Digital Distribution

9thX.com kicks off our Network Businesses series. For our purposes, Network Businesses are those that exploit unique features of the Internet in their business model. Often these businesses have a unique information asset that they are able to charge for. Further, they then exploit the network to make that asset even more valuable. This model lies at the heart of major upheaval in many industries.

As explained by John Bonaccorso, 9thX.com's CEO, the 9thX.com allows people to buy and sell digital media. They are an "end-to-end" solution that allows content producers and distributors to sell their content and receive royalty payments each time the content is resold. Some highlights from this conversation:

• 9thX.com allows content producers to be paid directly for their work. Most niche content producers have too small a market for an advertising revenue model to work.
• 9thX.com spends no money on marketing. All marketing is done by word of mouth through the web site and distributors.
• 9thX.com makes its money by controlling the digital rights management system that makes royalty-based payments possible. Each time an asset is purchased or resold, 9thX.com gets 5%.
• 9thX.com's computing infrastructure is supplied by Amazon's EC2 and S3 services.

In this 10 minute podcast (download iPod compatible, 51MB), Al McWilliams describes Quack Media's role in the multilayer filtering system that brings musical acts to the public's attention. Currently, Quack plays the role of an indie label, discovering local bands and then signing them to recording contracts where Quack pays a royalty on record sales.

A central issue in the music industry is that it has become harder to make money. In part, large record labels may have lost touch with their public and no longer provide music the public wants. In part, the rise of the mp3 (a free digital music format) may have taken the bottom out of prices in the music business. At any rate, Al feels that the classical model of monetizing music through record sales no longer works.

Al is currently experimenting with something he calls a music partnership and has signed a prominent local band, The Hard Lessons, to one such contract. At the time of the interview, Al would not go into details because the contract was still pending. Based on a read of Quack's website, the contract seems to be based on a fuller promotional package oriented toward events.

In this 9 minute segment (download iPod compatible, 47MB), Al McWilliams, Master of the Universe at Quack Media describes his role in making the business end of his small media conglomerate work. Al remarks that all entertainment media (e.g., publishing, video, and music) are "smashing together". This convergence is visible in retail and appears to be the motivator in large conglomerates like Time Warner with whom Al does business. However, the issue with large conglomerates is that the individual units do not always coordinate well.

As for Quack, it started by doing educational videos targeted at high school students. Now, he is moving on to the Internet doing videos for the online version of the Cartoon Network's Adult Swim. However, Al is unconvinced of Internet business models. Entertainment companies are putting in more money than they are getting out, and advertising revenues are adequate for only a few focused niches. There is a great mass of mediocre content.

Al believes that ultimately media, be it traditional or on the Internet, has to rely on trusted filters to separate the wheat from the chaff. In future segments, he will discuss how he is positioning Quack to be one of those trusted filters.

In this podcast (download ipod compatible, 175MB), Ron Suarez and I discuss his new venture, PromoVUZ, which took runner up in the Great Lakes Entrepreneur's Quest. In a sentence, PromoVUZ offers promotion and marketing tools for independent artists. PromoVUZ allows artists to track the audience that is listening to their promotional content and who is purchasing their songs.

PromoVUZ has partnered with Dick Huey of Toolshed, a digital media marketing firm, and Tunecore, a digital distribution firm, in developing and marketing his tools. Both partners also focus on independent artists. PromoVUZ and its partners offer tiered services to their clients with bargain basement entry level pricing. For instance, PromoVUZ will warehouse one song on the Internet for one year for $10. Tunecore and Toolshed have similar business models where they charge the artist for their services, often offering starter packages at very low rates.

Obviously, this business model differs from the traditional record label where the label signs an artist to a contract and then subtracts promotional and marketing fees from CD and other proceeds. As Courtney Love recently noted, the costs record companies charge back to artists are enough that most bands only earn very small wages for the albums they record if they earn anything.

When I asked Ron how he was able to do it for so much less, he pointed out that he had eliminated many middle layers that required significant compensation. It should also be noted that PromoVUZ has high technology leverage. Almost all of their entry tier services are fully automated, not requiring human intervention. PromoVUZ's more premium priced service offerings do require human intervention and are priced accordingly. Nonetheless, because of PromoVUZ's technology leverage, the overall cost still continues to be much less than may be typical of traditional labels.

Ron has an interesting background. Through an IBM program in the 1960's, he was exposed to computer programming while attending high school. Later he earned a doctorate in cognitive psychology at the University of Michigan, completing a post-doc and holding a couple of academic posts at nearby universities. During this period, he spent a lot of time automating the processing of wave form data and figuring out other ways to make lab work more efficient. He also briefly ran a Grateful Dead bootlegging operation (these were tolerated by the band which viewed them as marketing for their concerts).

When I asked Ron where he wanted to be in a year, he mentioned that he wanted to be in a position to sell the business. At that time, he thought he would be profitable from artists' fees alone.

Additional Links

• TuneCore, one of PromoVUZ's partners, was recently profiled in the New York Times.