Xiami Story: An Ideal Online Music Model Doesn’t Work for Now

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The latest rumor that Xiami was acquired by Alibaba group was confirmed with media’s finding the domain administrator’s email address was changed to alibaba’s. According to a source close to Alibaba and the case, the acquisition was initiated half a year ago. Interesting enough, the four core members of Xiami quit Alibaba as engineers in 2006, just before the company’s listing on the HKSE, to launch Xiami in early 2007.

It’s hard to say whether Xiami is a successful music service. It has gained a group of hard-core users, including myself, with quality music and a good service, but few people, either copyright holders or users, buy into the business model with which it was intended to revolutionize China’s music industry.

Before Alibaba years, Wang Hao, CEO of Xiami, had his own band back in college and started helping promote underground bands in Hangzhou where both Alibaba and Xiami are based. He knew well how hard musicians’ life became in times when Baidu MP3, the notorious pirated music download source, prevailed.

Back then, besides pirated music providers, digi-music market was crowded with legitimate music services, such as top100.cn and 9sky and A8, who tried charging users with iTunes-style stores or premium subscriptions. Few users would pay then and they blamed Baidu Mp3. Eventually they turned to advertising which could hardly cover costs on royalty.

Wang Hao and his team wanted to come up with a good music product — they didn’t think any of the existing was decent at all, and a solution to help the record music industry that would be defined by Xiami as a combination of ” P2P software + distribution platform + interactive community”.

An Innovative but Controversial Business Model

Xiami team came up with an ideal mechanism based on peer-to-peer file sharing: any Xiami user is allowed to upload MP3 files, no matter where they are from, for other users to stream or download. But downloads are not for free.

A user has to pay 0.8 yuan for one download. By the rule, 0.4 is supposed to go to copyright holder(s), 0.2 to the user who uploads it, and 0.2 to Xiami. Users are encouraged to promote songs with rebates; for instance, a user earns 0.1 when anyone downloads a song from a list he/she built. Transactions are conducted with Xiami’s virtual currency.

Xiami expected this model would make everyone happy: copyright holders would get a dividend from every download of their music property and users are motivated to help distribute music and, hopefully, stop seeding other free music sites.

But it soon became controversial as the one that upload an album doesn’t necessarily be the copyright holder(s). Some independent musicians were enraged, even though the founders’ original intention was to help them. In October 2010, Li Zhi, an independent singer, sued Xiami. Xiami finally took down all songs by him.

Local mid-and-small sized labels who accepted the model, more or less, asked Xiami to pay a basic royalty fee plus extra revenue shares when downloads were beyond agreed amounts. As to big international labels, Xiami cannot afford the prices some asked. Since it’s unpredictable what to be uploaded, there will always be potential risks of copyright infringements.

Still A Unworkable Model

Wang Hao believes that users would like to pay for high-quality experience. But, embarrassingly, Xiami’s revenue from downloads in 2010 was only 400 thousand yuan, with merely 0.5 percent of registered users that ever downloaded songs — Wang disclosed the metrics just this once.

Xiami eventually realized it was used it as a music streaming service, which is for free, so much more often than a download supplier. It shifted its monetization strategy, turning to display adverts and beginning selling concert tickets.

A rich dad is needed?

QQ Music, Tencent’s digital music service, rolled out premium subscription service, 10 yuan per month for downloading a certain number of songs and other premium services, in 2006. For so many years, its a unmentioned revenue source, which is estimated to be very small. For full-fledged internet service providers like Tencent, it’s a must service to offer, paying royalties with money earned somewhere else.

The much-hated Baidu also launched a legitimate music service, Baidu Music, last year for users to stream and download music for free. That also implies a huge amount of royalty payments.

It is expected the eventually the surviving music services will be those with rich dads to cover content costs for them.

For Xiami, being acquired by Alibaba may be a good thing that they don’t need to worry about content cost any longer. Xiami’s seed funding, 5 million RMB, was from Shenzhen Capital Group in June 2008. It is rumored Shanda invested in it later.

Xiami has been my No.1 music source since 2007. I wish it well.