Classmates.com. Let’s see. The site is merely a tiny subset of MySpace’s or Facebook’s functionality, but unlike them you have to pay for it. And it has something like 1/100th of the customers of either. And they’re unprofitable, with a shrinking customer base. Oh, and don’t forget the FTC investigation into their billing procedures.
I don’t know about you, but I’m calling my broker today.
I’ve been doing a lot of thinking lately about the future of the music industry. It started at Y Combinator last summer. An inordinately large number of the groups there were music related. I wasn’t sure if that was because hackers like music and want to do startups in the space because of that, or if Paul and company just thought the music industry is large and broken and therefore a good place to look for homeruns. It’s probably a little of both.
Also there’s been a lot of news in the space over the last month or two. Radiohead is getting much of the credit (and rightfully so) for opening up the debate with their release of In Rainbows, which is available for download at their store for any price you wish to pay. It’s the first time a major artist has totally sidestepped the recording industry, and it has definitely garnered a lot of debate. A couple other incredibly popular acts made or begun to make similar moves as well, and one of them, I’ve concluded, has delivered what will be viewed in twenty years as the current recording industry’s deathblow.
I can’t claim to have totally figured out the future here, but I think I can at least narrow it down quite a bit by using simple logic. I’ll break down my facts, opinions, etc. here, and then attempt to draw a conclusion from them.
Things aren’t going well for the recording industry.
This comes as news to no one. Sales are plummeting, and record labels are blaming illegal file sharing. The industry seems to be in a tailspin, and its major players are grasping at straws by hampering legitimate online music retailers with obnoxious, ineffective DRM, as well as suing their customers and making life generally uncomfortable for everyone involved. The situation isn’t pretty, and it’s getting uglier every minute.
DRM is a failure.
Though not mathematically proven (which would be virtually impossible) it logically seems as if DRM must actually cost artists and labels money on recorded music sales. It does nothing to prevent the root source of piracy because record labels still release CDs, which have no DRM and account for the bulk of music sold. Even if their DRM were unbreakable (and it certainly is not) it wouldn’t achieve its aims unless no music was released without it. With the bulk of music still sold DRM-free, it’s worse than useless.
Piracy still is, in many cases, easier than paying for music, even in the era of iTunes. And the DRM imposed prevents many willing and able consumers (myself included) from ever purchasing a track. Steve Jobs knows this, and the record industry is starting to figure this out, though I still don’t think they have any idea what to do about it. Luckily for them, I’m on the case.
Fans are fed up with the recording industry.
This seems to be self-evident. Ask any college kid what they think of the RIAA. Between years of price fixing, attacking the internet radio industry, suing its customers, and the general lack of imagination found amongst the acts it promotes these days, the major labels have lost their luster.
Artists are fed up with the recording industry.
The recording industry has long abused artists. For a detailed look into why, please see this transcript of a speech given a few years ago by Courtney Love.
It’s not really surprising that it ended up this way. On one side of the equation you have a bunch of Ivy League MBAs working for large, publicly traded corporations. On the other you have a few guys from a trailer park or ghetto with a guitar and/or a turntable and a dream of being a huge star. You don’t have to know much about the music industry to figure out which group is going to end up with the profit there.
Artists need the recording industry less and less ever day.
Back in the analog era, there seemed to be little bands could do about the abuse. They needed the supply chain and distribution system. The best they could do for themselves, when their contract was up, was to try to shop around, but when everyone you’re negotiating with plays golf at the same country club there isn’t really much point.
In the digital era, though, there is no more supply chain. Anyone can distribute an album freely if they wish. Thanks to Bittorrent, any artist could get his latest CD in front of every music fan in the world for no additional cost beyond the DSL connection in his home.
And since record labels have pushed artists to the point where their only strong source of revenue comes from the non-recording aspect anyway (touring, merchandise, sponsorship) it’s well worth it for them to do so. Every person who downloads a Radiohead CD, off of which they could have made a buck or two, is one more potential concertgoer, from whom they might gross as much $10 to $20.
The record labels never would have let Radiohead give away the goods. They’re middlemen and they are certainly not going to cut themselves out. But for the band, doing so will give them wider exposure, selling more tickets and merchandise. In the end Radiohead could be better off, even if nobody ever paid a single cent for the album.
Micropayments won’t work.
A lot of the anti-DRM, tech industry crowd has suggested micropayments (an as yet to be developed, easy solution for paying small amounts to whomever you wish) as a replacement revenue stream. This will never materialize. People will never pay for something they can have for free, at least not in significant quantities.
This, like the Facebook vs. MySpace debate, is yet another example of people in the tech industry having no clue how the other 99.9% of the population actually lives and thinks. People who write software, a form of intellectual property not as dissimilar to music as it may appear, feel a little more kinship with musicians than the general public (and are probably more likely to have a little spare change rattling around in their pockets) and therefore might actually pay for something they weren’t required to. And they assume that because they would, and their friends would, that enough of the rest of the population would to make it a viable economy.
They’re way wrong. People don’t pay for things they can get for free. It’s contrary to human nature. That’s why we’re having this discussion in the first place.
It’s nothing like tipping, as some may suggest, where there is a real person who can see you and who you know has no real income outside of that. It’s done alone, in the privacy of your own home, and you know that if you steal a Pearl Jam song, Eddie Vedder isn’t going to give you the evil eye.
Musicians, to most people, aren’t even real. We view musicians much the way we view athletes, as oversexed and overpaid. We feel little incentive to donate to someone whose life appears to be 100 times better than ours. Most of us have little spare money and a lot of debt, and marketers are constantly minting new necessities (cell phones, iPods) that we have to pay for. To think that, in the face of all of that, voluntary micropayments could even replace ten percent of the revenue made from CD sales in their heyday is beyond preposterous.
Even if consumers had the desire to use micropayments, it seems unlikely the industry will ever be efficient enough to enable it. While it could potentially become cheaper than PayPal (whose fees are a little hefty) the effort involved can’t decrease by much. One would still be required to sign up an account, verify their checking or credit card (which, in and of itself, requires one to be older than the people who have traditionally bought the most music), fund said account, and then transfer payment to the artist. Those are all major steps, and as anyone who has ever designed a consumer-facing website will tell you, some large percentage of users will turn away at each of them.
Making good music costs money, which new musicians don’t have.
Even without the expense of pressing or distributing CDs, there is a significant cost barrier to recording an hour of music. A major label record typically costs over a half a million to produce. Tours don’t organize themselves and t-shirts don’t grow on trees.
And, most importantly, music doesn’t promote itself. What Americans listen to is largely a function of where record labels spend their marketing dollars. Radio time is still for sale, despite the passage of laws designed to prevent such behavior, and it always will be. Even in the forthcoming era of ubiquitous, high speed, wireless internet (IP radio in your car or on your iPod isn’t that far away) marketers will ensure that you find the music they want you to. They might do it through MySpace or Pandora rather than KROQ as mediums change, but it won’t really be any different. As Led Zeppelin would say, the song remains the same.
Making money in the music industry will always require capital, which musicians, until they’re successful (and, thanks to heroin, oftentimes even after) do not have. So where will it come from? I think the answer was just revealed to us by none other than Madonna.
The Material Girl recently signed a contract with Live Nation, the exact terms of which are unknown, involving a combination of recording and touring. This, I think, is the future of the music business. Recorded music has become a valueless commodity, but live music never can. The experience of a concert can never be digitized and uploaded. It can’t be cheapened. And it’s also the largest remaining source of revenue for artists. In fact for many it’s virtually the only.
Promoters like Live Nation will gamble on new artists. They’ll give the albums away freely, or at least very cheaply, because they’re nothing but a marketing ploy to get customers in the door. They’re already becoming more efficient than ever at putting asses in seats by using sites like MySpace (and, in the future, probably ones more like Songkick) and they’ll only get better. They have a revenue model that’s not only impervious to the internet but fully embraces it. And it’s profitable enough to spend a little money on exploration.
In the end the record labels won’t be able to keep up, as they’re fighting against both the artists and the consumers. They’re a middle man, and they’ve been loathed for decades by both ends. And now that technology has eliminated the supply chain and concert promoters are stepping up with the seed investment necessary to develop new talent, they serve no function.
Response to Madonna’s contract so far has been minimal, with Live Nation’s stock slumping. But that’s because people are viewing this as a risky, long term deal with a performance artist who may already be past her prime. And perhaps that’s true. Who knows? I’m not a Madonna fan at all, but I have to admire how she has managed to remain relevant for so long. I don’t think it’s safe to count her out.
So this one might go south for them, or it might not. But it doesn’t matter, because this is much bigger than one old lady who likes to sing about sex. It’s the opening salvo in the war for control of the music industry in the digital age.
What the Record Labels Can Do
The writing is pretty much on the wall, so for a record label to have a chance they should do the following:
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Sell the good seats online via Dutch auctions. You’ll put the brokers out of business, make customers happy, and keep the extra cash for yourselves.
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I’m just speculating here as to how to go upscale, but like I said, you got your MBA from the Wharton School. I’m just a dumb American consumer. Make me want to buy something that I can’t download and make fun of people who purchase cheap knock-offs. If you can’t convince me that I need to pay for something I happily lived the first 27 years of my life without, you might as well start flipping burgers because it doesn’t get any easier than that.
I love Whole Foods. This should come as no surprise to anyone who knows me. The place sells the best produce and meat around. I’ve been making a concerted effort to eat in lately, so I end up going there a couple times a week. I’ve yet to buy anything I didn’t like, unless you count the plantain I had this morning, which was only bad because it was green as a lime. I wasn’t sure if I was supposed to wait for it to yellow like a normal banana and it was as hard as a carrot.
So that store is one of my favorite things about living in California, but sometimes I think they have a tendency to go overboard. I needed some vanilla yesterday, and when I got to the aisle they must have had 15 different jars of the stuff. One brand sold five varieties of organic vanilla from five different countries. That’s just too much.
How am I supposed to know which country’s vanilla is the best? Is there a vanilla sommelier somewhere? Maybe a Vanilla Spectator magazine? I can just see a guy swirling one drop of it around a thimble. “The ’04 Tahitians are drinking fine already, but the Mexicans still need another year in the bottle.” And how do you describe the flavor? “It has hints of milkshake and French toast.”
I’m no chef or anything, but I’m going to contend that nobody in the entire world knows the difference between Indonesian and Indian vanilla. No human being could pass that blind taste test. It’s not possible. Out of sheer confusion I ended up with the former and it tasted, well, like vanilla. But I mostly just walked away wishing they’d have one, or maybe two brands like every other grocery store in the entire world because then I wouldn’t be eating my French toast and wondering if it would be better had I just splurged on the Guatemalan bean juice instead.
As they say at McDonald’s, I’m lovin’ it.
We were featured on TechCrunch yesterday. The rest of the group was laughing at how the article was focused around me, as if I created the whole site myself. I didn’t really get that impression, but I’ll take it. What can I say? I’m our Steve Jobs. (Luckily for me, I don’t really do all of the work myself, as we wouldn’t be launching until about 2012 if that were the case.)
Our logo got a bit cut off, but Nick did an awesome job with the screenshot showing our team page, which I think is our best looking. For the most part the article is fairly accurate, except for linking to the wrong Internet Gambling act. I think that one never even passed. Oh well, nobody who reads TC really cares about the UIGEA anyway.
He’s very right about CBS. The payouts there are ludicrous. At the $500 buy-in level the rake is over 40%, and at the $15 buy-in the rake is as high as 72% (depending on how many teams you buy). At least, that’s how they appear. It’s hard to tell for sure from their site. I think the fact that anyone is willing to suffer through that shows how much people want to play fantasy sports for money.
What all this has taught me is just how brilliant the online poker rooms are. I suppose it should come as no surprise. They were startups, and as such had to redefine a problem and then solve it. Fantasy sports online exist mainly as afterthoughts for mega-corporations like Yahoo, Disney, and ESPN looking to gain a few page views. They’re run by pointy-haired bosses, not entrepreneurs looking to make money.
In fact, the entire online sports industry is that way. There’s really no good place to go check out scores and trash talk suckers who like your team’s rivals. It’s probably the biggest, almost totally unaddressed market still in play, and I’m pretty happy to be staking my claim in it.
Online poker rooms were true innovators. They had to be. It is an ultracompetitive, highly lucrative business, and in its early days one that the big corporations shied away from. That’s changed quite a bit in recent years, but back then it meant that the winner was the group that executed best, not the one with the biggest marketing budget.
As such online poker rooms invented or co-opted many brilliant marketing ideas, some of which the rest of the internet has yet to apply, because they had to. Luckily, having been involved in it for so long on both sides of the equation, I feel uniquely positioned to take advantage of that in this new space.
Investors often ask me who I think our biggest competitors are. The obvious answer would be Yahoo, ESPN, and maybe CBS, as they have the most customers, but I’m pretty sure that once we’re up and rolling we’ll carve through their user base like a hot knife through butter. They haven’t innovated beyond the game people played in bars in 1982, they just threw it online. For evidence please see their drafts, which are still Java Applets, the programming equivalent of a phonograph.
I’m much more worried about other startups. There aren’t many in the space yet. There’s Rotohog, which is pretty cool in a way, but the exact opposite of what we’re doing. They make the game harder to play and more time intensive, and only let you draft once per year, meaning that if your first round pick gets injured on Week 2 you don’t just lose one team, but every team you have on the site. There’s also Flea Flicker, which I hear good things about but haven’t yet seen.
And right now, that’s about it, but that’s going to change. It’ll be interesting to see where it goes from here.
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Best article I’ve read about the tech industry in a very long time. It’s worth some thought. How do I position my business as an Apple rather than a Microsoft?
Interesting question here from Hacker News. My thoughts on it were a little long for that site, so I thought I’d respond here. The question is:
So there are 2 guys that have an idea for a company. Granted it’s a great idea, if executed properly. They are offering the first developer (also the first employee) a 2% equity stake and no compensation at this point. Being that it’s a web company, said developer will probably be doing just as much work as the founders.
Is 2% reasonable? I don’t think so…I would expect an “unofficial” co-founder to get at least 10-30%.
First off, I’m skeptical about a startup with one dev and two non-devs if it’s a pure web play. If that’s the case and they’re offering you 2% I’d probably say no right there. If you can sum up their idea with something like “a social network for [insert dog breed/auto maker/fashion designer here] fanatics” then you’re better off passing.
If it’s something like Amazon and you have to deal with vendors and inventory, or maybe if it has some sales requirements, then I could see it becoming possible. But for something entirely digital that seems like too many chiefs and not enough Indians. Something to be wary of right off the bat (and I’ll explain why in a post I’m working on and should publish shortly about group dynamics).
As far as how much equity you should require goes, there are a lot of factors in play. What is the startup idea, and who are the two guys? If it’s some sort of enterprise software, and they have massive experience and connections in the industry they plan on serving, as well as the ability to sell, and possibly a line on funding, 2% might be acceptable. If it’s just two random guys with an idea looking for someone to make it happen, you should probably require far more equity, or avoid the situation entirely.
In the end you have to figure out how much you think that 2% is worth. How much do the other guys bring to the table? If it’s a lot, then 2% could be worth more than your day job. If it’s just an idea, then it isn’t. The most important thing is to examine your options.
If you’re a good hacker (or a not so good one who can sell himself) you can make a lot of money in California. You can get an excellent salary and some small share of stock in a company that recently had a Series B and will retire you if it hits big. And you can do it with a company far less risky than one in the idea stage is likely to be. Or you could take a more risky (and potentially more lucrative) job with an even earlier stage company for a bigger chunk. It wouldn’t be too hard to get 1-2% of a company that just had a large angel round or small Series A if you were the first or second developer on board, and you’d have a salary and much less risk than with two guys and an idea, unless those two guys add a ton of value.
Also, the fact that they’re offering so little equity means that they are either extremely naïve about market rates for developers or extremely confident in themselves and their idea and value add. Or both. If it’s confidence, that’s fantastic, and if you feel it’s warranted you should try to negotiate. Even if you still don’t think 2% is worth it, you might as well take a stab at getting them to a figure you’re comfortable with. It’s worth the little time you’ll spend.
If it’s a blend of naivety and well-deserved confidence that’s not necessarily that bad either, since I am sure there are many brilliant people in non-tech industries with impeccable reputations, invaluable rolodexes, and great ideas who know too little about how Silicon Valley works to realize how small that figure is. They might simply be unaware that they’re offering such a low amount that they’re potentially hurting themselves by ensuring they end up with a mediocre developer, if any at all.
And they may not realize how big a discrepancy there is between an excellent programmer and a good one. There aren’t many professions where someone who is great at his job would be preferred over 10 people who are merely good at it, so it’s quite possible for even the most successful people in non-tech industries to have never encountered such a thing.
So if you think lack of knowledge market rates for developers is the case, you might want to explain to them that they’re shooting themselves in the foot and see if they’re willing to go higher. If you have two bright guys who bring a lot to the table but don’t know much about your industry they can still be great partners, as long as they’re willing to learn and adapt. So try explaining. It’s possible, albeit unlikely, that they’ll realize how much they need your assistance, and if not, at least you tried to do them a favor.
So the answer to your question, I suppose, depends on the variables, and it would be silly to answer definitively in one direction or the other without more information. But I have to think that most combinations will lead to that deal being somewhere between bad and horrid. The odds of 2% of that company being better than a market rate salary and some fraction of a percent of equity at Zillow or Xobni seem pretty slim, but not impossible, going on the little information you’ve given.
So I’d tend to say no, unless you really had a lot of faith in those two guys. I suppose you’d have to have some to even consider the deal, but you should require a ton to take it. And even then, take a stab at getting more. They won’t blame you for trying, in fact, they might think less of you if you don’t,
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