Web Masters Episode #49: Jason Olim

Before Jeff Bezos Amazon took over ecommerce, the e-commerce market leader was Jason Olim and CDNow. So what happened? How did Amazon push out the incumbent? Find out on the latest episode of Web Masters.

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Jason Olim:

The story goes, whether the story is accurate or not is a separate question, the story goes that I really loved Miles Davis’s Kind of Blue. It was an amazing album, and so I went to the music store and I asked the guy there, “What do you recommend? I really love Miles Davis’s Kind of Blue” and he recommended Bitches Brew and it was a disaster for me. It was not the album I wanted. I should have gotten Sketches of Spain, and I thought I should have looked at a book. I should’ve looked up in a guidebook to see what they had to say, and it occurred to me that a computer would make that really easy. So I thought, well, why don’t I just put the catalog of reviews online so that people can search for them and learn about music, and to pay for it, I’ll sell the music at the same time.

So when they find the album they want, I’ll retail it and I’ll mail it out to them. So my initial plan was to, try to sell a couple hundred thousand dollars in music a year through this thing and have a business, and so I went out and licensed a catalog. I put it online. I found a wholesaler, one-stop wholesaler, who’s willing to ship the products out for me, so I’d have to touch them, and I put this thing up online on Telnet.

So it was a text only interface, and the idea started in February of ’94, and we went online in July of ’94, about six months later, and I remember telling a friend of mine about it back up at school, and he said, “Oh yeah, well, you should look at this web stuff. The web is really cool.”

And I had never heard of the web. So I mentioned it to my twin brother, who co-founded it with me, and he said, “Oh, I’ll take a look at it”, and a couple of weeks later, he put up a website. So we went from a telnet site to a couple months later doing the website.

Aaron Dinin:

The website was called CDNow, and it revolutionized consumer buying habits worldwide, but like any good revolution, it didn’t happen overnight. In fact, at the time, most people didn’t even recognize a revolution was happening, including to some extent the man leading it. His name is Jason Olim. He along with his twin brother founded CDNow.com, the website that ushered in the era of e-commerce. Are you ready to hear the story? Let’s get dialed in.

[INTRO]

Aaron Dinin:

Hi there. Welcome to Web Masters. I’m your host, Aaron Dinin. I’m a serial entrepreneur and I teach in the innovation and entrepreneurship initiative at Duke University. This podcast explores entrepreneurship by talking with some of the web’s most impactful early innovators. I love, love, love talking with people like today’s guest, Jason Olim, because he was literally inventing e-commerce. Seriously, when he started, things like digital shopping cart didn’t exist. He had to invent them. How cool is that? We’re going to hear his story. It’s pretty incredible, but first, I’m going to take a moment to tell you about this podcast’s incredible sponsor.

Web Masters is being brought to you in part thanks to the generous support of Latona’s. Latona’s is a boutique mergers and acquisitions broker that helps people buy and sell cashflow positive internet businesses, and other types of digital assets. A lot of the businesses, Latona’s helps buy and sell are related to e-commerce; things like Amazon FBA’s, Shopify stores, eBay storefronts, and traditional e-commerce portals. All businesses that can trace their roots back to the topic of this episode, but of course, those aren’t the only types of online businesses. You’ve also got SAS apps, content websites, domain portfolios. Basically, if you’ve got a business that makes money online, and you’re thinking about selling it, talk to the team at Latona’s, because they’re going to help you get it sold for a great, great price, or if you’re hoping to buy an internet business, you can see all the listings for businesses Latona’s is helping sell directly on their website. That’s latonas.com, L A T O N A S.com.

Of course, these days, most people don’t think twice about purchasing pretty much anything they need from a website, but realistically, this complete transformation of how people shop is a relatively new phenomenon. At the time of this recording, it’s actually less than 25 years old. Compare that for a moment to other historically revolutionary technologies. The first airplane plane, which would completely change the way we travel took place in 1903. So, we can’t talk to the people who revolutionized the travel industry. The printing press was invented in the 14OOs, so we can’t talk to the people who revolutionized the book industry, but we can still have conversations with the people who completely transformed commerce.

How cool is that? And we’re talking to one of the true pioneers of e-commerce today, Jason Olim, co-founder of CDNow.com. As the name suggests, it was a website that sold CDs, compact disks. For all you young people listening back in the nineties, we used to put all our music on these small shiny plastic discs. I know sounds a little crazy.

At the time, ordering your music online would have seemed even crazier. To give you an idea of just how strange it sounded, take a listen to how investors responded to Jason back when he was trying to raise money for his company.

Jason Olim:

An investor would say, but people love to go to the music store. They love to pick up the products and turn it over and read the track list, and they can’t do that on your website. Yeah, okay. Surely, they can, and some people will do that, but it was really hard to convince them.

I remember I talked to a partner at a really prominent venture fund who said, “You know what? That’s just a bad idea. You need a good idea. Like we just invested in a big box retailer where you buy 12, you get a 13th pair of shoes free.”

Aaron Dinin:

And how did you respond to things like that?

Jason Olim:

Like, oh, that’s a great idea. We didn’t have trouble getting people to use us. We had trouble understanding why they’re using us, but we just grew. We grew by a factor of three X. I mean, our second year in business, we did a couple of million dollars. In our third year, we did six million dollars. It was just growing of its own accord.

Aaron Dinin:

So basically the rise of e-commerce took place in a bifurcated world. Most people were like the venture capitalist, Jason was pitching. They didn’t understand much about computers or the internet, and they couldn’t imagine buying things, using a computer from their own homes, but clearly based on the early growth of CDNow, there was a whole segment of consumers willing to shop online. So who were those people? Well, I’m guessing they were people who grew up a lot like Jason.

Jason Olim:

I suppose I discovered computers when I was pretty young. They had some computers in my middle school and I was very excited by them. I can say might’ve been DOS machines. I took some computer programming class at the local little computer store, and I got myself an Apple 2 for my bar mitzvah, and that was really where I began.

I played a lot of computer games. I wrote a couple of computer games in basic and played with compilers, and generally was a computer nerd through high school, and when I got to college, I was planning to do Physics, but all the courses started at 8:00 AM, and so I looked at the science catalog to see what I could do and Computer Science that didn’t have a class earlier than 11. I said, oh, that’s what I’ll do. So, that was my major.

Then when I graduated in ’92, I was working for a software company that did email communications. It was called Softswitch. We did email routing basically, and that was again before SMTP, when you had SNADS on IBM to send messages from machine to machine. You had all these different protocols. There was X400, and we even thought that X500 was going to be the future addressing system. That was like the addressing standard, and we were working on something there when SMTP just took over and that was the end of it.

So, yeah, I spent some time doing automated routing for Telex in the IOTA format, the airline format for a Japanese company, a Japanese shipping company. So yeah, I was basically sort of immersed in the internet as a messaging platform for my first job, and that was when I decided to put a music store online.

Aaron Dinin:

If you didn’t catch a lot of those initialisms and acronyms and tech jargon that’s okay. The point is Jason was a tech guy who kind of naturally understood the internet and its benefits, and as you heard, for him, the idea of selling stuff online was obvious. In other words, he didn’t need any sorts of complex brainstorming sessions to come up with a brilliant startup idea. He just kind of decided to launch it because it seemed useful, and presumably his early users were the same way. They weren’t like the venture capitalists Jason was pitching. They didn’t need any crazy convincing that buying stuff online was a good idea. All they needed was well, to know where they could buy stuff, and that’s exactly what Jason gave them.

Jason Olim:

In our first month, we sold $316 worth of music, and that was nothing. We bought ads in a WIRED magazine that said Telnet CDNow. People responded to that. So, we got some response. Telnet was fine, but the web was obviously the big driver because it was about a two or three months after we launched the Telnet site that we launched the web and our business exploded from there. So we ended up doing a few hundred thousand dollars by the end of 1994.

Aaron Dinin:

Telnet, by the way, was an internet based protocol that proceeded the web by about two decades. It was an interactive text system, and CDNow was originally launched on that. So people would type the names of the artists and music they were interested in rather than clicking on things. So the first iteration of CDNow was incredibly primitive. However, even in that primitive form, Jason was proving that people wanted to buy things online, what he couldn’t figure out at first was why people were buying.

Jason Olim:

I think what’s interesting is that we didn’t understand why people were shopping with us originally. We thought it was because of the information and that sort of thing. We thought it was also the depth of our catalog, but actually it’s just a convenience. We were educated by our users as to why they liked our services because it was easier than going to the store.

Aaron Dinin:

So even in the earliest days of e-commerce, it sounds like convenience was the number one factor contributing to growth. Was that pretty much your experience?

Jason Olim:

The convenience of being able to shop for music without having to drive to a store, without having to see if they could find it, it was just purely, primarily the convenience play for users. So in the first place, it was the speed of shopping, the speed of the shopping experience, the speed of gratification. From the second place, it was the long tail and being able to find music, they couldn’t find elsewhere, and in the third instance, it was the ability to learn and discover.

Aaron Dinin:

How hard was it to convince people to enter their credit card info. I always kind of assumed most consumers were hesitant to share stuff like that in the early days of the web.

Jason Olim:

Yeah, it was, it was straight forward. Now there was this one funny moment back in, I don’t know if it was in March of ’95 when Netscape launched its browser, the 0.94 B version, if I remember correctly, which said when you submitted a form, please do not submit credit card numbers because it’s insecure. There was a day when that first showed up on the web, when the new version of that browser client had this built-in warning, whenever you submitted a form, it would warn you not to send credit card numbers over the internet.

Now, the reason they did that is because they were launching their $6,000 per instance, a web server that had encryption built in. So that was the first SSL encryption, but they warmed up the marketplace by putting that warning out there for a month or so before you could buy that server, and then obviously we had to buy the server, but meanwhile, it really had a big dent in our business cause it scared off customers, but it caused a panic in the press.

Aaron Dinin:

And what about PCI compliance and other regulatory issues for processing and storing credit cards? How’d you handle all that kind of stuff back then?

Jason Olim:

Probably poorly. We would capture the data and store it in our server, probably right in the user record. There was no sort of PCI standard out there for people to follow. It was definitely early days, wild west. So, I don’t know exactly how we did it, but I imagine it probably wasn’t done the right way. We were never hacked that we know of. You know, we were never defrauded in any meaningful way outside the company. Within we did have a customer service person sending products to themselves or giving themselves credits or something like that. I don’t recall the story, but we did have one time I’m aware of that someone stole from inside and it was meaningful. It’s like $10,000 worth, but otherwise, no, I don’t, I don’t remember ever being defrauded from outside or having trouble.

Aaron Dinin:

As you heard the value propositions of CDNow were basically the same as what people get with e-commerce today, and certainly enough people were willing to enter their credit card info on a website. The big difference between then and now of course, was that people weren’t used to shopping online. So how did customers discover CDNow in the first place? That’s actually a huge part of how Jason and his team truly shaped the e-commerce industry.

Jason Olim:

There’s a few things. One is we did buy ads in WIRED magazine and there wasn’t a whole lot of advertising web services at the time. We bought the first ad on the internet.

Aaron Dinin:

Seriously, That’s crazy. Tell us more about that.

Jason Olim:

We were the first people to buy an ad on the internet that I’m aware of. There was a company in Boston called Downtown Anywhere, and for a $100, this fellow up in Boston would make a little entry on downtownanywhere.com with your name on it and link it to your phone number or whatever it was that you wanted to have, and we said, well, you know, we have our own website. Why don’t you link to us? And he said, okay. So we paid him a 100 bucks and he had a link to our website on his website. That was the first ad that I’m aware of that anybody paid for on the internet.

Jason Olim:

I mean, if you remember, the HTP stands for hypertext transport protocol. The web was hypertext. The idea was you’d have strings of text and you would have links in the text. You could read Shakespeare and you could click on the word Bodkin and see what it means, you know? And so the idea that someone would pay money to have a link was just crazy. It really was remarkable at the time that it was remarkable at the time. So that was the first ad I think ever bought. That was about August or September of July or August of 1994. Then in October we invented affiliate marketing and.

Aaron Dinin:

Wait. You’re saying you invented affiliate marketing too? What’s that story?

Jason Olim:

The original affiliate program was BuyWeb. It was a linking technology where you would say link to this product, and this is who I am, and I get money if you make sales, is the original affiliate program. I know that Amazon sued to protect the idea that they did it first, but we did it before they even existed. We called it a BuyWeb link at the time, and we did it with Warner Brothers and Geffen Records. So on their Madonna website, there was a link that sent people to CDNow. It credited them with having sent the traffic and we used that to pay them an affiliate fee, and that was in October of ’94.

Aaron Dinin:

In case you’re keeping score at home, Jason just told us how CDNow bought the first internet advertisement and created the first affiliate marketing link. Those are of course, two huge milestones in e-commerce, and the fact that CDNow had to invent them should tell you something about just how early they were in terms of pioneering the e-commerce industry, and if those two innovations weren’t enough, CDNow can claim another important first in the world of e-commerce.

Jason Olim:

We actually also invented the shopping cart, the idea of stateful shopping. The stateful web didn’t exist. We got a call from the MIT media lab and they said, how did you do that? You know, the idea of preserving state was absolutely new. There were no cookies. You had no cookies. There was no way to leave anything on a client’s computer, and so what we had to do is we had to propagate our SID or session ID. We had to propagate a SID through every single web request. So when someone arrived in the site, if they didn’t have a SID, we gave them one, and every URL that we drew on the site had the SID embedded into it so that we could propagate it further, and that SID we used as the key to look up at our database for our service site cart.

Aaron Dinin:

And just for good measure CDNow also pioneered one other important internet phenomenon, though it wasn’t quite as successful for them.

Jason Olim:

We had this thing called Cosmic. All right. So, BuyWeb expanded a bit, and we developed a program where if you were a band, we would carry your music for you, and if you sent the traffic to us, we would give you affiliate credit, and we called that program Cosmic Credit, right? Cosmic Credit was basically BuyWeb for bands, and then Cosmic Credit, what we did was we gave you the ability as a band to not have to build your own webpage, but we would host it for you. So you could configure your own band’s webpage on cosmic.com, and so cosmic was a website builder where bands could upload their MP3s and share their music with their fans. And fans could interact with them directly through our website. So cosmic was really the first MySpace back in 1998. We didn’t know.

Aaron Dinin:

So there you go. CDNow also created the first, MySpace. Though CDNow was gone by the time that idea actually caught on, luckily for Jason, a lot of their other pioneering work did catch on and it led to enormous growth, not that it was all easy or enjoyable for Jason, and certainly none of it went according to plan.

Jason Olim:

It was definitely running around and trying to survive that for sure was the root of everything. You know, it was trying to make sure trying to understand what I was doing, trying to understand what was coming next. There was a not a lot of peace and quiet, man there was a lot of work. It was constant learning. Learning about just how to organize the business, and make a P and L, and manage cash, to learning how to hire people, learning how to manage people, learning about how to get outside investors, learning about going public, learning about dealing with the press.

I mean, I had to learn constantly every day. We went from two people, me and my twin brother, to 550 people including a subsidiary in Japan. It was an extraordinary learning experience, and so I just ran as fast as I could to keep up with it. Nothing was ever all along my plan. Anybody who tells you that it was all along their plan is telling you a story. Nothing ever happens according to plan. If you go back and talk to, look at, whatever anybody said back in the past, it’s not the same thing they say now. My founding story is a story. It’s always a story. Nobody ever understands what they have, and certainly at that time, nobody understood what was coming.

Aaron Dinin:

So are you saying in that moment, the moment of building CDNow, you didn’t recognize the bigger shift taking place in commerce across all industries?

Jason Olim:

Yeah. I mean, I think I may have been more myopic than I should have. I mean, Jeff Bezos got it right. You know, he had the right idea and I missed it, which is that if you can buy one thing, you can buy anything. The idea of a special purpose music store doesn’t really make sense, and I didn’t appreciate that at the time. I thought that being a music store was enough in a consumer’s mind that they would prefer to shop at a music store. If convenience really was the primary factor, then we should have gone beyond music, but we thought going deep into music was the answer.

Aaron Dinin:

In terms of learning about entrepreneurship, this is probably one of the most important lessons in Jason’s story. Hindsight allows us to look back and recognize that CDNow was ushering in a much broader cultural shift toward e-commerce, or as Jason noted, once they were helping people buy music online, why not help people buy other things too? That would have been pretty smart, right?

That might be easy to see in retrospect, but when you’re an entrepreneur scrambling to manage rapid growth, it’s actually the kind of thing that’s not so easy to recognize. Instead, you’re focused on growing your core business, which is exactly what Jason did. He focused on music and it worked pretty well for a time until early 2000 when, well, a lot of bad things happened for a lot of web entrepreneurs.

Jason Olim:

So we went public in ’98. We grew to a hundred and something million dollars in revenues, and then March 15th happened in 2000 when there was an article in Barron’s, which said these 10 companies are going to run out of money, and one of those companies listed was CDNow. Now, it was inaccurate. It was wrong. We weren’t going to run out of money. I don’t know why they chose to put us on that list of 10 companies, but they put that article out, and the next thing you know, the entire market tanks within two weeks. The whole market falls apart. We had just come out of a failed merger agreement with Sony and Time Warner. The Federal Trade Commission blocked the deal because they didn’t want to see Warner and Sony on the same board together, so they blocked this billion dollar plus deal.

And then this article comes out a few days later and boom. It’s the end of the world, just collapses. So a bunch of people I know, their businesses went under. They had nothing, and we decided that our best move was to sell the company, and so we put it out in the market. Our stock price had collapsed at that point, and that was when Bertelsmann came in and bought us, and they took us private,, and tried to run it for a couple of years and didn’t get the hang of it, and then sold off the assets.

Aaron Dinin:

So looking back on all this, you still had good revenues and a huge customer base, and you had all these pioneering technologies like shopping cart technology, and affiliate marketing technology. So what happened? Why weren’t you able to capitalize on any of those things and become Amazon?

Jason Olim:

Myopia. We had a hammer and everything was a nail to us. We didn’t see all of the other opportunities that were ancillary to and easily, easily accessed, but you know, neither did anybody else, so we missed so many great opportunities. Amazon got it. I mean, Jeff Bezos, he said, “I’m going to be the first store to get to a billion dollars within five years”, and he did. So he saw himself as coming along to replace Sears, who took 100 years to get to a billion dollars, and there’s Walmart took 20 years to get to a billion dollars, and Amazon was going to get there in five years, and so he got it. He figured that out. He started with books, but he figured it out around the same time that we went public, that it was a bigger play.

Aaron Dinin:

I feel like a lot of entrepreneurs talk about the value of being first into a market, first mover advantage. It kind of sounds like maybe being first is actually a lot harder because of the number of unknowns. Amazon was able to come behind and correct some of your mistakes. Is that kind of your sense of the issue with pioneering and industry?

Jason Olim:

Well, we would definitely talk about first mover advantage. I don’t think I necessarily felt in my bones a first mover advantage was a thing because we had to solve problems every day, and I think I made a joke more than once that it’s the pioneers who get shot in the back. It’s easier in many ways to be a fast follower, and there were followers. There were people who tried to do what we did with coming at it with more money or a different approach, but we maintained our leadership until eventually Amazon took over. We maintained our leadership for five years. Part of it was because we were already there and entrenched, but most of it was just hard work every day, blocking and tackling and trying new things.

Aaron Dinin:

And as Amazon was coming up behind you, did you ever look over at what Jeff Bezos was doing and think that guy, what an idiot?

Jason Olim:

Nope, No, no, no, no, no, no. I remember being impressed by him from the first time I met him. He laughed all the time at everything you said, which is a great, great trait in anybody. He was really delightful and super smart, and I was really impressed from the beginning.

I was a dumb kid doing what I was doing. I don’t think I ever looked down on anybody. Now I look back on it and I can think, oh, the guy buying all the internet words to start with the number four, that wasn’t good, but it was very tricky to know who wasn’t going to make it and who was. Everything was up in the air. Everything was up in the air. It was just, it was astonishing.

Aaron Dinin:

That’s what it’s like when you’re pioneering an industry. Nobody knows what’s going to work. Everything is up in the air, and as an entrepreneur leading the charge, you’re just trying to make the best decisions you can. That’s what Jason did, and well, you’ve got to admit he did a pretty good job. After all, the concepts he and his team invented things like affiliate marketing and shopping carts are the backbone of the e-commerce industry today. Yeah. Maybe it’s not quite as cool as building Amazon, but it’s still pretty darn impressive, and do you know what else is impressive? This podcast series. Am I right? So as we wrap up another episode, why don’t you take a moment and share it with some friends so they can be impressed too, and while you’re at it, if you wouldn’t mind, leave us a nice review wherever you get your podcasts from.

Those really help us out as we try to spread stories like Jason’s to more people. Speaking of which, I want to thank Jason for taking the time to share his story with all of us. I also want to thank our audio engineer, Ryan Higgs for pulling together the episode and our sponsor, of course, Latona’s. They deserve thanks too. Remember if you’re interested in buying or selling an internet business, don’t forget to check out Latonas.com.

If you’re interested in sharing feedback on this episode, remember you can find us on Twitter. We’re @WebMastersPod. I’m on Twitter too — @AaronDinin. That’s A A R O N D I N I N. You can also check out all my articles and other work related to entrepreneurship over on aarondinin.com, and that’s all we got for you on this episode, but don’t worry. There’s more coming soon. Go make sure you’re subscribed so that you get the next episode as soon as it’s released. Until then, well, it’s time for me to sign off.

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