Whoa! Did you hear that? If you’re in the digital music business, that ear piercing sound you just heard is the cracking of the industry’s landscape. Maybe not right away, and maybe it won’t cripple many companies, but the fact that Spotify purchased The Echo Nest today puts a spotlight on the challenges all the companies that partnered with the music discovery company now face. And even beyond that, it could give Spotify a huge advantage.
The Echo Nest powers music discovery for quite a few of the music services, from Rdio to Rhapsody to iHeartRadio to Vevo. The companies use it primarily to run their radio services. But the service can take any piece of content–tracks, albums, playlists, radio, similar artists, or genres–and create recommendations. And The Echo Nest makes the recommendations personal for each of their client’s customers. The service provides the company with all the plays that a customer logged and The Echo Nest creates a ‘taste profile’ for every user. That in turn guides the recommendations algorithm.
Within an hour of the announcement, an exec from one of Echo Nest’s customers told me that The Echo Nest said they will fulfill their contract, which he understood to mean that after the contract is up, his firm will need to build a recommendation algorithm. “It’s tractable work. It just requires time and money,” he said.
And talent, too. Let’s not forget that part of the equation. What has made The Echo Nest so attractive to music startups is the peerless quality of their algorithm. To create a great algorithm, you need to understand music, you need to understand technology and you need to understand cultural significance. These are three different skillsets that don’t naturally go together and getting them to work as successfully as The Echo Nest has, for a massive number of customers, is extremely challenging.
So unless startups are willing to create highly skilled teams of musicologists, machine learning Ph.Ds. and engineers that know how to tap big data, a company isn’t going to get close to what The Echo Nest can do. Conservatively it’s at least a million bucks to get into the game, and probably more than that just to get to parity with them. And instead of development times taking a minimum of a year, The Echo Nest can get you up and running in about a month.
But here’s the thing: to do a deal with The Echo Nest, a company most likely chooses to not build its own algorithm, which is what all these companies are staring down the barrel of today. Everyone who is a customer with the company considered The Echo Nest to be a neutral partner that didn’t play favors to any of their competitors. But not everyone thought about it this way.
When Spotify launched their radio product in 2011 it was with The Echo Nest’s algorithm, but they quickly developed its own. Why? The company knew owning its algorithm is strategically important. Beyond that, it might not have wanted to hand over customer play data to personalize the system. And that’s where this deal gets very scary.
Think about play data for a digital music company like you’d think about a country’s natural resources. It contains amazing insights of what customers like, what songs relate to each other and a great deal of intelligence about customer behavior. But just like getting natural resources out of the ground, it requires a big data infrastructure to mine it and make it actionable. Some companies have invested in heavily in this infrastructure, but most have this data—perhaps a service’s most important asset—buried deep in within their usage logs.
It just so happens that The Echo Nest has all this data—from all of its customers—to power its algorithms. Services are very protective of this data and are therefore extremely concerned about exposing their streams to competitors, and of the ability for The Echo Nest to potentially centralize the data and create products that show a total view of online listening.
But here’s my question: did Spotify just get access to all the listening data for all of The Echo Nest customers? Even if they do not commercialize it, just seeing that data could lead to enormous advantage for the company.
Look, all these services have different customer bases. An iHeart customer is very different from an Rdio one. Rhapsody customers listen differently than an Xbox one. Insights on how these music fans are different (and are alike) would give Spotify a total view of the listening universe, which could help in everything from tuning their algorithm to targeting customers for acquisition.
And if Spotify wants to continue to sell The Echo Nest’s algorithm, wouldn’t that give the company an enormous, NSA level of music playback? The company confirmed today that they’re pulling out of the algorithm business for other platforms once all the terms are up. But if you want to build an app on the Spotify ecosystem, you can have access to The Echo Nest’s goodness.
Daniel Ek has built Spotify into a company with the best technology in the industry. He’s now bought the shiniest tech toy on the market and he’s taking it home to play with it. Alone.
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