Web Masters Episode #79: Michael Robertson


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Michael Robertson:

We’ve all seen these lists of the most searched for things, right. [inaudible 00:00:07] it’s Britney Spears. Those lists are fun to watch, but I would make the case that people always look at the wrong end of the list. Because if they’re an entrepreneur and the businessman what’s interesting is not what’s at the top of the list, but what’s at the bottom of the list that was never on the list before. Because as an entrepreneur, that’s when you have to take action. If you’re reading it, “Oh, it’s a top search query.” You’re too late. That train is left the station. There’s other people who are already leading that. You need to find something that’s on the list and rising and has never been on the list before. So, that’s exactly what I would do at Filez is I would watch what people were searching for.

Aaron Dinin:

That was Michael Robertson. He ran an FTP search engine, a search engine specifically for finding files back in the mid nineties called filez.com. That’s F-I-L-E-Z.com. And while he was running it, he noticed an increase in people searching for a strange new type of file, a type of file he’d never heard of.

Michael Robertson:

I started to see people searching for this thing called MP3. I’m like, “MP3? What’s that? It’s just some constants and a number.” And so I go, research it and I realized it’s a new audio format. And for those people who don’t know, in the early days of the internet, there was audio pioneered largely by real audio [inaudible 00:01:32] real audio, but it was very little quality. So, it kind of sounded like [inaudible 00:01:38]. It was audio. So, it was amazing. There was audio coming out of your computer, but the quality, the [inaudible 00:01:44] was very low. Well, MP3 changed that because what MP3 did was through some very clever engineering and heuristics, they took these audio files, which were so big that you normally have to squeeze them down to get them onto the internet and make them sound bad. They could squeeze them down, they would still sound really good. And that’s why MP3 was so astounding because I remember hearing my first MP3 and going, “Oh my gosh, this sounds great. This sounds like a CD. This sounds phenomenal.”

            And I knew right then like, “Oh, this could be a great traffic source for Filez. That’s what I thought about it. I’m thinking only about how do I get more users to filez.com because I have this model where people do searches. They see these targeted ad. We make money. So, if I just get more traffic to filez, we’re going to have a big success here.

Aaron Dinin:

And this realization did indeed lead to a big success for Michael. It just wasn’t the success he envisioned for filez.com. Instead, Michael’s big success became MP3.com. Are you ready to hear the story? Let’s get dialed in.

[INTRO]

Aaron Dinin:

Hi there and welcome to Web Masters. You are listening to the podcast that teaches about entrepreneurship and internet history by sharing the stories of the digital revolution, as told by its most impactful participants. I’m Aaron Dinin. I’m a serial entrepreneur. I teach entrepreneurship at Duke University and of course, I am your host. On this episode, we’re going to dive back into one of, I think the most interesting topics in internet history, which is the evolution of digital music. And it’s interesting because of how contentious it was. If you were an entrepreneur playing in the digital music space, back in the early days of the web, there was a good chance you were going to get sued big time. And of course, you were the villain.

            For example, that’s what happened to Peter Sunde, founder of The Pirate Bay, who we spoke with back in Web Masters episode number 10. And it’s also what happened to Michael Merhej, founder of Audiogalaxy, which we heard about in episode number 23. It also happened to this episode’s guest, Michael Robertson, but as those other episodes also taught us there’s two sides to every story. And even though Michael and MP3.com were portrayed at the time as evil, intellectual property thieves, hindsight might tell us a different story. It’s a story we’re going to hear right after I tell you about this podcast’s sponsor. Web Masters is being brought to you with support from our sponsor, Latona’s.

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            These days, the website MP3.com is basically nothing useful, but for a brief time, MP3.com was the most popular music website in the world. Even more impressively, it accomplished that in spite of not getting any early buy-in from the powerful music industry who as you’ll hear thought digital music was a fad and believed everyone preferred to own physical copies of their songs. Huh? Yeah. Right. However, what the music industry couldn’t see this episode’s guest, Michael Robertson did see. He saw it in part because he was an entrepreneur and as Michael argues, entrepreneurs are naturally good at seeing the future, which allowed him to place a bet that the music industry wouldn’t.

Michael Robertson:

One of the big advantages that entrepreneurs have is that they often do see the future before others and they’re willing to place bets. And I knew with 100% conviction, that music was going to go fully digital. The benefits were just so enormous. And I tried to convey that and I remember saying, “Hey guys, imagine if every computer was a taco stand. I’d say you’re in the taco business. And then like every person had a taco maker in their own house selling your tacos. Would that be a good thing for your business?” They’re like, “Yeah, of course.” I’m like, “Well, that’s what it’s going to be with music.” And they just couldn’t get there. For entrepreneurs, it’s a two edged sword. Yes, it’s bad because they’re not going to partner with you, but it’s good because they’re going to be asleep and you can go seize that opportunity. And that’s exactly what we did while their reticence prevented them from doing anything MP3 was growing and growing and growing and growing.

            And pretty soon we’re the number one music website in the world with no music from the record labels. I mean really astounding that we were able to do that considering the dominance, that major record labels have.

Aaron Dinin:

So, before we get into the story of how Michael managed to successfully build MP3.com, let’s step back a bit to see if we can understand how Michael became an entrepreneur and develop the skills necessary to, as he says, see the future.

Michael Robertson:

I grew up poor, classic broken family, single mom, four kids, story that you’ve heard a million times. And I hated being poor. It was really tough. I went to tough high schools. You know, the classic stuff, you have holes in your jeans. Kids make fun of you because you got old clothes and stuff like that. So, I hated being poor. I sort of had in my mind that I wasn’t going to be poor. And to me, when I looked around and said, well, what do you have to do to not be poor? It was kind of obvious. Well, you start your own business.

Aaron Dinin:

That’s kind of a strange start to becoming an entrepreneur because I usually tell people, entrepreneurship is actually a terrible strategy for getting rich. I mean it can work, but there are strategies with much better odds. So, I’m actually a little surprised you turn to entrepreneurship.

Michael Robertson:

It was out of necessity. We didn’t have money. I remember going to the refrigerator and opening it up and there’d be like a can of pickles and two heels of bread. That was it. That’s how poor I was. I hated being poor. So, I knew I needed to work to get money. And they told me, you need to get a work permit from the government. I’m like, wait a second. I got to get a permission slip from someone to be able to work, to feed myself and my family. This is crazy. But I knew that if I got biscuits from the grocery store, you know those little popup biscuits that come in the roll, you hit them on the counter and they will pop and you can bake them. Well, I would make them into little donuts and I would take them around the neighborhood and sell them. And I didn’t need a work permit to do that. I would take them, drop them in hot grease, roll them in cinnamon and sugar. And then I’d go sell donuts door to door in the neighborhood for money.

            To me, it was a necessity like, “Oh, if you want to make money, when you’re young, you can’t work formally, you have to create your own business.” To me, business was the way. I would agree that it’s not an efficient way to get rich. When you’re starting a company, it’s very risky, most businesses fail. But, if you look at all the wealthiest people in the world, they all pretty much for the most part, started their own business and took that enormous risk.

Aaron Dinin:

All right. So, entrepreneurship was a high risk, high reward way to get rich. Yeah. I guess I can buy that. So, how did you move from the selling homemade donuts version of entrepreneurship to tech entrepreneurship, which you saw as having much bigger upside I’m guessing. Usually for most of my guests that seems to happen somewhere around college. Is that the case for you?

Michael Robertson:

I went to UC San Diego. I applied there totally as a whim. My best friend in high school said, “Where are you going to college?” And I was like, “Ah, where are you going to go?” And he said, “UCSD.” So, I applied there, thankfully they let me in. It was the only college I had applied to. And so I went down to UCSD and I liked computers, but I wasn’t a great student, because I was working too. So, I had like a B plus average in high school, but I was working 35 hours a week. I moved out when I was 17. So, I’m living on my own and thankfully UCSD wasn’t quite as hard to get into and I did well in the SATs. So, they let me in, I liked computers, but I didn’t have the grades to get into computer science because that’s an impacted degree.

            So, I ended up in a field called cognitive science, which was a brand new field, sort of the godfather of cognitive science is a guy named Don Norman and he started at UCSD and I realized that if you took cognitive science, they still let you take computer science classes. So I’m like, “Oh brilliant. There’s my hack, you know.” And so that’s how I sort of got into the computer era. And I was fortunate because UCSD had one of four supercomputer centers. So, the Federal Government was funding these large computing places where researchers could apply to get computing time. Back in the nineties, late eighties, early nineties, computing was really expensive. And if you had a big job, you wanted to look at atmospheric data or neural imaging or something like that, it was tough to find computing. So, the Federal Government basically paid for four computing centers, supercomputer centers. And I ended up working at one of them, which was San Diego Supercomputer Center as like an intern, as like a desktop support guy and along comes NCSA Mosaic. This was one of the first web browsers.

            Well the NCSA, was who made the Mosaic web browser that was Andreessen of Andreessen-Horowitz, everyone knows him or most people do if they know the history, and NCSA is a sister center in Illinois. So, I remember being at San Diego Supercomputer Center and they’d have presentations every once a month or something. And one was about the worldwide web. And I remember sitting there watching this guy, look at this page of text, “Look, when you click on a word, it goes to another place.” It was literally like very rudimentary. There were a few web pages to go to. So, it was very conceptual, but I remember looking at it going, “Wow, that’s pretty interesting.” And so, I like to think that because I was there, I had like a front row seat on the invention almost of the internet.

Aaron Dinin:

So, you saw the early web, thought it was interesting and then what? I’m guessing, that’s what led you into tech entrepreneurship?

Michael Robertson:

Right. So, I was working at the supercomputer center and my duty there was to set up our internet, was to put desktops on every desk and teach people email. Email just first come out and then there was online calendaring and some other stuff like that. And this was all really cutting edge stuff, because this was like early nineties. And when Macintosh started making the ability to interconnect computers, I said, “You know what? This is kind it risky. Because what if the HR lady accidentally shares the folder with all of the spreadsheets that have everyone’s pay in it?” And so, I decided I was going to write some software that would scan a network looking for vulnerabilities, so that administrator could proactively go in and change something to make it secure. So, I wrote some software called network security guard and I started selling it and I started selling it all over the world to anyone that was deploying large groups of Mac computers.

            I saw the need there. And then I went and wrote the software. And to me, by this time I was in my early twenties, but I had done enough businesses to know that selling donuts door to door is not the way to get rich because you need scale, right? You need something that you can do once and get paid for repeatedly. And software was something that made sense to me in what would’ve been the early nineties. So, I actually created a company called MR Mac Software. My initials are MR, right, MR Mac Software and made several security type software programs that sold. And that’s actually how I lived and bought my first house. And I ended up taking a second out on my house to start MP3.com. And so, a lot of that goes back to that first software company that I had started.

Aaron Dinin:

How does a security software company lead you down the path toward a giant music company? Those two things don’t seem particularly related.

Michael Robertson:

No. What happened is, so I saw a digital camera. It was Apple Quicktake. It was almost laughably huge. They’re almost like binoculars, right. And they could store, I think it was eight high res images, but it was the first digital camera that was like a consumer focused thing. And I looked at it and said, “Oh my gosh, this is going to change everything.” Because if you come from a world of film and taking it in and getting it developed and stuff like that and moving to where you can just click-a-click and you have the pictures and stuff like that. I said, “[inaudible 00:15:35] going to change everything.” And so, I started a company called Media Minds and we made picture album software. I was like, “Well, people are going to want to store their photos online and share them and organize them and send them to others. And so let’s make software that does that.” And so, I started a company called Media Minds and we made photo album software. And for the most part, it was a failure.

            What I learned there is that I was a hundred percent right in what I saw, but as is often the case with entrepreneurs, they’re overly optimistic about the timing. So, it’s not enough to be right when you’re talking about a new technology trend, you have to have the timing right. If you’re too early, you’re PalmPilot. You have this great idea and everyone’s going to walk around with a little device, but you sort of flame out because you’re too early, your mind outran the natural technology development. And that’s what happened with Media Mind. So, it failed, but it wasn’t because digital photography, wasn’t going to totally radically change how we capture photos, it’s because it was still too early. That Quicktake was too expensive. It could only store eight photos, high res and moving photos around was really laborious and still storage was too expensive, but that was an important lesson to watch for the timing.

Aaron Dinin:

Worth noting. This is a very important lesson. Timing is critical to entrepreneurial success. We heard a similar story, even in relation to digital photography when we spoke with Raj Kapoor of Snapfish back in Web Masters episode number 27. Snapfish, you might recall eventually succeeded as a digital photo album and storage business, but only after it nearly failed because it was too early and Raj had to give up most of his ownership in the business just to keep it afloat. So yes, new technologies change the world and those changes are often easy to predict, but the speed at which those technologies mature, is much harder to predict. And it’s caused plenty of businesses to fail, including to some extent MP3.com, which is what we’re going to hear about. But first let’s find out how Michael got from a failed digital photo company to the world’s most popular music website.

Michael Robertson:

So from there, I really liked search engines. So, I started a search engine company called filez.com, F-I-L-E-Z. Back in the mid nineties, the web search engines, they didn’t index FTP servers. So, what I mean by this is that if you wanted a file, an actual software program, an image file, a sound file, those were not on web servers. They were on a different type of server called an FTP server. So, if you went to Lycos or AltaVista or one of these search engines from the mid nineties and you typed in, I want a picture of a doc, or I want the latest PalmPilot software, or I want antivirus or something, you wouldn’t get any results because they only index web servers. And all these files were in a different type of server called FTP servers.

            So, I created a search engine called filez.com, F-I-L-E-Z.com. And we would index all the FTP servers around the world. So, when you wanted a software program or an audio file, you could go to filez, type in I want the sound of a train and you would say train and make it audio. And we would show you the matches from servers all over the world. I love the search engine business, and we were really ahead of our time there. And I’ll tell you why. I was like, how could we make money from this? And I had this idea that people were just trying to sell products online. One of the earliest stores was called The Cyberian Outpost, Cyberian, C-Y-B-E-R-I-A-N. And they were selling technology stuff.

            And I started thinking, “Well, wait a second. What if I got enlisted everything that they sold in their store, on their online store?” And when someone did a search on filez for say PalmPilot, because they’re looking for the latest updating software, I could say, “Hey, you could buy a PalmPilot case or you could buy a PalmPilot three because I was matching it to inventory from The Cyberian Outpost. And so, I went to The Cyberian Outpost. I said, “Hey guys, I want to charge you 35 cents per click. You only pay me if they click and they go to your store and you’re going to get really qualified traffic, because people are going to want to buy whatever they click on. Because the only reason they’re they’re clicking is because they did a search that’s related to what they’re interested in.”

            So, The Cyberian Outpost loved the deal and gave me a copy of their inventory. I matched the search queries and we saw 37% click through. Because it was the first time where you did a search and then you would see up at the top, “Hey, are you interested in buying some stuff? Here’s some matches for what you typed in.” This is before Google, that started making money.

Aaron Dinin:

Would you mind giving us a sense of just how big filez.com got?

Michael Robertson:

I remember I had done like 50 partnerships with anyone to put our search box for filez all over the internet to try to get users. And I had worked so hard. Of course, the internet was a little tiny spec of what it was today. And I was so proud because we had like 10,000 unique daily visitors, which was a lot and this would’ve been like 1996, 97 ish, but filez.com actually was the key to MP3.com.

Aaron Dinin:

We heard about that key at the beginning of this episode, that’s when Michael explained how by looking at the long tail results of search queries over on filez.com, he saw more and more people trying to find MP3 files. Since an increasing number of people were searching for MP3s, Michael wanted to figure out a way of directing some of that search interest toward filez.com. So, he tried to do exactly what anyone would do to get traffic for a keyword back in the early days of the web, he tried to buy the domain MP3.com.

Michael Robertson:

This is the fun part of the story. So, I’m like, “All right, well let’s set up an MP3 site and then let’s put our search box on it and drive more traffic to Filez.” So, I looked at MP3 purely as a low cost marketing tool for the Filez search engine. So, I’m like, “All right, we need a website. Let’s see MP3.com, oh it’s taken.” And I said, “Well, maybe I can buy it.” So, I reach out to the guy who owns MP3.com and said, “Hey, I’d like to buy MP3.com.” And he says, “What are you going to do with it?” And I was like, well, honestly I didn’t really know what I was going to do with it. I was like, “Ah, I’m going to create an MP3 information site.” I knew I was going to put my search box on it for filez, because people were looking for MP3 files and I was going to do that. And that’s really the extent of it. So, I said, “I’m going to create an MP3 information site.” And the guy writes back to me an email and saying, “What’s MP3?”

            So, now I’m puzzled, right. Because domain names don’t fall out of the sky. You have to go register them. And I said, “Well, it’s a audio technology. But if you don’t know what MP3 is, why did you register MP3.com?” And what he told me was the following. “In the early days of the internet, there was only one place to register domain names. It was a company called Network Solutions. They had a monopoly, the government gave them a monopoly. So, if you wanted to register a domain name, you’d have to go to Network Solutions. And that’s where you’d register. Well, when you went there, you’d have to set up an account, that’s normal. Well, you didn’t get to pick your username at Network Solutions, instead they would assign you one. Like I was MR 121. So, apparently they’re using this very sophisticated algorithm. They would take your initials and then add a number to it, increment the number afterwards. So, I guess I was the 121st person that had initials MR to register a domain name.

            Well, this guy had gone to network solutions to register domain name and his name was Martin Paul. And so they said, “Hey, your username is MP3.” So, he goes, “Okay, I’m going to register MP3.com too while I’m here completely on a win.” So, when I offered him a thousand dollars, he said, “Oh sure, great, sold.” And so, I bought it, it’s so funny because I’ve heard people say, “Oh, you were so lucky to get MP3.” And I was like, “Hey man, I paid a thousand dollars for this in 1996.” This is before people bought domain names especially for speculative ones. And so, it was a huge risk because a thousand dollars was a lot of money for me.

            And I remember going home and I said, “Oh honey, I bought a new domain name today.” And she says, “What’d you buy?” And I said, “MP3.com.” And she said, “Hmm, how much did you pay for that?” And I said, “A thousand dollars.” She said, “A thousand dollars? That’s just two constants of numbers. Doesn’t even mean anything. What are you doing?” I was like, “No, no, trust me. It’s going to be big.”

Aaron Dinin:

All right. That was a good guess that you certainly showed her. So, what did you do with MP3.com?

Michael Robertson:

So, I turn on the website. I just turn on the website. I don’t tell anybody there’s no press release, no, nothing. I just turn on the website, get 10,000 unique visitors. Filez, who I had been marketing incessantly for like two years, had by this time, like 15,000 or something unique visitors and here’s MP3.com with no marketing, just turn on, gets 10,000 unique visitors. And that was another big bump on the head like, holy crap, something big is happening here with MP3. Then it became like, “All right, what am I going to do with of this thing?” I said, “Ah, here’s what I’ll do. I’ll just create a list of MP3 sites. Oh, this site has some software for MP3. This site has some music for MP3 and I’ll put my search box everywhere.” That was it.

            And people go to MP3 and then they would send an email to me because I’m big on putting a link. “Hey, send me email on every business.” Even the businesses I do today, everyone has my email. I want to know what customers are saying and what the customers were saying was, “I went to your site and it sucks because I wanted music. And all you had was a bunch of links to other stuff.” You can get one of those, no big deal. But if you started getting, three, five, seven, ten, a dozen, you’re like, “Huh, maybe I need to start figuring out how it would give these people music.” So, I decided, “All right, here’s what I’m going to do. I’m going to try to find legal music sites for MP3.” This would’ve been 1997 ish.

            I scoured the entire internet and I found like one jazz band in Sweden. And I found one rock band in Louisiana and a metal band in New York. And I would send an email saying, “Hey, can I link to your music? I’m running this site called MP3.com. Can I link to your music? Because I noticed you have an MP3 up there for free.” And of course every band was like, “Yeah, sure, go ahead.” So, I create a small music section on MP3 that says pop rock and there were like two bands and jazz and there was one band. And so everyone would go to the music section, click on pop, click on the first band and crash geo cities. Because they were all linked to these early first generation web hosting sites that weren’t used to delivering a three megabyte file.

            So what they would do is send email to MP3.com saying, “I went to your site to get music and I clicked a link and it didn’t work. You suck.” And I’m like, “Huh.” So, how can I get the music? And I was like, “Well, what other choice do we have? We’re going to have to host the music.”

Aaron Dinin:

Let’s make sure we take a moment here to notice how Michael is responding to consumer demand. It’s something that seems obvious, but a lot of entrepreneurs screw this up. They try to force their vision onto the market rather than listening to the market as consumers, tell them what they want. Michael didn’t do that. He didn’t say here’s MP3.com. You’re going to like it just the way it is. Instead, he launched the website, made himself accessible to consumer feedback and then iterated to match what the consumers were asking for.

Michael Robertson:

So, I went back to those bands. It was like 30 bands. And I said, “Hey guys, I got a deal for you. Here’s my deal. If I give you a free website, I build it for you.” And remember back in the mid nineties, if you wanted a website, you had to hire a web programmer. You had to go to a company and pay $30 a month for web hosting. So I said, “I’m going to give you a free website for your music, pictures of your band, your songs. And all you have to is give me at least one free song to give away.” And of course, all 30 bands said, “Great. I love it. Do it. Free website.” Because these were all independent bands. These were garage bands and hungry artists. So, we go and we create a couple dozen websites, but then I realize this is a lot of work, creating websites, one by one by one, what could I do to automate it?

            And it occurred to me that I could create like a form based system where the band members themselves, they could type in the name of the band, type in the list of band members, upload the pictures of the band, upload the songs [inaudible 00:28:44]. And then we would just approve it and publish it live. And so, that’s what we built. Now, this sounds so remedial, but this was cutting edge in the nineties. Today, this is how everything works, whether it’s LinkedIn or Facebook or whatever. It’s like when you sign up, you create all the stuff and it creates a web presence for you. But this was cutting edge stuff. We created an online system where bands could upload a song and create their web presence at MP3.com. People would listen to music and make sure they didn’t upload something that wasn’t theirs or something like that. And if it looked good, we would click go and bam, they would be on the site.

            And I remember pushing this out, we started getting three bands a day, five bands a day, 10 bands a day, 20 bands a day, 50, a hundred, 200 bands every day signing up. And I’m like, “Holy smokes. This is going to work.” It was really fun to watch the adoption from the community.

Aaron Dinin:

So, once you started seeing all that growth, then what? Obviously you turned your attention to MP3.com rather than filez.com. But, what’s the value of all that music traffic if you are not a music company?

Michael Robertson:

It was a far different phase of the company. This was the collision with the major record labels/ while MP3 was so promising and such amazing technology, the major record labels feared it. Because at the time, they’re selling CDs for 16 bucks, 20 bucks each. They’re making ridiculous amounts of money because people would want one or two songs and they’d have to pay 16 bucks to get a CD. And when they looked at the internet and looked at more specifically MP3, it frightened them. And so, naturally they became very adversarial. I was naive at the time. So, I’m creating MP3.com and I decided, “Well, let me go partner with the major record labels.” Why not? They have all the music. Major record labels, for those who don’t know, 90% of all the artists that you’re familiar with, that you hear on radio, they’re controlled and owned. All their music is controlled and owned by the label. So, the artist doesn’t have the rights. They turn their rights over with some contractual binding to the record labels.

            So at MP3.com, we were doing all of the known artist, but I was like, there’s no reason we shouldn’t work with the record labels. I jump into my beat up Honda Accord. I’m living in San Diego at the time. And, I drive to Los Angeles. Because the record labels, they’re either in New York or Los Angeles and I meet with two or three of the big record labels. And it was really eye opening meeting because here’s this young kid, I’m mid twenties at the time, and I show up and I said, “Hey guys, you won’t believe what people are doing with music. They’re putting it on their computer. And my vision is your whole music world is going to revolve around the computer.” And they were frightened by the change because all humans fear change.

            But, more importantly, they were dismissive of my view. They couldn’t imagine anything besides that Oak cabinet with your stack of CDs. When I said, “Oh look, you could put your music on your computer and you can like organize the songs in just the order that you want. Or you can make a custom CD or you can send it to a friend. They couldn’t imagine that. I remember them saying, “Yeah. So, you think everyone’s going to listen to music on the computer?” I said, “Yeah.” And they said, “Well, most computers don’t even have speakers.” Because at the time, you’d buy a PC, it didn’t have a sound card. You’d have to go buy a sound card, which is very geeky. I know, but that’s just a technicality. Imagine where the world’s going to be.

Aaron Dinin:

So, the music industry couldn’t see any of that future, but you, I guess would’ve still had to move forward with building a business, right? Because you had all that traffic and I’m sure back then that the bandwidth was really expensive. So, I guess how were you going to make money?

Michael Robertson:

To me, the math was real simple. If you cost effectively get users, you will win. That was the extent of the math that I knew I had to do. Meaning that if you can get users for cheap, how you make money from them, you can figure that out later. It’s about, do you have a model that will cost effectively get users? And so, we were constantly honing MP3.com. For example, while the major record labels were highly critical and adversarial and litigious, I listened to all their criticism and some of their criticism actually I found completely absurd, but some of it was very poignant and cutting and I took changes. For example, one of the comments was, “Well, naming your company, MP3.com is so crazy because a new format’s going to come along and you’re going to be passe.” I’m like, “Well that’s ridiculous.”

            MP3 is not about the audio technology. It’s about what people could do with it. What it represented? And they’re like, “Oh, that’s absurd.” But they said, “Well, you see what we do at record labels, we decide what music is good and what music is not good. And what you do at MP3 is you allow every person on. Some guy can arm fart The Star-Spangled Banner, and we go, “Yep, go ahead. You’re on.” I said, “Well, music is so subjective. I’m not a fan of Death Metal, but a lot of people are, so why should my views at MP3 dictate what people can get. Why can’t I just let all the music come in and let people decide. There’s the only model they could imagine where they decide what are the best acts.”

            They said, “Well, the problem is, if you accept everyone, you’re just going to have piles of garbage. You’re just going to have so much shaft that no one could find a wheat.” And I thought that was a fair criticism. How can we change our business so that the good stuff floats to the top? And what we did was we turned the whole website into a game. So, today you would call gamification. We didn’t call it gamification back in the late nineties. But what I did was, I said, “Well, why don’t I use all the data that I’m getting to organize the content. We could track page views. We could track downloads. We could track CD purchases. We could track all that stuff. Why don’t I just use all of that to rank all the content and let the good stuff go to the top.”

            So, what happened is that the entire website turn into a competition where every band was trying to get to the top, because there was number one, number two and there were lots of subsections. There would be Southern Louisiana jazz. There were lots of little categories and every band would try to get to the top of their category. So, that approach, it did generally bring good content to the top, but it did something else that was so much more important. And that was, it turned every artist into a marketing machine for MP3.com. It turned every artist into a sales agent for my company.

            I remember driving through a Taco Bell drive through and you know that little window that jets out, you pay your bill. I remember drive through it and I saw somebody had put a MP3.com bumper sticker because we had MP3.com/band name. That would be their express URL. We call it and somebody had made bumper stickers and put their bumper sticker with my company name to facing the Taco Bell. I’m like, “Wow, how cool is that?” I knew if we built the audience, that revenue would not be an issue. So, that was sort of the extent of it. I didn’t have to dive into it too much deeper.

Aaron Dinin:

Of course, Michael is right. You get enough users for a website. All the traffic is increasingly valuable and you can figure out plenty of different ways to monetize. But monetization takes time and handling all of those users is still really expensive, which is what usually leads entrepreneurs toward venture capital.

Michael Robertson:

I knew that raising capital was important. I had actually tried to raise capital with my previous photo company, Media Mindset, I mentioned, right. And it was really a tough task. Raising capital takes so much money, but MP3.com had just phenomenal numbers. We were just booming and I was bootstrapping the whole thing. We were literally buying PCs and building them ourselves and deploying them in a data center to keep our costs super low. We were using all Linux and MySQL before it was cool. Everyone at the time was running Oracle, the really expensive databases and Solaris machines. And I’m getting the cheapest PCs I can get. And so, we said, “Oh, you can’t run a real business on that.” But I knew I needed that cost savings, so I could decided, “All right, I’m going to hack raising capital. Because every entrepreneur is looking for hacks. And I said, “Well, the hack is I’m going to offer such a sweet deal to the VCs that they’ll just agree at no time, without months and months of negotiation.”

            So, I go to the local San Diego VCs, because where we’re based. And I say, “Hey guys, look at MP3.com. The numbers are astounding.” And these aren’t projections. Everyone’s projections look good. These were actual. I said, “I’m not going to show you projections. Because who cares? Every entrepreneur thinks their stuff is going to go up to the right forever. But I said, “Look at the actual numbers, look at what we’re doing in terms of artists signing up and number of songs that we have, a number of visitors that we have and number of music downloads.” Everything was zooming up to the right. So, I go to all the local VCs and I said, here’s what I’m going to do. I’m going to give them such a screaming deal that they’re just going to go, “Michael, this is a no brainer. Where do I sign?” Boom, boom. So, I said, “I’m going to raise two and a half million at a $10 million valuation, somewhere around that.

            So, I go and I do a bunch of presentations and they say, “Oh yeah, we’re kind of interested.” And then, “Oh, we want our experts to look at it.” And so they would bring in some media company expert like one person from Disney. I knew the media company people would like not know what we were doing. This was classic long tail. This was user generated content. They wouldn’t appreciate it. And naturally they’re like poo-pooed it. So, I was irritated because I was watching what was getting funded in the internet world. And I’m like, we have more traffic, more users, more revenue, more everything than these other people, like more technology. I was frustrated by like, you know what? I don’t care. I’m going to keep growing because eventually if you keep growing, you get big enough where they come to you.

Aaron Dinin:

Let’s quickly pause here to point out another important lesson from Michael’s story. Most entrepreneurs think they need to go out and actively try to raise venture capital. But there’s another strategy that’s admittedly difficult, but much more effective. You can keep your head down and focus on building an amazing company. And if you’re successful at it, those VCs are going to come to you. Not only that, as you’re about to hear when VCs come to you, you are going to have all the leverage.

Michael Robertson:

So, I’m out pushing my kid in the stroller, I get a phone call and the guy says, “Hey, I’m from Sequoia Capital. And we would like to talk to you. Are you raising money?” And I was like, “Well, kind of.” And he says, “Well, will you tell us about your business?” I said, “Yeah, yeah. I’ll tell you about my business. It’s booming. It’s going well.” And I said, “But we’re not really fundraising mode right now.” He said, “No, no, no. We just want to check you out and see if something’s a good fit.” And I said, “All right, well, you can come down if you want.” So, we had this tiny little office, three people packed with some servers even in there. And I said, you know, these guys have come down here and they’re going to think we’re not serious because our offices are so low rent. So, I go to the guy who owned the suite next to mine and I said, “Hey, can I borrow like four offices for a week?” Because he had a bunch of empty offices and he’s like, “Yeah, sure. Go ahead.”

            So, what we did is we put the internet cables up through the roof and we went, bought some potted plants and we spread out like we were this big office so that when Sequoia Capital come down, I say, “Oh, come into my office. I had my own personal office.” But it wasn’t my office. It was just a borrowed one from the neighbors. I said, “Oh, don’t close the door.” Well, they couldn’t close the door because there was no doorknob on it. Because it was just an access door, sort of had an instant office. And so they said, “We want you to come up and do a partner presentation. And I was like, “Okay, but you know what? I don’t have like a huge deck with 30 pages. I got like three pages that show our businesses are rocket-chip.” He said, “No, no, come on up.”

            So, I go up to Sequoia Capital and they do their Monday partner meeting. We have to do a presentation. So, I get in, I do my presentation and I see Douglas Leone who was the head guy there. He’s like the godfather of the VC. I see him write a note and pass it around to all the partners during my presentation. And after I got funded, I said, “Hey,” Mark, that was the partner that I was working with, “what did that note say that Doug was passing around?” He says, “Oh, it’s had three words, fund these guys.”

Aaron Dinin:

Douglas Leone to borrow Michael’s raise, really is one of the godfathers of VC. He’s a billionaire VC partner at Sequoia. He led investments in Rackspace, ServiceNow and RingCentral among plenty of other notable companies. And he also led Sequoia’s expansion into the China and India markets. So yeah, he really is a big deal in the VC world and Sequoia and specifically Doug’s excitement for the MP3.com deal is what gave Michael the leverage he needed to negotiate great terms.

Michael Robertson:

I did the presentation, they take me out to lunch and they said, “Okay, we’re really interested. We’re going to get you a term sheet.” And I said, “All right, fine.” So, I fly back to San Diego. When I land there’s a term sheet. They had sent me a term sheet and I look at it and it was for $10 million at a $7.5 million premoney valuation, which means they would own like 60% of the company or something like that. And they said, “Hey, we’re going to control the board. We’re going to own 60% of the company. And you have to sign a no-shop until the deal closes.” So I go to my attorney in San Diego and I said, “All right, I want you to go back to them and say the 10 million number is good, but we want a 40 million valuation, not seven. And you don’t control the board and there’s no no-shop. When the deal closes, that’s when there’s a no-shop and then I won’t take it to someone else.”

            And my attorney, who was working for Cooley Godward, which is one of the finest firms, he goes, “Oh Michael, you don’t understand this is Sequoia Capital. This is the company that funded Apple and Oracle and Cisco. And they’ve never given $10 million to anyone and they gave you $10 million. And so, while there’s probably some leeway in the valuation, they’re at seven, you said 40 premoney, usually, you can go up like 30% or 50%, but not 400%. And if they give you $10 million, they’re not going to let some 27-year-old kid run the board. Control the company.” And so I was furious. I was like, “Hey, are you my attorney or are you their attorney? Because you should be busting them, not busting me. The fact that they tell me they don’t want me to shop. It’s anyone else tells me they’re super hungry.”

            So, here’s the deal. I’m going to change law firms, unless you go back to them with something different. And so, my buddy, who was the junior guy there, he called me up and he said, “All right, they’re going to sign a new partner to you at Cooley Godward.” And the new guy comes in. He goes, “Michael, what did you want? 40 million pre, okay. They get two out of five board seats, right. Okay. Done.” And he sent it to him. They signed it right away. We closed a deal in like three weeks done. At the time, I didn’t appreciate Sequoia Capitals notoriety, but I was smart enough to realize that I had the goods because we had the numbers, we had the data, and I was seeing what was getting funded out there. And I’m like, we blow away everything else for real. This is real. It’s not like me just pontificating about what the future’s going to be like. We were actually delivering it. And I knew that somebody would to see that.

            So, I think that was a case where we’d raised more money from Sequoia on really phenomenal terms and my youthful naivete in a lot of ways, because I didn’t have the historical baggage of, “Oh, this is how they always do it. They always take control of the board and they always get 40% of the company.” Or whatever, I didn’t care about that. I knew we had the numbers. And so, I was proud of that because that allowed me to keep a large chunk of the company by getting that higher valuation.

Aaron Dinin:

But I’m guessing that deal still paid off for them because didn’t MP3.com go public pretty soon after that?

Michael Robertson:

Right, I mean, this is astounding because I raised money in December 1998 at the time, all of our financial data was in Quicken, not QuickBooks Quicken, like personal, keep your own budget in. Because we were just a very tiny little organization. Seven months later, we were public on NASDAQ, really astounding, right. And you couldn’t do that today because they’ve made it far more complex process because of The Sarbanes-Oxley and stuff like that. But we went from a company in Quicken to a NASDAQ traded company in seven months. And I knew things were very hot at the time and I knew that it wasn’t going to last forever and we needed to get public as soon as possible. And so, when we went public, we were the largest internet IPO of all time at that time. Webvan beat us a month later, but we raised almost $400 million in our IPO.

Aaron Dinin:

Okay. So, you were backed by Sequoia, you raised nearly $400 million in your IPO. What happened? Why aren’t we using MP3.com now for all our music?

Michael Robertson:

Yeah, we had done this big IPO. We’re now working with the major record labels. They were giving us promotional songs. So when they gave a song to radio, they would give it to MP3.com. I remember going to a Lakers game and you know, how they play intermission music and musical timeouts, they were playing music. And I was like, “That song’s on MP3.com? Oh, that song’s on MP3.com.” Because as they gave songs at radio, they would give it to MP3.com because we were the number one music site in the world. But I was thinking about, “Okay, where does music go?” And I was serious that everything was going to move to the Cloud. This was my vision. But there was a huge technical problem for this in the late nineties and that was the bandwidth wasn’t there.

            So people were talking about music subscription services and I’m thinking, “Well, you know what people care about right now, is they care about the CDs they’ve already bought. Can I make a way for them to take the CDs they’ve already bought, put that into their personal music collection in the Cloud and then let them play that.” The problem with that is that even with MP3’s 10 to one compression, because that’s about what you get, right. So, a music CD is about 600 megs of data, use MP3. It turns into 60 megs of data. Even with that uploading 50 CDs or a hundred CDs would take weeks or months because people still had modems. So, I spent a lot of time thinking about, “Okay, how do I solve this problem that I want to get music into the Cloud that they care about, but the pipe is not big enough.”

            So, I came up with this idea since every CD is the same, let’s say that you have, Alanis Morissette’s Jagged Little Pill and I have Alanis Morissette’s Jagged Little Pill CD, because remember this is the nineties. It’s the same CD. They both have nine tracks on it. And they both have Irony as a number three track. Instead of like moving all the bits, what if I could build a system where a user could prove to me, they have the CD and then I would just turn it on. So, that’s a technology that we built.

            We went out, we spent couple of million bucks buying a bunch of CDs and we digitized them and put them on the Cloud. And then we built a system called Beam It. And what it was is you would take an audio CD, your Jagged Little Pill and you would put it into your PC. And we would scan the CD. And by looking at the characteristics of the CD, we could precisely determine that’s Alanis Morissette’s Jagged Little Pill, because we would look at how many tracks there are. How long is each track? What’s the space between tracks?

            And once we determined that was Alanis Morissette’s Jagged Little Pill, we would even actually go a step further. And we would say, “All right, I’m going to ask you some random questions about that CD. Like what data is at sector four offset, 95. You send me that sound wave that you see there.” And so we’d ask these little questions of that. So, you’d have to have the CD. It’s kind of like if you ever seen those spy movies where the spy goes into the park and it says, “Unicorns don’t fly at night.” And then the guy has to say something like, “The badgers always wear blue.” Or whatever. They have a challenging response system. That’s exactly what we did. We would ask you a random question about the audio bits on your CD. And the only way to answer the question was to really have the CD and my opinion was, “Well, if you really have the CD, you already have access to those songs. So, when I turn on those songs for you, I’m not giving you anything you don’t already have.”

            So, this was something called Beam-It and it was magical. You would take an audio CD, you’d put it into your CD round. It would go bur, bur, bur, bur, 20 seconds later, we’d go, okay. Here’s all the songs in your Cloud listening experience that you can now listen to. And then you would take it out and put in the next one. So, in 30 minutes you could move all hundred of your CDs into the Cloud. It was really magical. So, what we had built was a way to very efficiently in effect, move the songs into the Cloud.

Aaron Dinin:

To be fair, Michael’s system was a brilliant solution to a difficult problem. Or as he described it, the solution they’d created was magical. Unfortunately for him, in MP3.com, the record labels preferred a different term, they called it illegal.

Michael Robertson:

Well, the music industry hated this and they sued me. And what they said was, “Hey, you infringe our copyrights.” And the reason they say that is because the way that we set the system up is that we went out and bought a few million dollars of CDs in advance and we digitized them. So that when you proved to me, you had Alanis Morissette, I could just turn it on. And they said, ‘Well, that was a license of our music. You used a copy of our music without getting a license.” Our argument was, “Well, think of us like a bank. When you deposit $20, then later on you get $20 out of the bank. It’s not the same $20 bill, but it’s identical, something called fungible. So, technically the person who puts in that Alanis Morissette’s CD into their CD run drive, they could upload all the bits. It would take them a week and a half, but we already have the bits. So we don’t need to do that. And it’s the same bits.” And so they sued us and we lost.

            They sued us in New York, which is media company friendly. Maybe it would’ve been in into different outcome, maybe not, I don’t know, on the west coast, which was more tech company friendly but we got sued in New York and we lost, and we ended up paying hundreds of millions of dollars in damages. It was ridiculous.

Aaron Dinin:

Can we talk about why it was ridiculous? In my mind, this is, I think one of the most important parts of the MP3.com story because you and the other tech entrepreneurs working around the music industry at the same time were largely vilified. But, here we are 20 something years later and you all seem to have been right. Eventually we got to the vision for music that you all had, but these big record labels, they just didn’t get it and they certainly didn’t go easily. There was lots of kicking and screaming and well, I guess lawsuits.

Michael Robertson:

I tell people that to understand this, you have to understand a few principles of business. One principle is lawsuits are a business strategy. Most people want to know lawsuits from like car accidents, right. Where I back into you and I got to sue you to make you pay for to fix my car. And the lawsuit is really measuring, right and wrong. Did I hit you or did you hit me? And, that’s how people think of lawsuits and make me think of criminal cases where there’s someone’s guilty or not guilty. But a lot of business lawsuits have nothing to do with guilt, nothing to do with wrongdoing, simply about business leverage. Can you get leverage over your competitor? Can you slow them down? Can you make it harder to raise capital? Can you scare away their partners? Can you generally muck up their business?

            And then the second thing is that in music business, there’s something called statutory damages, which are really detrimental. And it’s why you see so many lawsuits. Let me explain. If you go back to that car example where we’re in a parking lot and I back into your car and I get out and I look at your car and I say, “Oh, well, I hate your car, but there’s no damage. Well, you sue me.” And you would say, “I was just sitting there, judge. He backed into me.” And the judge would say, “Yeah, you’re right. He’s liable. How were you damaged?” And you’d say, “Well, you weren’t damaged.” “Okay, only window money.” That’s the way most court cases work. You have to prove that you were harmed. Not that just somebody did something wrong. You have to prove that you harmed.

            Well, it’s not the way it is with the music business. In the music business, they have a special preferential law called statutory damages where they can say, “I don’t have to prove that I was actually harmed. I can just get up to $150,000 per copyright infringement.” If you think back to our beam-it instant listening, my message to the industry was, “Guys, you will sell more CDs because you will keep the CD alive in the 21st century.” I knew what was coming. I knew the iTunes were coming out there. And I said, “Guys, when you go to iTunes and sell songs for $1 each, that’s not going to help your revenues. You want to keep people buying this bundle of songs for 15 or 20 bucks, as long as you can. So, if you make the CD relevance by the CD, I’ll give you the digital tracks, that’s really good for the industry.”

            Didn’t matter. It didn’t matter if they sold more CDs because they elected for statutory damages, which are up to $150,000 per work. Now, we had digitized like the entire library of music in the world. So, it was billions and billions of theoretical damages.

Aaron Dinin:

Yikes. Is it safe to assume that, that was pretty much the proverbial nail in the coffin for MP3.com?

Michael Robertson:

Here’s the craziest part, maybe the craziest part of the whole MP3.com story, which is just a wild story. The company that sued us the most was called Universal Music. They’re the largest record label today. They own like 40% of the market share. And that’s the company that bought me. So, what was so crazy is that I’m in court, in New York and I’m sitting there and on my side, their attorney gets up and it tells the judge, “Your honor, this guy is lawless. He’s reckless. He doesn’t care about the law. He doesn’t think the law applies to him.” Because this is all during the [inaudible 00:56:17] time, where there were people that say, “Hey, all music for everyone for free.” That’s not we did. We were like the exact opposite guys, but it didn’t matter. They got up there and they just disparaged me like crazy and said, “I’m a renegade and a rebel and a big corporate infringer.”

            And then we would leave the court and they would come out to me and say, “So, are we going to do a deal or not?” I’m like, “Wait, wait a second. You just told the judge that I was the devil.” And that I think it goes back to one of the biggest stories is like business is cutthroat and what people say in court and stuff is not necessarily the truth. A lot of times is just a strategy. And so, it turns out the Vivendi Universal buys my company. So, after all these lawsuits and they had pummeled us from all the sides and they ended up buying my company.

            And I think ultimately that definitely shows that I wasn’t this renegade lawless person. When people take time to look at what we did and how we did it, it’s exactly the opposite of natural. We were responsible at every step. Did we outrun the law? Yeah, probably, in terms of what the law allows or should allow or whatever, I don’t want to complain because that’s part of what you sign up for as entrepreneur when you’re doing innovative new stuff.

Aaron Dinin:

So, as you heard the company suing Michael and MP3.com for obscene amounts of money, was also the company that wanted to buy MP3.com. Well, it’s not really for me to say whether or not what Michael was doing with MP3.com was right or wrong, there is clearly an interesting relationship between what was going on in the courts and what was playing out on the business side of things. In fact, Michael shared one other interesting and related story that happened in the aftermath of MP3.com sale to the Vivendi Universal.

Michael Robertson:

After companies get sold, they typically go to a celebratory dinner called the closing dinner, and it’s usually at a fine steakhouse. So, we’re selling the company to the Vivendi Universal and Edgar Bronfman Jr. there, who was the CEO of Universal Music. We go to a really nice steak joint. He’s sitting next to me, and it’s a very positive event because even though there was some bad blood, you’re passed that, you’re drinking wine, you’re having a good time, midway through dinner, he looks over at me and goes, “Michael, do you know why we sued you so much?” And I was surprised at the question because normally it’s like all about being positive and looking forward and there’s going to be a great marriage, that kind of stuff. And I was like, “No, why? And he goes, “Because we thought you were getting too powerful. Pass the salt.”

            I mean like that casually, that just goes and show you that when you read all these business fights and lawsuits and stuff like that, ah, it’s just about power dynamics. And then I don’t fault those guys for suing me. If I was on their board, I probably authorize the lawsuits too because that’s business, it’s a bloody game sometimes. Anyways, I thought that’s just a really telling story about what you read in the paper about, oh, this guy’s bad guy, good guy and stuff like that. And where business actually ends up could be two different things.

Aaron Dinin:

Michael’s story reminds me of something. One of my early business mentors said to me once, he was actually coming back from port, his company was being sued and I said something along the lines of, “I’m sorry, you’re having to deal with that.” And his response surprised me. He said, “You know Aaron, I’m not. The truth is in business, getting sued means you built something valuable because nobody sues you if you don’t have anything useful.” Mind you, I’m not suggesting entrepreneurs should intentionally do something illegal or get themselves sued. I’m just pointing out an interesting relationship between established businesses and startups.

            As startups come along and threaten established businesses, some of the most potent tools that those established businesses have are legal tools and for better and worse, well, they use those tools and they use them without much pity. That happened a lot in the music industry. And as the story of Michael Robertson and MP3.com reminds us as well as some of the other stories we’ve heard here on Web Masters, it might have been good for the record labels to be able to sue those companies out of existence, but it might not have been so great for consumers. After all people like Michael believe that they were fighting for us.

Michael Robertson:

I would say that I was very consistent from day one in pushing the industry to open formats. There was a huge battle over DRM, where I would leak internal documents from the record labels, trying to do crazy schemes to lock every song to every set top box. I mean just like crazy, crazy schemes. And I was consistently on the consumer side of saying, “Hey, if you buy the CD, it should play everywhere. If you buy the digital track, it should play everywhere.” I was a true advocate. This wasn’t just a marketing strategy. I’m an advocate today.

Aaron Dinin:

And he actually is. You’ll find that Michael is still actively working in the digital music industry, which considering all the friction he encountered along the way, is kind of impressive. So, if you’d like to see what he’s up to now, you can find him on Twitter. His Twitter handle is appropriately @mp3michael. Of course this podcast is equally appropriately named on Twitter. We are @WebMastersPod and I’m on Twitter @AaronDinin. That’s A-A-R-O-N-D-I-N-I-N. I also write lots of articles about business, startups and entrepreneurship that you can find over on my website, it’s aarondinin.com.

            I want to thank Michael Robertson for taking the time to share his story in the story of MP3.com. I also want to thank our audio engineer, Ryan Higgs, and I thank our sponsor, Latona’s. Remember if you’re interested in buying or selling in internet business, be sure to check out latonas.com. Finally, thanks to all of you for listening. If you enjoy this episode, please like, share, subscribe, rate, do all those other wonderful things that help podcast grow. I’d really appreciate it. And in exchange for doing all those things, I promise to be back very soon with another episode, until then it’s time for me to sign off.