We're digging a bit deeper today with Dan Faiman, CEO of a music industry-targeted start-up, and a partner in a new incubator targeting the mobile app space.
Despite what some think, Dan doesn't agree that tech is in a bubble, and he tells us why towards the end of the interview. He also talks about the pitfalls of social media, and the benefits of the incubator model.
Mark: Let's talk about specific niches... The music industry in particular has had it rough the last 15 years or so. First Napster comes out and pretty much destroys the old model. Other than "vintage" record/CD stores, the neighborhood music store is history.
Then along comes iTunes, which further decimated the CD business. Why buy a whole CD when you can download and create your own for the same price, song by song, with nothing to stick on a shelf and collect dust?
YouTube music video views now trump the actual sales of the songs themselves... It's all digital downloads and "free" promotional content. How do the artists and labels make their business work?
Dan: This is the million dollar question in the music industry. How DOES it make money?
You have legacy artists who want royalties on album/CD sales over the last 30 years, and you have new artists who's popularity is based on YouTube views.
If you look at the numbers of YouTube views for any artist, new or old, and compare that to album or single sales they don't add up. An artist can log hundreds of millions of views on a social media platform and barely sell a million units of the song on iTunes.
The reason this happens is access to content and the value that's placed on it. There's a disconnect between the world of walking into a CD store and making a purchase, versus playing it on your iPod instantly. The new generation grew up in the world of "free" and digital. The older generation remembers the days of albums, and liner notes.
The digital space has taken the idea of music being a tangible item that's purchased as a CD, and reducing it down to a single click on a computer screen. Nowadays it's a singles market.
Young people don't buy the entire Ke$ha or Britney Spears album any longer. They view the music space as a spoon-fed experience. "Here's the song that's popular, you should listen to it since 'we' the labels put down millions of marketing dollars to tell you that you should like it."
Unfortunately not every song is a hit, and the labels don't have the funds to market an entire album piece by piece. When they select 4 songs off a Rihanna album, most likely those are the ones being purchased. You also have artists adapting to this consumer thought process, and artists who refuse too.
Linkin Park, Coldplay, and Springsteen, want you to experience their music as a whole and tend to develop this idea in the early stages of pre-production of their album cycle. The pop singers are one-offs, they work with "grand slam" producers to get them a few hits, then add filler to the rest of the album.
The execs, and label regime view the music vertical as an albums industry. Unfortunately it's not, and this is why the machine isn't working. Consumers have adapted to instant, in your pocket singles from iTunes, videos on YouTube, and free streaming on Spotify.
Friends of mine at the labels are taking meetings with artists we've known for years that just can't sell albums, but the executives above them are saying, "sign them for a few million anyway." In reality, no one is arguing that this is the wrong approach, but they'll never recoup their investment from consumers downloading "free" or $1 singles.
Mark: That seems crazy to me, but I guess that's exactly what's occurring now.
Unfortunately the answer to your question "how do they make their businesses work?" is that they aren't. They're grasping at straws trying to stay afloat, using old business models that worked 15 years ago, refusing to adapt to new technology.
Mark: What's the problem as you see it?
Dan: It may be more a "political" issue. There is still a lot of bureaucracy at the labels. You hear stories about how Steve Jobs walked in to these execs and said, "I'm not here to listen to you, I'm here to tell you what you're doing wrong, you had your chance." He was right. You can't have guys at the top who don't understand Twitter, Facebook, or Last.fm.
It's a much different consumer nowadays, they're personal, intimate, in your face, and accessible. Before the days of the Internet, engaging with your favorite artist, having the opportunity to meet or speak to them was highly unlikely. Now it's a simple tweet or comment on a blog.
Mark: So what are these guys missing?
What the labels aren't seeing is that they can cut their costs in half by embracing the tools already provided to them, and doing away with the concepts that worked for Generation X.
Today's fan is mobile, intuitive, and willing. You have a more intimate relationship between the artist and fan than ever before, and it's only becoming more so. We know YouTube views don't translate to sales, so adapt the artists expectations to what is feasible.
Million dollar contracts are a thing of the past. You try to scoop an artist for a 360 deal, but we have smarter musicians saying, "well I don't want the label getting a piece of everything I do," but in return the label is saying "you need us." Why do they need you?
The musician has access to his fanbase across social networking platforms now. They can record an album on a Macbook Pro, mix it with software and push it through Facebook, Twitter, etc. What exactly is it that the label is providing? Marketing, and funding?
Mark: Yeah, I mean have these guys ever heard of Kickstartr? I've seen bands fund their tours over Kickstartr and other crowdfunding platforms.
Dan: Exactly. But if you're not a big name act the lables pitch is still extremely enticing. Guys like Coldplay and the Foo Fighters could ditch their label deals and still sell out MSG and Staples every night. Someone playing at the Coffee Bean is going to have a harder time growing his fan base, or "brand" without help. You can become an overnight sensation on YouTube but that doesn't mean you're generating enough money to feed yourself.
The labels and artists need to embrace their fans, technology, and the ability to budget. With the new social media tools the fan is capable of marketing an artist like never before. Incentivize and cultivate a relationship where the fan clubs are motivated to work for their artist; live and breathe the music their listening to and focus on viral marketing and increasing the bottom line.
If the artist is actively Tweeting, fans feel like they have a personal relationship with the artist. For the 15 seconds you have the fanclubs attention, why not look for ways to increase that time to 30 seconds or even a minute. Those blips of a second are years in Cyberspace. A simple click from a fan allows for instant marketing on a global scale.
Mark: Without letting the cat out of the bag, per se, tell us about some other niches that you think are exploitable short-term. What's the next big thing?
Dan: I'm really fascinated with niches that haven't evolved in many years.
Take for instance a deli meat slicer. You order a half pound of roast beef from the guy behind the counter, who then "guesstimates" how many slices are in that half pound. Usually he overestimates by a slight margin and asks if that's "close enough." The consumer almost always says yes.
I understand the stores make a tiny profit on this "user error," but why not just put the scale inside the slicing machine? Taking an old technology and bringing it up to speed can be highly lucrative.
This is the same for the technology space. Craigslist, travel websites, auction platforms, security systems; every new "idea" like that is just a pretty disguise for something the consumer has been using for 30 years.
The "next big thing" is tough to pinpoint. I really like the idea of communicating with people around you in a way that enhances your interaction, rather than systems that allow you to "check-in" to places. What if you could generate a relationship on a platonic level with people in your neighbourhood, or surround yourself with individuals with similar interests using a mobile app?
I think the Facebook's of the world are fantastic, but I want to interact with people who also love the drums, sports, building cars, or technology. Today's social networks don't drill down to the small details. They attempt to, but they are overly-cluttered with noise. There's a niche site for almost everything, but you're not going to join yet another social network just to talk to your friends.
But what about an app that connects you with people who can benefit you in some way, or add value to your life, whether it be at home or business..? In fact, we're working on a new platform that I'm excited about that helps develop those relationships; the ones that are more useful and beneficial to the end-user. It's in stealth mode right now, but the idea is based on helping small communities prosper together, both individuals and local businesses.
Mark: Yeah, I think that makes a lot of sense. I recently cancelled my Facebook account. I don't need to hear about every goal your six year old scores at their soccer game on Sunday, or how you got a sunburn at the beach or found canned tuna on sale at Safeway. Sorry, I just don't give a crap (laughs).
Dan: Right, you hear that a lot from people on Facebook, Twitter, etc.
Mark: What else?
Dan: I think the video chat space is still new, you have systems like Google + creating chat room environments, chat roulette really, that attempt to connect you with strangers. Skype that lets you talk to your friends and family across the world, and more.
But I think the use of video as a social networking platform is about to evolve in a new and exciting way. Users still aren't comfortable with the intrusion of a video camera while at home, but the way mobile has evolved I think we're about to experience video as more of an everyday social tool.
Lifestyle apps are on the rise as well. You call for a taxi via phone, but you could summon one using an app just as easily now. There are small barriers to entry with a lot of these types of apps. Targeting consumers while on the go, whether their wandering aimlessly around Vegas without a plan of attack for the evening, or just looking for a nearby restaurant.
I think apps that relieve the stress of the social environment, or address on-the-go needs will be huge. I don't see any that have attracted the customer base to drive profitable businesses in and of themselves, so it's still wide open.
That's some of the stuff we're working on, and we're excited about it.
Mark: So that leads me to my next topic. You're involved in an incubator now as well. In full disclosure to our readers, Chris and I are also involved. Tell us why that model works in your opinion?
Dan: That's easy to answer, it's the right time. Low cost barriers to entry for start-ups, great valuations, increasing revenue streams, development outlets - all these things are converging to create a perfect storm.
The app world is booming at an alarming pace, time to market is key and the competitive landscape gets tougher by the minute. A few days are "dog years" in the tech industry. You have to be prepared not only from a development stand point, but also with many other contributing factors in order to launch a successful business.
Many entrepreneurs tend to overlook some of these things. It's that "oh sh*t" moment when they realize they're under-staffed and under-capitalized. With an incubator we can minimize the noise, trim the fat, complete the due diligence in advance and provide the resources all start-ups struggle with.
I've always considered the incubator model to be a fantastic idea, but I think it needs some refreshing. There's this new stuffy aura to incubators, most of which I feel turn off the entrepreneur. On paper it looks wonderful, then you realize you're one of hundreds and not receiving any focused attention. If it works, great, fantastic; if not, there's 5 more start-ups coming in behind you.
You hear more sob stories from incubators than success stories. I've been in start-ups and technology for years. I owned a web design firm while in college and grew that into an SEO firm, and eventually into an e-merging technologies group. There's an immense struggle as a start-up to access the resources necessary to become successful.
Mark: You mean you don't just walk onto the set of Shark Tank and you're off to the races.
Dan: Well I guess that works for some (laughs).
I want to throw away all the stuffiness of the incubator and get back to creating solid ideas, with a great foundation, in-house to give the entrepreneur the attention they deserve.
For example, start-up weekends are exciting, fly by the seat of your pants productions. They're kind of like rock festivals for the tech industry. Why not bring that same feel into an incubator? Set the pace, expectations, and time-frame and hold the start-up accountable.
We receive ideas all day long, but what I don't see is a plan of execution in most cases. When I was running the e-merging technologies group, we'd take on tech projects where no one had any business experience, and have business experts come to us with no technology expertise. There were constantly 1 or 2 pieces missing to the puzzle.
Start-ups need incubators where all the puzzle pieces are within arms reach, otherwise 75% of your time is wondering what to do next when you could be focused on getting the best product to market.
Money is being thrown into this sector like never before. Like you guys, I personally feel the risk of putting your money into a corrupt and manipulated public financial market is worse than sitting down at the tables in Vegas. The risk is exceptionally high.
Who is profiting in the buy and hold game any more? When I look at my portfolio, half the time my stocks are up, half the time they're down. It's incredibly frustrating, and I have no personal connection to the company. I can't simply walk in and say, "hey this is what you're doing wrong."
The start-up used to feel like a scary black hole an investor was throwing their money into. This is a hurdle incubators were designed to relieve. It allows investors to inject their money at the best possible time. I think the new generation of angels want a closer relationship with their investments. An incubator still has risk, but at least you can pilot the ship to some degree.
Mark: But what about the risk of a market top. We talked about Apple trading at highs, Google, the Facebook IPO. To some this screams market top.
Dan: Incubators aren't perfect, and I'm not saying every idea is an acquisition deal waiting to happen, but despite what people are saying, there's no bubble right now.
What we have is a booming industry with valuations that are starting to stabilize, and companies that are highly profitable. This isn't 1999, where a company generating little to no revenue would turn around and sell for multi-billions. The dust has settled. Companies are putting revenue on the books and getting healthy valuations. I think this excites investors and intrigues people who are tired of playing the markets.
As I said earlier, within the incubator setting you're allowing ideas to cultivate. People working side-by-side, bouncing knowledge and experience off each other in a team setting. The costs are low, the pace is fast, and an investor can typically see a tangible product to market within a year at the absolute latest.
I know first hand the struggles a start-up goes through, whether it's funding, development, putting a team of advisors and executives in place or the panic of wandering aimlessly and frustrated. My partners and I collectively have 50 years in the tech sector, and have put together all the resources a start-up needs to prosper.
I get excited at the prospect of putting my money into an early stage company where the opportunity for a 10x or 20x multiple is at its highest. Minimize the gamble, the concern, and the struggle, while maximizing the chance for success.
Mark: That's great stuff Dan, thanks for talking to us.
Dan: You're welcome, any time.
Chris and I agree with Dan's views on the incubator model, and we've talked about it quite a bit over the last few months.
We backed Dan's music industry targeted start-up, and we're also participating in the incubator project. We don't know how many home runs we'll hit, but a few base hits will be just fine.
If you've participated in incubators or have any wisdom to share, please leave us a comment below.
"The Internet is a great way to get on the net." - Bob Dole
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Chris and I have invested in two private companies that Dan is associated with. Neither company trades publicly at this time.