Don’t stop the music

While record labels struggle with technological advances, one company is riding the wave. Jason Hesse reviews Omnifone.

Music streaming services are growing. Fast. At the heart of many of these services is one technological platform, Omnifone.

Market

Omnifone provides a cloud-based music streaming platform for large brands.

If a multi-national company wants to launch a music streaming service, it has two options. It can either develop the platform itself, at a cost of tens of millions, or it can partner with a company that already has the infrastructure and licenses in place, such as Omnifone.

Omnifone was the first company to offer an unlimited streaming service with Sony, available in nine countries with ten mobile operators.

The company provides two key pieces of technology: the core technological platform, which manages the music play out, the digital rights management, subscriptions and codecs; and licensing and reporting.

“We expose around 260 APIs to our partners – they’re the legos that our clients can build upon,” explains Omnifone chief executive Jeff Hughes.

Content management is a key part of the company’s technology. “On a global basis, every song is owned by a record label, publisher and collecting society. Content management involves taking all of the feeds from the labels, cleaning the metadata up, and pushing it out to the clients. It’s a technical mountain to move, which we provide for all of our partners.”

Accurate reporting and metering is important. “Anytime anyone plays something, we record what has been played on which device. We need to report everything to the rights owners,” he says. “You need a service that works for the rights owners as well as for the consumers. The licenses have to make commercial sense.”

Omnifone negotiates licenses with the rights owners directly, on behalf of most of its customers. “Because we’ve worked on licensing agreements many, many times, we’re more efficient at it and can get our partners a better deal than if they try to work it out themselves,” says Hughes.

“No one else can do what we do across so many territories,” he adds. “We made a bet four years ago that streaming services would be the way of the future. We invested a lot into that platform, and we’re now reaping the rewards.”

While Omnifone doesn’t have the marketing or customer management expertise of its well-known brand clients, says Hughes, the company can set them up with the service they need. “We make it easy for them to get on board the platform.”

The music on Omnifone’s platform is held in Scotland. All of the content is taken from the owners and kept in one central catalogue. This is differentiated by territory, as licenses change per region. There is a 90 per cent overlap between all catalogues, however.

The music streaming market is growing quickly. While an estimated 6-7 million people are paying for digital music subscriptions today, it is estimated that the market will grow to 161 million people within five years, according to ABI Research.

“Even if this prediction is half right, that is huge, explosive growth,” says Hughes. “Digital music is the only growing part of the music industry, and we’re sitting right in the middle of it. We’ve got strong relationships with the labels and our partners.

“We’re backing as many horses in the race as possible, and we’re also building the track that the horses run on. It isn’t sexy or glamourous, but we’ve grown it into a stable, profitable business.”

Team

Omnifone was founded by Rob Lewis, Phil Sant and Mark Knight. This is the co-founders’ third business together.

Along with Sant and Knight, Lewis, who is now a non-executive director of the company, previously founded internet software developer Cromwell Media, which the trio sold to InterX for £850 million in March 2000. Lewis was also the founder of Business & Technology Magazine, sold to Dennis Publishing, and was founder CEO of Silicon.com, Silicon.fr and Silicon.de, which were sold to CNET Networks.

Sant is Omnifone’s chief engineer. After a career at Rolls Royce, he ran the former Compaq Tiger Team along with Omnifone co-founder Mark Knight. Knight is chief architect at Omnifone. He has a developer background, and is responsible for authoring Jotter, the world’s first ever commercial word processor for portable devices. He has also developed software within the flight simulation, communication, finance, publishing and distribution sectors.

“They have worked together for a long time,” says Hughes. “They put in the initial capital to launch Omnifone.”

Hughes’ background is in the subscriptions business, having previously been executive vice president and chief information officer at BSkyB. He has also held senior positions at IBM, PricewaterhouseCoopers, Cambridge Technology Partners and Andersen Consulting.

The company employs 187 people, the majority of which are technical staff, based in Chiswick. There is also a large operations team, which is responsible for delivering and helping to implement the product with partners.

A key team at Omnifone is its legal and licensing team, which is made up of 11 people, including six lawyers. “We have to do new deals every time we win a new partner. We also have to work on licensing every time we move into a new territory.”

Tech

Omnifone’s main processing technology is cloud-based and built in Enterprise Java, with an Oracle database underneath it. All of Omnifone’s services are on its own infrastructure, and the company also use Amazon Web Services to help distribute some services when needed.

The company’s Scottish content technology is build around Microsoft’s data warehousing technology. “We produce huge numbers of reports for all of the digital rights centres around the world,” explains Hughes.

Omnifone creates Warp APIs which feed straight into partners’ platforms. “These can sit with the client, and can tunnel through to our platform. This allows the partners to just focus on the user experience,” he adds.

The technology is “pretty scalable”, says Hughes, although he admits that every new partner or customer is always going to require some work: “More than anything else, we do systems integration work, which can take time.” However, the core platform does not need to change much with each new client, he adds, which means Omnifone enjoys a high amount of leverage.

“If a large company wants to build a music streaming platform for its customers, they’ll need to spent $30 or $40 million,” says Hughes. “But they don’t need to, because we’ve already done that. There is no reason for them to.”

Traction

Omnifone has three large global partners – Sony, Research In Motion and Rara.com – plus other medium-sized customers. The consumer brands powered by Omnifone include: Sony’s Q Music Unlimited, RIM’s BBM Music, Music Station for Android, Sony Ericsson’s Play Now and Vodaphone’s MusicStation.

“In terms of their number of customers, they’re all growing rapidly,” says Hughes, although he declines to say how many customers use Omnifone’s platform in total. “We have millions of people using our platform. Our goal is that we serve more paying customers than anyone else by the end of the year.” Omnifone’s services and music is available in 23 territories, soon to be 27.

There are around 20 million tracks licensed on Omnifone’s platform, of which 16 million are catalogued. In any given country, most services will host around 12 million tracks. “That is plenty – more than anyone could ever listen to in a lifetime.”

The company operates a revenue split model with its partners, where it doesn’t get paid until the partner makes money from the service. “We make it easy for the partners to sign up and get on board, and they pay us when they make money. We’re very strong believers that this is just the beginning – demand for streaming services will grow stronger and stronger.”

Hughes will not disclose Omnifone’s turnover, but he expects the company to be profitable this year. Last year, the company made a £14 million loss, and the previous year £21 million. “This year it will be positive. It won’t be huge, but we’re very proud of it.”

The company is 100 per cent privately held. It is owned by the three co-founders as well as the employees. A number of private high net worth individuals have invested $50 million in the company in the last five years. “It’s a really clean set up – there is just one class of shares, so everyone is in the same boat, moving in the same direction. It makes things work.”

Why hasn’t the company taken venture capital or other institutional investment? Hughes says: “Because we haven’t needed to.”

He does not dismiss VCs altogether, however. “VCs can add a lot, such as rigour and discipline, but as the company was initially seeded by the founders, we haven’t sruggled with cash. We really like having just one class of shares, which wouldn’t be possible with institutional investors. That’s not to say that we never will go down that route, but as we stand now, we don’t see the need.”

Hughes says the company intends to grow by winning new partners: “We intend to take on one new global partner every 12 months. This sounds slow, but for the industry it’s quite aggressive.”

The company is also developing a product for smaller companies and start-ups in the music space. “We’re working on a pretty wide-ranging set of APIs that they could use. We’ve been focused on large multi-nationals, but many smaller companies have been getting in touch with us. One of these start-ups will be the next big thing, and I want them on our platform,” says Hughes.

Omnifone is also working on supporting other media. “Some of our partners really like what we’ve done with music. We’re a global platform, so it makes sense to look at other media – we’re pretty close to being able to handle other types. It isn’t as easy as just switching from music to video, but there is no reason why we can’t leverage what we’ve done for different content types.” He adds that there is a compelling bundling proposition, where Omnifone could wrap up products together.

The industry is going through a “land grab” moment, Hughes says, where no single player is dominant. “We want to make sure we don’t miss a big partner. If someone wants to launch global music service, we want to be there.”