The man with a will to make online music pay

RIO Caraeff has chosen quite a week to visit the UK. As his New York-based music video company, Vevo, is embroiled in negotiations with Google over a potential investment that is rumoured to value it at $500m (£315m), Britain’s most prominent high street music retailer, HMV, is entering administration.

Vevo, founded by record labels Universal Music, Sony Music and EMI, is exactly the type of company labelled as responsible for HMV’s struggles. It allows people to watch thousands of music videos online, free of charge, and has seen spectacular growth since its 2009 launch.

Supported by adverts, and a revenue sharing deal on Google-owned YouTube, Vevo is expected to have generated nearly $300m in sales last year. The company is expanding, recently moving its London headquarters to a state-of-the-art office by Oxford Circus, and launching in Spain, France and Italy in November.

“We started the company with a simple focus on how to deliver a premium entertainment experience to as many people as possible and in as many places as possible, and to do it in a way that can build a sustainable business,” Caraeff says. “It’s not about trying to sell people things they don’t want to buy, and it’s not about trying to change people’s behaviour or force them to do something they don’t want to do. It’s about being compatible with the physics of the web and figuring out how the new rules work.”

This approach has paid off for Caraeff, who has seen the number of videos watched on Vevo since its launch hit 4bn per month. This has translated into high double-digit revenue growth, even though Caraeff admits that, contrary to reports, Vevo is yet to turn a profit.

“We could stop investing and be profitable but we’re continuing to invest in and grow the business, so we’re not profitable yet,” he says.

Even as Caraeff targets expansion in Latin America, Europe and Asia, he admits that revenue growth is bound to slow down. Faced with this, Caraeff is planning changes that he says will turn Vevo into a more diverse operation, less reliant on video adverts and in particular YouTube, with whom Caraeff has had a difficult relationship, although he says Vevo is “now in a good place with them”.

“Right now we’re a very large advertising platform and as those numbers get big, growth starts to slow down, so I think there’s something of a natural ceiling in terms of how much revenue we can generate from that,” he says.

“You can’t keep growing [advertising revenues] for ever, so I think you’ll see us start to expand where our revenue comes from, looking at a variety of subscription models, looking at a variety of other programming opportunities so I think that’s natural.”

The company is planning to charge customers for access to Vevo for the first time, offering a premium subscription offering in a similar way to audio streaming service Spotify, which is itself seeing tremendous growth but remains lossmaking.

Caraeff also outlines an opportunity on internet-connected televisions and set-top boxes, naming Sky, Virgin Media and YouView as potential partners. “You’ll see at least a dozen of those new platforms this year from us,” he says. “We have a lot that we’re cooking for the year.”

Yet even if companies like Vevo and Spotify do grow into profitable success stories, it remains to be seen if these new web services can sustain an industry hit by falling CD sales.

The two firms have paid out $700m (£441m) in royalties between them since their births in 2009 and 2006 respectively – an impressive sum, but a fraction of those generated by CD sales, which fell by a fifth in the UK last year, and were dealt a further blow last week with HMV’s administration. Caraeff admits that the music industry is going to take time to heal, but is confident of a recovery.

“We’re not going to replace CDs, no one company will,” Caraeff says. “But it’s not healthy for any business to have one revenue stream and to be dependent on one category. The music business will be much smaller before it can grow, but this is a solvable problem. It’s not going to be Vevo or any one company that solves anything, it’s going to be a combination of things, but I’m not worried. If we wake up tomorrow morning and everybody on the planet no longer likes music, then that’s a much more serious problem. But that’s unlikely to happen.”