September 21, 1998
Recording-Industry Vanguard Turns to Internet
By PETER EVERS
ith revenue of $12.36 billion in 1997, profits in the music business have been essentially flat for the last few years. So, lured
by an online music market that the research firm Jupiter Communications predicts will reach $2.8 billion a year by 2002, the
record industry, from producers to retailers, has struggled with how to take advantage of Internet technologies to realize better
margins.
After experimenting with audio, video, live "Webcasts" and other multimedia technologies,
the vanguard of the new-media recording industry says it is poised to employ the Internet to
radically alter the way tomorrow's artists will be sold, promoted and even discovered.
But like everything on the Internet, there is no road map to profits from online music. On the
Atlantic and Pacific coasts, two very different pioneers are blazing divergent paths to the
future.
In New York, N2K Inc. was formed in 1996 as a complete online music and entertainment
endeavor with a huge retail music store, its own record label and magazine-type content
organized around communities of shared musical tastes and interests -- jazz, classical, rock
and country.
Unlike most start-ups in the Internet world, N2K is headed not by youngsters with more
vision than experience but by respected longtime players in the music industry.
Across the county and in another universe financially -- but just a mouse click away on the Web -- is Red Button, a San
Francisco-based company founded last spring as a platform for unknown bands to distribute their music. Recently, the company
shifted into recording and artist management.
About the only thing these two companies have in common is a desire to make a business out of music and an unwavering belief that
the Internet is the place to do it.
N2K's leaders were adapting new technologies to the recording business long before there was an Internet. Its chief executive,
58-year-old Larry Rosen, founded GRP Music, the label that introduced all-digital recordings for CDs in 1982. It was sold to MCA
Inc. in 1990 for $40 million.
A great deal of the company's creative force stems from Phil Ramone, one of the recording industry's premier producers. The first to
use Dolby four-track discrete sound in 1976, two decades later Ramone was the first to use a fiber-optic system known as EDNet to
record simultaneous performances at different locations for the Frank Sinatra Duets I and II albums. This month, Ramone moved into
a senior executive position on the corporate side of N2K. In his new role, he will use the promise of Internet distribution and
promotion to attract established artists.
N2K's mainstay is Music Boulevard, an online music store that has evolved into the nexus for a network of online music channels,
including Rocktropolis, Jazz Central Station and Classical Insights, not to mention myriad sites of major artists, including Stones World
and the Miles Davis site.
"It's about dealing with more and more artists," Rosen said. "Recently, we signed Wynton Marsalis, exclusively for the Internet, for his
performances online."
Though N2K did not sign Marsalis, the Grammy award-winning jazz trumpeter, to a conventional recording contract, it will manage
his online presence and produce his cyberconcerts. The Internet, Rosen said, is "a new place for artists to expand -- and not in conflict
with a recording contract" with another label.
Music Boulevard, the major source of N2K's $17.14 million in revenue for the first half of this year, is among the most successful
online music retailers, offering some 300,000 titles. While the company had an operating loss of $30.14 million for the half-year,
Rosen says that N2K is on track.
"Our investors are in for the long run," he said. With 80.2 million page views and 130,000 new customers in the second quarter,
Rosen said he expected to turn a profit in 2000.
In addition to the company's original label, N2K Encoded, which markets its recordings through traditional retail outlets, it recently
created an imprint, Digital Artists, which will record established artists who the company feels can best benefit from online marketing,
promotion and digital delivery, in addition to traditional retail stores.
Rosen said the plan was to construct a suite of recording, distribution and online environments to cultivate tomorrow's stars, not
one-hit wonders. N2K broke new ground last year selling the Tragically Hip's album "Live Between Us" solely online. On Sept. 21,
Musicblvd.com will debut and sell Dave Stewart's "Sly Fi Mission Control" album exclusively on the Internet.
On the West Coast, Red Button is a shoestring start-up led by Jake Sloane, 51, who recalls that the company was originally
developed "to play independent artists' music to the World Wide Web audience."
Using an electronic distribution method similar to Music Boulevard's "e-mod" online music delivery system, Red Button sells
CD-quality downloads over the Internet using a technology known as Liquid Audio. However, the company's primary direction
quickly changed, recognizing opportunities in the electronic world to begin redefining traditional roles in music.
Recently, Braden Merrick, Red Button's 26-year-old vice president for marketing, decided to invest start-up capital in a new San
Francisco band called Brando. Upon signing a two-year management contract for 20 percent of Brando's revenues, Red Button
evolved instantly from an online music store to an artist management company and an independent label.
For an investment in Brando of $16,000, Red Button first placed the band on its Web home page, offering Liquid Audio singles of just
two songs. The money paid for an eight-track tape recorder, a mixing console and some microphones, plus a small contribution to the
quartet's living expenses.
Less than two months after the band's Web site went live and Brando finished recording six new songs, the quartet came to the
attention of 26-year-old Gary Savelson, who four months earlier had started a free e-mail newsletter called "Demo Diaries" devoted
to chronicling unknown bands that he discovers, often on the Web.
Each Monday, Savelson focuses on two bands that he believes show promise and e-mails his newsletter to some 300 people at
established record labels.
Within a week of Savelson's profile of Brando, Red Button's office fielded calls and e-mailed inquiries from some 40 established
record labels, including Geffen, Arista, Reprise and Dreamworks, said Red Button's Merrick.
"Some Liquid Audio singles were sold," Sloane said. But in one measure of how far the industry is from accepting online distribution,
he added, "All the labels received CDs in the mail, at their request."
Tom Loftus, Brando's lead singer and song writer, said of Red Button: "We're the guinea-pig band -- willingly. This is just an
opportunity for all the good bands out there not to have to wait for a record deal."
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