Peter Kafka

Recent Posts by Peter Kafka

Exclusive: Thumbplay Gives Up On Music Subscriptions, And Clear Channel Steps In

After less than a year in the music subscription business, Thumbplay is giving up: The company is selling off the struggling service to Clear Channel Radio.

Thumbplay will hang on to its once-booming ringtone business, but only temporarily; it intends to sell that off in a separate deal.

Terms of the Clear Channel deal weren’t disclosed, but a source familiar with the company tells me investors who put some $41 million into the company don’t expect to get all their money back. PaidContent reported earlier today that a sale was in progress.

I’m told that Clear Channel will be buying a business that only managed to sign up 20,000 subscribers, who pay $10 a month for unlimited music, since March 2010.

But the radio company seems more interested for now in using Thumbplay’s technology and team to build out its existing, free Web radio service. That is, it is competing with Pandora, more than Rhapsody, Rdio and Spotify.

“This is step one,” says Bob Pittman, the investor who put his own money into Clear Channel and came aboard as its “chairman of media and entertainment platforms” last fall. “Three percent of all radio listened to is digital, and it is early still. We need to get ahead of the curve and not behind it.”

Pittman says Thumbplay’s technology will be integrated in the coming months into Clear Channel’s “iheartradio” service, which offers 750 free Web radio stations and boasts 25 million monthly uniques. He says all 65 Thumbplay employees working on music services will get jobs at Clear Channel.

Clear Channel will get into subscriptions “eventually”, Pittman says. Clear Channel says  existing Thumbplay subscribers won’t notice any change, but that the company will stop marketing for new customers.

Thumbplay is both a cautionary tale for investors pouring money yet again into digital music, and for the perils of pivoting in the wrong direction.

Just a few years ago, Thumbplay was doing more than $100 million a year selling ringtones, with about a million subscribers paying $10 a month for the digital novelties. But its management team could see that the business was on its way out, and used revenues from ringtones to fund a foray into subscription music.

But Thumbplay ran into the same problem that every other music subscription has faced so far: Lousy record label economics, and a lack of consumer demand.

Things were supposed to improve once subscriptions services started working on Apple’s iPod and iPhone platform, and they have — they also work on Google’s Android, Research in Motion’s BlackBerry, etc — but it’s still a niche industry, with perhaps a million subscribers in the U.S.

Spotify, the music industry’s, next big hope, boasts about 1 million subscribers for its European service. But it’s been able to lure them by offering unlimited music for free on their PCs, then upselling users into a service that also works on the phones.

Subscription services in the U.S. have traditionally only offered three days of free music to trial users, and the amount of free music that Spotify offers has been a sticking point as it tries to launch in the States.

So you can see why Pittman and company would be targeting free Web radio before trying out subscriptions themselves. That business has big music fees, too, but they’re more manageable, and with enough scale it might be possible to turn a profit.

Pandora, which has filed to raised $100 million in a public offering, lost $330,000 on revenues of $90 million in the first 9 months of last year. And Pittman seems confident that Clear Channel, with its network of 850 terrestrial radio stations — and crucially, an established salesforce – can do much better than that.

“We already have 25 million monthly uniques and we think we can use those to compete with Pandora,” he says. “Pandora is a great feature rather than a business. And we want to have all these features and add to the service continually.”

Latest Video

View all videos »

Search »

Nobody was excited about paying top dollar for a movie about WikiLeaks. A film about the origins of would have done better.

— Gitesh Pandya of comments on the dreadful opening weekend box office numbers for “The Fifth Estate.”