the core of everything. You focus on doing a few key things that matter, relentlessly, relentlessly focusing on getting better for the customer. That, for me, that's really helpful, it has become my thing.

If you read the reviews and you talk to customers, people who use Rdio love Rdio. The biggest problem is not enough people use Rdio. The exciting thing for me is its very strong base culture, it was founded by some people with a very long-term view who have been very successful. Focus on simple, elegant, and effective design until you have a great product in an industry that's growing incredibly. You have all the factors that make it a pretty exciting place and, I think for me personally, a good fit.

You've talked about how important innovative value is. What about Rdio offers that innovative value? What about as you lead it forward?
Bay: One of the reason I chose to come here was Rdio's elegant and efficient design. If you sniff around, which I of course did before I came here, there are a lot of people who are really passionate about Rdio. Not, frankly, because of the company itself, they're passionate because of how Rdio enables them to have music in their life. Remember the founders of Rdio were the founders of Skype. If you were ever a user of Skype, Skype was really easy, elegant, simple -- and at the time Google, Microsoft, Yahoo, Cisco, and about 15 other people all had voice over IP applications. Why would anybody ever use Skype? Well, because it just worked well. That's the heritage of this company, the heritage is really really customer-focused design.

Beautiful design, if you say it's in your heritage, it's something that has been around for Rdio since the beginning. Rdio has been around for a while, it's still very small.
Bay: Yes, I agree.

How is that going to change?
Bay: Let's have this conversation again in a year. I've been here two months: A, I'm not in a position to tell you because it wouldn't be appropriate in a public forum. And B, there's a lot of things still to figure out. In terms of what we will do to continue to make Rdio unique for customers, stay tuned. As far as Rdio being smaller, that's frankly why I'm here. I know how to build larger businesses, I understand certain things about scale, and that's why this was a good fit for me. And if you ask the people who own the company, I think that's why I think they felt I was a good fit for them.

What about your user base? Can you tell me how many users you have? The outside numbers, at least in the US, look kind of anemic.
Bay: Anemic! You cut, you hurt.

I'm sorry, I mean, you said yourself you don't have enough. How many do you have?
Bay: I said we're not as big as we'd like to be, and you make us sound ill. Look, we don't disclose numbers, but I'd say we've done a very good job at attracting lots of people. The problem is we didn't have a free version that could keep people around and offer one audience -- one very large audience -- a way to have a relationship with us everyday. They had to decide to spend 10 bucks or leave. As a result of that, our numbers aren't as big as we'd like them to be.

Rdio had some layoffs before you got there. Is that a step you're going to have to take, more layoffs? Are you going to be adding people?
Bay: It's impossible to say what the company looks like down the road, but if I thought we were going to be laying off a bunch of people, I probably wouldn't be here. It's always a very tough thing when you have to do that, because it's people's lives. But the company is on a more stable footing as a result. That's the balance that as owners they had to make.

Read: Spotify, Rdio, Beats Music, and more: How to get started with subscription music services

When your position was announced, global reach came up as an important element of what you're going to be doing. What do you see when you have a globe in front of you and you're thinking about Rdio's future?
Bay: In hindsight, one of the things that Rdio didn't do, when you compare it to Spotify or Pandora, both of which are larger, is Rdio had only a subscription option, it had no freemium option. If you look at what's worked for Spotify and what's worked for Hulu, and what's worked for a lot of gaming companies in particular, it's a freemium model. We didn't have that before, and we really only launched it a few months ago. So one of the reasons we're a lot smaller is for the same reason that the other subscription-only services are a lot smaller.

We are working with different types of partners, a particular one that is pretty unique to us is terrestrial radio -- Cumulus in this country, and we are evaluating those in multiple territories. With Cumulus you have a company that knows a lot about the radio business, and knows a lot of about the free ad-supported business. They spend all day working to sell ads, so we don't have to hire hundreds of people and we don't have to do that in every country. You need to have a very lean cost structure because these businesses over time tend to be very aggressive on the economics.

The licensing element, it's a burden to have to deal with, it's a big cost.
Bay: It's a privilege.

It's a privilege?
Bay: Absolutely.

That's not how I think about my taxes.
Bay: Your taxes? No, your taxes are very different. We are in the business of taking other people's music that we didn't own and making it available to the world. So it is a privilege, seriously, to be able to have the right to do that. It is not an obligation of the music companies to give their music away. Those things belong to artists and composers and musician. Yes, we have to pay them for that, but you know, you have to find a fair exchange. Ultimately I think we do.

To be able to enjoy that privilege, you have to pay a lot of money. I'm interested in how you have a lean cost structure, where is the leanness coming from?
Bay: It's everything other than licensing. Licensing is what it is. The good news is that the way the law works pretty much around the world, pricing on a licensing and royalty basis is the same regardless of the size of the company. You know Wal-Mart can get a better price on shoes than you and I could if we started our shoe store. Wal-Mart cannot get a better price on music, and so the economies of scale that you get in a lot of physical business don't apply. So it's a level playing field.

Let's talk about where Rdio fits in. This is such a burgeoning industry, there is so much growth -- but there's also so much competition. Pandora has the big audience, Spotify has a lot more users, and Beats Music just launched with this big marketing machine. And then there's Apple and Google, giants. Can Rdio survive in that kind of environment?
Bay: Sure. And thrive. I'm going to give you a very Amazonian answer to that, which is: In the final analysis, it's up for the customer to decide. It's true. To use another Jeff Bezos [saying], it's still day one. He says that about the Internet, and he's still probably right. It's very hard to look forward, other than to remember the things that make music the opportunity that it is.

Music playback and experience has shifted in a very short time to your phone, primarily. You have a billion and a half smartphones in the world, approximately, and you have at least half of them with mobile data plans. There are at least 600 to 700 million people right now who could be listening to digital music, and the market will not quite double this year. It's hard to imagine, that's like 3 million phones a day, most of those in developing countries and most of those with data plans.

You have the center of gravity of music moving to apps, you have Bluetooth and WiFi-enabled devices that are built to play music or include music as a key features. You have this whole world that's evolved of stuff that's just waiting for a great music experience. So in the "where we are," I'm incredibly bullish about the opportunity. That's the starting place: the huge opportunity. And then it gets down to how do you build something that people like.

I don't think anybody doubts the opportunity, I think what people are skeptical about is the idea that there can be more than one or two that everybody uses.
Bay: How many cable channels do you watch?

That's the problem, cable channels can differentiate themselves. It's not a commoditized thing, music is -- 15 million song, 20 million songs, it's not like your song catalog is incredibly different. It's not like you have "Mad Men," and Spotify doesn't.
Bay: I'm going to continue to go back to -- look from the future backwards. If you and I were having were having a discussion about Netflix six years ago, what about Netflix's catalog that was in any way differentiated?

Differentiated? Well, nothing.
Bay: Nothing. Netflix had a completely nonexclusive content business model in 2007.

Does that mean Rdio's going to be making music? Signing artists? Netflix eventually went the route of original programming.
Bay: No, all I'm trying to say is that the question is: How do you have to continue to innovate on behalf of your customers to build a compelling value proposition? Netflix started out as a disc business, there are a lot of people who use Netflix who don't even know it had a disc business. If Netflix didn't continue to reinvent itself, Netflix wouldn't be where it is today. And it's not a zero sum game. Netflix costs $8 a month, we cost $10 a month. How much do you pay for your phone every month? How much do you pay for television every month? People prioritize that.

So there's no predictor that we will be ultimately successful, it's up to us, but -- Christ, smartphones didn't exist seven years ago. The tablet category didn't exist four years ago. I mean, really, four years ago. People have dogs that have been around for way longer. You look at the magnitude of change. I don't know what the music business will look like, but I do know that people will have smartphones, people will be listening to music, people do it globally, and the opportunity do great things continues to evolve.