Sonific goes under - more on the way I am sure

well, Sonific is closing its doors.  And I have to say, I’m not suprised.  There are a large number of startups doing the user upload thing to try to avoid the copyright infringement issue, but the record labels are starting to take a more aggressive stance against them and against linking companies like Seeqpod.

The copyright law, for all it’s flaws and problems is nothing if not clear:  knowingly making a copy of a copyrighted work for commercial purposes is punishable by up to $150k in fines per infringement.  Now, some companies are trying to get out of that by taking the view that their users uploaded it, they just provide the platform.  But that doesn’t really work.

Meaning, without the platform in place, the infringement couldn’t happen. So, unless you place safeguards against infringement, you are providing the means to do it.  Some will disagree with me, but look at it from an investor risk assessment:

1. I can assume the risk and hope I don’t get sued
2. I can assume the risk and hope someone with deep pockets buys me
3. I can assume the risk and hope that the system changes

Since most of these are very unlikely to begin with - the second most likely - but not really, an investor is not likely to pursue investment with such a company.

Thus - when services like this start to run out of money - which they will - more will go belly up.

In our view, while the copyright law does not make much sense for our new music order out there on the internet, it’s far better to play ball with the copyright holders then it is to see them in court.

 

The missing link in internet pure plays - customer intimacy

When you look at business operating models, there are generally only three from which to choose:  Operational efficiency, Product innovation and Customer intimacy.  To understand these, it’s effective to look at three companies that exemplify these models:

1. Operational efficiency:  Wal-Mart.  Wal-Mart’s goal of lower pricing is driven by operational efficiency. Down to prioritizing their long-haul trucks over vendor long-haul trucks.  Or having only two cashiers on staff. Or being a leader in using RFID. They do NOT focus on making customers feel welcome, guided and supported. They do not focus on developing radical new products that change the market place.
2. Product Innovation:  Apple.  Apple’s drive to create highly innovative devices (iPod + iTunes, iPhone, TV, etc) has changed the way people think about products.  With the exception of their stores (and I might argue they are not really an exception either), Apple is not focused on operational efficiency, or customer intimacy.
3. Customer Intimacy: Nordstroms.  When you walk into a Nordstroms you get “service”.  Maybe that’s a personal shopping consultant, maybe that’s someone who walks you to the part of the store you need to find. Above all else, Norstroms will make you feel welcomed, loved and taken care of.  They are not creating a wild new product, or being extremely efficient.

When thinking about pure-play Internet companies - whether that is blogging, news, media, retail or content I believe you tend to see only two of the models above:  Operational efficiency and Product innovation, but mostly product innovation.  Think YouTube:  product innovation.  Think Google search and think operational efficiency. Think Imeem and think product innovation, or Facebook, product innovation, or Cnn.com - operational efficiency.

But - I think what’s missing from pure play Internet companies is customer intimacy.  A way to make the customer feel welcome, loved and taken care of.  It’s definitely missing from a customer support standpoint, but I mean more broadly.  Web 2.0 is/was about ease of use and sociability. It was not about the consumer per se.  And even then companies have blogs (typically as a means to drive traffic) that is not about customer intimacy.

I think there are a couple reasons for this:  1. the Internet is for geeks.  Or at least it was started by geeks and the kind of geeks who are not thinking about customer intimacy.  The very notion of anonymity on the Internet is the antithesis of customer intimacy.  2.  It’s perceived to be too expensive and the perceived value of the Internet is in efficiency.

And for those who say that Web 2.0/social networking creates customer intimacy on the Internet:  maybe - but not if you want to sell something other than ads. And that’s not company to customer intimacy, that’s customer to customer intimacy - and that does not really lead to selling anything.

This is all true when it comes to on-line music companies too.  But we’re going to change that. We’re going to drive to customer intimacy in the on-line music experience.  I think it’s a great strategic move. A great differentiatorand a real value add to the consumer.  As long as we’re not cheese balls about it and as long as we can scale it effectively - which I think we can.

MySpace mobile - competition

Well, I’m not going to pretend that it doesn’t make me nervous, but MySpace just announced their MySpace Music application.  In essence it will allow users to download/stream tracks from artists pages and user pages and allow people to share playlists. There will be a download piece and an add supported free stream piece.

Now, it’s not without its challenges, and my first thought is this: MySpace is free, always has been and consumers will not spend money there. That’s clearly a challenge to their download model. But it still makes me nervous.  Until this, we really had the only deep social networking/downloading presence - now we’re up against MySpace - not good.  But wow - would I NOT want to be Immem, iLike, Jango or others - that would just be a killer.

In our case, we’re still not a “web site” - rVibe is a social jukebox and download service.  It’s still differentiated. It’s still not primarily about people and their pages, it’s about music and what people are listening too. 

And fortunately, the download market grows and the opportunities still abound.

Process: “Fundraising is wretched”

When thinking about anything that has any kind of process around it, I generally take the stance of:  the process around something serves a purpose in some capacity;  it may not be a process that serves me well and my engaging in the process may not feel efficient or nice, but the process is efficient for some entity with some purpose. And that process ALWAYS serves the purpose of the one in power.

You can actually apply this thinking to pretty much anything: customer service, purchasing, government, institutional, Disney World.  My current favorite example is TSA security in the airport.  People whine and complain about it - and I do too - I can’t stand it. But, it serves someone/something quite well - you just have to understand it.  Meaning - even with multiple checkpoints, the process is very sequential and single threaded; it’s very cumbersome and labor intensive (for everyone -consumer and provider). This is really a pain for the traveller. BUT - it’s great for someone.

That someone, has an intent, a message and a purpose. I am not sure I can causally identify the real root of all that for TSA, but here it goes:  If we assume that the purpose of the security check points (in addition to actually checking for terrorists) is to demonstrate control over the environment, demonstrate commitment via the number of people engaged, delay people to remind them of the importance of security and humiliate (minor humiliation) people so they feel a bit out of control them selves (and further the notion that the TSA is in control), then the process of security checkpoints a airports is marvelous. It serves that purpose perfectly. Disclaimer: I am not saying that is the purpose but the process maps to the results.

The same process thinking can be applied to purchase paths on websites. If the intent of CNN was to have people actually buy something - it would be a disaster of a design.  If the intent of Amazon.com was social-networking - it would be a bad design.  However, for Amazon’s, the intent is to make it easy to find something to buy and easy to make that purchase.  In this case, the process serves that goal.  I mentioned that the process serves the one in power - think of LL Bean or Amazon.  Great customer service - easy to execute a purchase, etc etc.  The customer is in power. Think TSA - painful, communicating dis-empowerment and worry - the government is in power (albeit to keep you safe). 

So, I was talking to another successful entrepreneur the other day who is also in the process of raising money. He said to me “raising money is the most wretched thing we do.”  Now - all my process proselytizing aside, I feel the same way.  For the entrepreneur, it is painful, ugly, humiliating and tiresome.  It’s really something I don’t enjoy.

But the process of fund-raising is not inherently wretched. When you look at it through the investor’s eye - and mainly through the lens of risk mitigation, it becomes quite elegant.  If the the purpose is to remove risk as much as possible (and I think it is), then the items below from a process sense map perfectly to the goal.

1. Weed out those not serious: To ensure only those who are serious about raising capital actually work at it - the process (organic or intentional, it does not matter) must be difficult.  Keep funding sources in-obvious, hard to find, difficult to contact.
2. Weed out those without credentials:  To ensure that those resilient enough to find sources are legit, the process must have gate keepers.  Only accept funding opportunities from those you trust.
3. Weed out those who don’t “seem right”: Those that make it through steps one and two, must pass additional scrutiny around soft skills such as presenting, personal presentation, dress. They also need to pass a backrground check. Not a legal one - but like “where did you go to school”, who do you know?
4. Weed out those with anything incomplete:  That includes business plan, team, or product.
5. Weed out those that don’t conform to investment criteria: That means by business segment, market type, etc.
6. Weed out those that that don’t have all their ducks in a row:  Meaning - when performing legal and business due diligence (which actually started way back at 1 - but this is more detailed), remove risk by removing opportunities that have business or legal issues
7. Once an investor does elect to invest, offer terms that only work for the investor.  This is obvious

 So - it is wretched for the entrepreneur.  Of course, there are investors who don’t play by those rules completely, and they are typically the ones who don’t use risk mitigation as the limiting factor on investment.  When a different criteria is used, the process is different. 

Once you understand it - it’s a lot easier to stomach the process.  Still is not really fun though.

There’s “free music” and then there’s what people want

“Free streaming” services are popping up by the hand-full.  Qtrax and Spiralfrog are attempting to line up labels and get their “free download” services off the ground. There is a problem with ad-supported, and I don’t just mean it’s not cost effective for businesses.

From the consumer’s view, the music is not really free, it’s really ad supported.  Which means that you have to either hear or view ads to experience the music.  So - let’s not call it free - let’s call it ad-view supported.  The consumer has to experience ads in order to experience music. For radio streaming - where you’re fed a playlist that you don’t control - that’s not necessarily a bad thing - radio has done it for a long time and quite successfully (until now anyway).  Dropping in an ad here and there has not deterred people from switching on the radio to experience music.  But I think when you choose the track you want and when you want to “own” that track, it is not a really viable model.  It’s all a question of what people think of as ownership.

And I think it’s pretty clear people do not want advertisers slapping ads on things they think they own.  Now - people might do that them selves (think the words “GAP” on any gap t shirt that people buy), but they don’t want it done to them.  For a couple examples - when a company gives you a free T shirt with their logo, you may or may not wear it (ie: OfficeMax)- but it’s not likely to become one of your staples.  Hmm - but the analogy breaks down - a t shirt is something you have - but it’s not really an experience, where music is an experience.

People don’t want advertisers inserting an ad into something that people own - that is experience based.  Think owning a car - if an advertiser (again like officemax) offered to give you a car painted with an officemax logo would you want it?  But wait - there is a better example - think going to a psychologist (any many people think of music as therapeutic); that is a relationship that the patient feels they own.  Now - do you think people would stand for it if every time the therapist opened their mouth to say something an ad came out first?  I kinda doubt it. They would rather pay for the experience than go through that.

Hence the reason that paid downloads are booming.  It’s just so simple - make all music available for download and give users a fun and easy way to get music they know they want, find music they will like, experience and manage their music in a way that works for them, and allow them to incorporate music into their social world.

I suppose people will try out Qtrax for a while, and some people will stick with it.  But at the end of the day, I don’t think it’s going to be a large segment of the music business - it’s just not they way people want to experience music.

Accepted into the AVF

Well - we’ve been accepted into the Angel Venture Fair to present to investors.  First round is March 13th, although we’ve been exempted since we’ve talked to a number of their investors already.  Pitch round is in April…  We’re getting closer!

How to change strategic direction

One of the greatest things about a small company and even better about a startup is the ability to change strategic direction - quickly.  Unlike larger corporations with large investments in human capital and infrastructure, a nimble startup can identify opportunities and action them fast. Of course, a large company typically has greater resources at their disposal, but also when there are greater resources, there is often less hunger. 

So - I think what that means is that smaller can be (but does not have to be) more nimble, and companies that are hungrier will move on opportunities.  Of course, being nimble and moving doesn’t do much good unless there is a vision to align to - you can’t just start swinging. When you have limited resources, you have to be smart.  And that’s where good leadership comes in:  being receptive to new ideas and new ways to do business, allocating limited resources effectively and moving quickly to maximize on delivery.

That’s all pretty basic strategy stuff of course, fine.  But getting to that point takes something else. Courage and inspiration.  Courage to follow your note and inspiration to get others to follow your lead.  Change does not come easily to groups, and you have to make sure everyone is on the same page.  

All this is to say - that’s what we’re doing right now.  We recognize that while rVibe is pretty well differentiated in terms functions, look/feel, benefits; we need to also differentiate further to be really successful.  Thus, we’re adding a segment to our business.  We were approached with an opportunity, we maximized that relationship, we extended it and started developing additional partners and we’re moving.

We’ll be able to announce more about our direction pretty soon - but suffice it to say - it’s both a new business that very very few others are doing - and no body like where we’re headed, as well a great fit into the rVibe ecosystem for music delivery.