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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | JANUARY 10, 2001 MOVERS & SHAKERS By Spencer E. Ante Musicbank's CEO: Hitting the Right Net Notes Michael Downing and his partner avoided legal battles over their online music "locker." Now they have deals with all the big record labels and a chance to test their model
At the time, a service of this type had yet to be created. Only problem was, Downing and his partner, Pierce Ledbetter, weren't sure if they needed to strike copyright-licensing deals with record labels and song publishers to make the service fly. But it was clear that they had two choices: Either musicbank would run around the music industry, or it would work with it to create the new service. RENEGADE APPROACH. It was a very difficult decision. These were the early days of Web music -- months before the Recording Industry Association of America (RIAA) sued Napster and MP3.com for copyright infringement. Initially, Downing and Ledbetter were leaning toward taking the renegade approach, but their lawyer, Elliot Groffman, eventually convinced them it would be smarter in the long run to take the high road. So they did, bending over backward to accommodate the concerns of music bigwigs. For almost a year, with Groffman's introductions, Downing and Ledbetter met with record-company executives, explaining their strategy until they were blue in the face. They even wrote a series of research reports about subjects such as security, audio quality, and business models. And then, taking on the most difficult challenge, Downing negotiated first-of-a-kind three-year licensing deals with all of the five major music publishers. "A lot of the music guys are used to very cocky tech guys that expect to license their technology," says Downing, musicbank's CEO and president. "That's not what we did. We tried to answer every possible question." BIG ACCOMPLISHMENTS. Although musicbank has no revenues and has yet to launch its locker service, the 29-year-old Downing has cunningly steered it around one gargantuan pothole and given it a fighting chance to become an important player in the nascent digital-music industry. So far, musicbank has finished testing its technology, raised $20 million in venture capital, and secured licensing deals with all five of the major music labels without having to make huge up-front payments. And the company is close to nailing down a final deal with the key players in the music-publishing business to secure all the licenses necessary for running its service. "[Downing] seems pretty sharp," says Malcolm Maclachlan, an analyst with research firm IDC. "There will be several companies that create this service, but musicbank got the jump on them." By contrast, music service provider MP3.com fell into a legal and financial black hole. On Jan. 21, 2000, the company was sued by RIAA for developing a similar music locker service, dubbed My.Mp3.com. In April, a federal judge ruled that MP3.com's music locker violated industry copyrights because the company uploaded about 40,000 CDs into its database and offered them to consumers without first getting permission and licenses from the music labels. Since then, MP3.com has reportedly agreed to pay the five majors more than $150 million in licensing and settlement fees to keep its service running, and has been sued by other companies, including emusic.com. "They paid $170 million more for the copyrights than we did, and they still have six to eight lawsuits," Downing says. "HUGE BUSINESS." Downing may not have legal problems, but neither does he have a business plan yet. The idea he's floating is to provide a basic hosting service for free; then charge users a subscription fee to stream new music and another fee to host an unlimited number of songs; and sell advertising. The cost to the company: Every time musicbank stores and streams a song, it pays the copyright holder a fraction of a penny. "With the royalty we've obtained, we believe we can create a huge business," Downing says. Downing may seem tech-savvy today, but his roots don't suggest the makings of a new-media visionary. He was raised in Dallas, where most of his family worked in the cattle business. Growing up, he rode horses often and developed a talent for playing polo. His grades were poor, but he landed a polo scholarship at the University of California at Davis, which had one of the strongest teams in the country. In college, Downing majored in political science and caught the tech bug through friends who were computer-science geeks. He showed an entrepreneurial bent by starting a small business that helped employers use the Internet to recruit college students. The venture failed, but, Downing recalls: "We made enough to pay the bar bill." DELVING INTO WEB DESIGN. After graduating in 1994, Downing landed a job at Simulations Interactive Media. He was hired to scare up some business for the company, which used CD-ROM technology for corporate marketing. Soon after, he left Simulations to run an interactive-marketing business out of his house. Then he "got pretty deep into the whole Internet thing." In 1996, sensing an opportunity to build a bigger business, Downing raised some seed capital from a bunch of angel investors and founded Addwater, an early Web-design and consulting shop. In December, 1998, Downing got a call from the president of Sonique, who was trying to turn its popular MP3 player into a business. Downing joined as chief operating officer. His timing couldn't have been better. In June, 1999, America Online acquired Nullsoft, the maker of Winamp, another popular MP3 player. Digital-music software companies were now officially hot. "When that happened, everything kind of went crazy," he recalls. Two months later, in August, Lycos bought Sonique for $37 million. Today, Downing is entering a much-less forgiving world. Although musicbank's conservative strategy has hit all the right notes, it still has a lot to prove. First, it has to launch its product. Attorney Groffman says the arrangements with the publishers are largely in place now, but some details still need to be worked out. "My guess is in the next month, [the service will] be officially online," Groffman says. A HANDFUL OF COMPETITORS. Then musicbank will do a classic dot-com land grab, signing up as many customers as possible before the competition heats up. There are less than a handful of music-locker services in development, including myplay.com and Echo Networks. Echo has signed one content-licensing deal, with Warner Music. "The labels aren't going to work with too many companies," says IDC's Maclachlan. "That's a huge advantage there." But Downing and company will have to create services and subscriptions that are attractive to consumers. In theory, analysts and executives agree that a locker service makes perfect sense. With music becoming increasingly digital, consumers will need a site they can draw from to play music on stereos, computers, or any portable information device. Still, no one has figured out a successful business model for streaming digital music yet. But thanks to Downing's shrewd leadership, musicbank is in a position to help concoct the winning formula.  Ante covers Internet companies for Business Week in New York  | | |
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