#DigitalSkeptic: Human DJs Find Their Place Deep in Age of iTunes

NEW YORK (TheStreet) -- Johan Lagerlof is making real money with a way-untrendy digital music business idea: What humans want is not tunes coldly conscripted into musical service by robots, but songs lovingly curated by other living, breathing humans.

"We have the tech tools for distribution and management and the boring stuff. But we have humans do all the fun stuff," said Lagerlof, the engaging and surprisingly blunt CEO of X5 Music Group, a Sweden-based digital music distribution and marketing company, over the phone from Stockholm.

And at least so far, the musical bots at Pandora's Music Genome Project and whatever intelligent preference engines that drive Spotify, Facebook and Google appear to have something to worry about. Not only have investors begun to debate the true power of machines automating the musical experience; the 30-employee X5 saw $12 million in revenue last year. Sales are growing by 30 percent year over year, mostly through the sweat and blood of roughly 40 paid independent music curators who hand-pick X5's tracks and mixes.

"We work with music nerds from around the world that create playlists, select anthologies and craft music collections," Lagerlof said. "And then we distribute them on various digital platforms."

Like many musical entrepreneurs, Lagerlof started off as a songwriter and producer. But the downturn in music revenues caught up with him, and his business collapsed in the early millennium.

"It was fun sitting in the studio," he said. "But it was sad because your costs were not covered."

He left producing, first to sell ringtone versions of popular music to European cellphone companies. Around 2004, he was wowed by iTunes opening up shop in Germany. Immediately, to Lagerlof's credit, he realized that digital music worked backward from traditional retailing. Successful tracks on iTunes did not rise quickly during the first few weeks of release as they did in traditional discs or vinyl; in the digital world it took time for users to rate a song, link to it and allow search technologies to pull it out of the heap.

The turtle-beats-the-hare digital music market, therefore, was ideally suited for the repertory with the longest shelf life -- that is, classical music. Lagerlof curated and secured rights to a full library of music collections from the likes of Brahms, Mozart and Beethoven. "What we saw was, you were not limited to CDs in terms of length or rights," he said. "So we tried 10 songs in one iTunes package for $10 and then 30, and then finally 50 for $10."

Almost immediately The 50 Greatest Pieces of Classical Music jumped to the upper ends of the iTunes classical download list. And it has stayed there essentially ever since.

"By using humans to create the best collection of music, we provided the best experience," he said. "That's the secret."

Spotify gets 'Classify'-ed
Lagerlof's next hot spot for humans turned out to be Spotify, which went large in his native Sweden several years ago. In 2012, as the subscription service began growing dramatically, he realized that the sheer size of the Spotify library made it hard for users to find the songs the loved. So when the platform opened up its development to third parties, Lagerlof created Classify, an app that enables his human playlist curators to comb through Spotify's archives and create top-quality lists that drive usage. He says his 50 Greatest Pieces of Classical Music list boasts 90,000 subscribers on the service.

"We have playlists for blues, for jazz, we have somebody in Sun Studios," he explained. "And just like in the vinyl and CD business, we take a percentage of the fees Spotify pays to labels and artists.

"It's the same business we've always been in, but updated for digital music."

Some new-media nonsense
All these years in the digital music industry have rubbed off on the otherwise sensible Lagerlof. Language issues aside, he utterly lost me when I tried to get him to explain how selling 50 songs for $10 was not a business disaster compared with selling 10 for the same amount.

"It's the same revenue we get for 10 or for 50 songs. The same money flows out to the labels and artists. So everybody is a winner in the deal," was the nonsensical quote I promised him I would write down and print. So there it is.

And there remains the deep question of whether X5's model has legs here in the United States, where 15 years of digital-age abuse has rendered music essentially worthless. Spotify's premium non-ad-supported product can fetch only $10 a month here, as opposed to the roughly $15 per month it can charge in Sweden, meaning there is 30% less revenue for X5 to split with artists and labels -- and probably just that much more risk in making money here.

But still, it is hard not to be impressed by this one man casually doing what thousands of Silicon Valley entrepreneurs promised us all was impossible: Finding a place for warm-blooded humans in an otherwise cold-blooded digital world.

This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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