Time Warner Cable recently announced that they will fully subsidize (via rebate) the $300 cost of a Slingbox for new customers of their Wideband Internet service. The set-top box allows users to stream what plays on their home television to other televisions, computers, mobile devices and tablets–a good deal for the consumer, but sure to rankle certain cable programmers with whom TWC has been feuding. READ MORE
My career from ages 18 to 28: In 1991, as a college freshman, I had an idea for an online service offering “real life” education to college students: practical advice about jobs, personal finance, and health. I made the simple observations that no one was teaching us these subjects in the classroom, and that computers — rather than books or TVs — had become the primary medium of communication and entertainment. During my sophomore year, Dick Sabot, a very smart Oxford-trained Ph.D. in economics and the professor of a class in which I received a B-minus, agreed to collaborate with me on my concept. He did so not because I was his best student, but because he had had a near-death experience during which a higher power advised him to do “something different.” By 1994, when I graduated from college, our project had indeed become something different: an Internet start-up company we named Tripod. Using what little cash I could raise from friends and family, I hired a team of computer programmers. I did this because I did not know how to install a web browser on my own computer, which is a significant barrier if you plan to run an Internet company. Unbeknownst to me, and surely with some sort of anarchic motive, these lawless, long-haired, multi-pierced, tattooed, incredibly charming and smart hacker hooligans built a piece of software on Tripod that had nothing to do with offering practical advice to anyone. Instead, this software gave individuals the power to publish their own “personal homepages.” By 1995, the popularity of the Tripod Homepage Builder was growing rapidly and had far surpassed my original idea to offer college students “practical advice.” It occurred to me that I might have a business on my hands. Having never written a business plan, I went to the local library and checked out a book called — you guessed it — How to Write a Business Plan. In August 1995, Netscape went public and proved that Internet companies had value. Or at least proved that Wall Street investment bankers had convinced the stock-buying public that Internet companies had value. One month later, I was able to convince New Enterprise Associates (NEA), one of the world’s most respected venture capital firms, to review the Tripod business plan. They agreed to do so only because Dick’s wife’s brother’s college roommate knew someone who knew someone at NEA. NEA liked the plan because it mentioned the Internet several hundred times. It provided $3 million in financing. By the beginning of 1996, one year after it was launched, the Tripod Homepage Builder had fundamentally changed the nature of consumer media. For the first time, anyone with access to a computer and a connection to the Internet could publish pretty much whatever they wanted; and anyone else with access to a computer and a connection to the Internet could view it. By the middle of 1997, Tripod had attracted nearly one million registered members. Tripod never posted a profit. Tripod generated barely any revenue. On December 30, 1997, in the middle of the stock-market bubble, I was offered $58 million for Tripod. On December 31, 1997, I agreed to sell Tripod in exchange for $58 million in stock of a publicly traded company named Lycos, which at the time was an Internet company only slightly more stable than Tripod. I agreed to a “lockup” that forbade me to sell all of my Lycos stock for two years. Over those two years, I watched the value of my Lycos stock increase tenfold. By December 31, 1999, at the height of the bubble and just a few months before the market crashed, I had sold nearly every share of my Lycos stock. I invested the majority of those proceeds in bonds and real estate because they were the only two investment vehicles I could thoroughly understand. And because I needed a house. By now, I hope my theme has become obvious. Luck is a part of life, and everyone, at one point or another, gets lucky. Luck is also a big part of business life and perhaps the biggest part of entrepreneurial life. At the very least, entrepreneurs must believe in luck. Ideally, they can recognize it when they see it. And over time, the best entrepreneurs can actually learn to create luck. Luck in business is different from regular old luck, like when you find $20 on the sidewalk. First of all, being lucky in business has an intoxicating underbelly called believing you’re smart. No one actually believes that he should take credit for finding $20 on the sidewalk. But when people get lucky in business, they are often convinced that it is not luck at all that brought them good fortune. They believe instead that their business venture succeeded thanks to their own blinding brilliance. The big challenge is that everyone — the press, your shareholders, your colleagues, your significant other, and your parents — will work hard to convince you otherwise. They will tell you, over and over again, that you are in fact a genius and should take complete credit for all the great things happening to your company. Why? Because to them, you are one of the following: A source of professional gain A source of financial gain A boss A lover Their pride and joy None of these relationships provide incentive for any of these people to tell you the cold hard truth about your entrepreneurial success: You may have gotten just plain lucky. The second difference between business luck and everyday luck is that luck in business can be created, whereas everyday luck cannot. You can’t will yourself to find $20 on the sidewalk. But you can create a company that gets lucky more often than the average company. Indeed, there is a pseudo-scientific formula for creating business luck. The key element is this: Lucky things happen to entrepreneurs who start fundamentally innovative, morally compelling, and philosophically positive companies. Why? Because lots of smart people will gather around companies with these qualities. As it turns out, precious few such companies exist. And the vast majority of human beings, and certainly most of the smart ones, are constitutionally caring creatures who would, if given the chance, prefer to spend their valuable time in a positive setting contributing to the betterment of society rather than in a negative setting contributing to its detriment. Shocking, I know, but true. And when smart, inspired people gather around a fundamentally innovative, morally compelling, and philosophically positive company, they work very hard. And when smart, inspired people work very hard, serendipity ensues. Serendipity — the faculty of making fortuitous discoveries by chance — causes lots of unexpected things to happen to a company. Some of these unexpected things are good. Some are bad. But because no one planned for the good things to happen, they appear as luck. In other words, the best way to ensure that lucky things happen is to make sure that a lot of things happen. It’s really that simple. Much of what makes a company fundamentally innovative, morally compelling, and philosophically positive is contained not in the company’s business model, but in how the entrepreneur communicates the mission of the company. A company’s mission, communicated by the entrepreneur with charisma and passion, is what creates the environment that attracts smart people and gets them inspired in the first place. Which is exactly what gets the luck rolling. Tripod made what money it did by selling advertising to clients such as Ford and Visa. That was our business model. But Tripod’s mission, as I described it to my colleagues, was to revolutionize consumer media, allowing anyone to publish his or her views to the entire world using the Tripod Homepage Builder. Suddenly, almost overnight, the stories, viewpoints, and opinions of every individual, interest group, or culture could be made available for others to grapple with. “Tripod isn’t here just to make money,” I told my colleagues. “We are here to fight the most important battles on the frontier of the First Amendment!” Mezze, the restaurant group I later co-founded in the Berkshire Hills of Massachusetts, serves food and drink to locals and to tourists from New York City and Boston. That’s our business model. But the mission of Mezze is larger: to set an example of quality and service for all the Berkshires’ retail establishments. I tell our staff that by working hard to refine Mezze, we raise the bar for everyone. And that by doing so, we will together attract more visitors to our small part of the world. Village Ventures, the venture capital firm I co-founded in 2000, makes money by taking advantage of the supply and demand imbalance that results from the concentration of venture capital in only a few large cities. That’s our business model. But the mission of Village Ventures is different: to enable entrepreneurs to start companies in the towns where they want to live. Rather than having to flee to Boston or San Francisco to find venture capital, entrepreneurs in Boise, Idaho, and Providence, R.I., can get capital from Village Ventures right in their own hometowns and build their companies in the same place they’d like to raise their families. Missions such as those of Tripod, Mezze, and Village Ventures create an aura of authenticity, which is the elixir that attracts smart people and inspires them. There is little authenticity in the modern business world. But it’s just the thing that people crave most in their work. When people find themselves aboard one of these vessels, they don’t want to get off. They form a fierce protective boundary around it and will do anything to keep the vessel afloat and its inhabitants alive. These people are liberated by finding not only a way to make money but also a way to feel good about it. This is what takes inspiration and turns it into hard work. And the results of smart people working hard are serendipity and luck. Marty Liebowitz, the vice chairman and chief investment officer of TIAA-CREF, one of the world’s largest pension funds, once said to me, “Thank God they created the word ‘muffin’ or I’d be eating a cupcake for breakfast.” Words are incredibly powerful, sometimes causing us to do things that we would never normally do. It is for just this reason that I harbor a tremendous amount of guilt about my place in entrepreneurial culture. I fear that perhaps thousands of well-intentioned people wasted hundreds of thousands of hours pursuing entrepreneurial projects in part because of what they read in the press about me. I created a sort of playboy persona for myself as the CEO of Tripod. Pictures of me skiing, mountain biking, drinking beer, skateboarding in the office, and attending meetings in shorts, Birkenstocks, and a baseball cap graced several major media outlets. From Forbes to ABC’s Nightline, from BusinessWeek to People, from MTV to Spin, the media broadcast images of me doing just about everything but working. I absolutely, completely, 100% sold myself to the media to promote Tripod. Together, we created this image of the Slacker CEO: an athletic, shaggy-haired, perpetually mellow 24-year-old making millions while barely lifting a finger. This image was broadcast not just in the United States but also to most of Europe. In five days during the summer of 1999, I jetted from Madrid to Milan, to Hamburg, to Paris, and finally to London, attending launch parties for Tripod Europe, staying in first-class hotels, and internationalizing the Slacker CEO myth of which I had become the archetypal example. Hell, who wouldn’t want to be an entrepreneur? I was a rock star. And I was the only person who knew it wasn’t true. Friends would ask me, “What’s it like to be a famous international Internet CEO?” “I’m not a famous international Internet CEO,” I would answer. “But I play one on TV.” Working with the media was the most important job I had at Tripod. Period. Twenty-four-year-old Bo Peabody, with his hip Internet company in the mountains, was a perfectly packaged pied piper for the story of the decade. I was not only Tripod’s poster child, I was shilling the whole goddamn Internet. And when it came to promoting these two things, the only self-respecting thing I ever did was turn down an interview on Montel. How noble. I’ve often kidded that 90 percent of Tripod’s value was in the amount of press we received in such a concentrated period of time. Sitting at a board meeting, lamenting our anemic revenue, I once joked to the board of directors that rather than actually running ads on the Tripod site, I’d sell potential advertising customers the opportunity that I might mention them in an article or wear their logo on my baseball cap. The board didn’t laugh. They asked me to look into whether or not this plan was possible. A lot was left out of all those articles. The hundred-hour workweeks. The anxiety attacks. The crashed cars and missed planes. The times I had to tell colleagues that we couldn’t make payroll. The years of a $12,000 salary. Night after night after night of pasta dinners and stress-relieving Advil “cocktails.” The countless meetings with absolute assholes who had no interest in learning about the Internet, the single most significant business innovation of their lifetimes. Pleading to venture capitalists for financing. Firing perfectly pleasant people when they didn’t perform. In the late nineties, this reality did not sell newspapers and magazines. Baseball caps and Birkenstocks did. Had I actually begun to believe what was being said about me in the press, I would never have sold Tripod when I did. I would have reasoned, instead, that I was in fact a genius, and that I should take complete credit for the great things happening to my company. Never mind that Tripod had little revenue, no profits, and an unproven business model; we should take this horse public! “Yeah,” I could have said, “I am smart, not lucky, and I can defy economic gravity. I am in control!” Wrong. Tripod was all hat and no cattle. Had we taken it public, we would most likely have failed, and everyone, including many unsuspecting individual in-vestors, would have lost a lot of money. I was not, however, completely immune to the media frenzy. Following the sale of Tripod to Lycos, what personal money I did not invest in bonds or real estate I invested in more than 20 Internet start-ups. Only five of these companies are still in business. The others are gone, along with a few million of my dollars. The quickest way to tank your company is to believe what you read in the press, especially if it happens to be about you. The vast majority of journalists are not interested in covering what is actually happening. They are interested in covering what they think people want to think is actually happening. Everything is sensationalized. In 1999 it was sensationalized on the positive side, and in 2002 it was sensationalized on the negative side. It’s never exactly accurate. As it turns out, accuracy can be quite boring. And quite boring does not sell newspapers and magazines. Learn to keep your ego in check. That’s how you’ll be able to distinguish the crucial difference between being lucky and being smart. Your ego is both the most dangerous and the most useful weapon in your entrepreneurial arsenal. When used wisely, ego helps entrepreneurs craft their mission, work hard, and keep faith in their companies, even in the face of heavy scrutiny. Ego also gives entrepreneurs the confidence to sell their start-ups to partners, customers, and investors, and the courage to act like famous international CEOs even when they know they really are just playing a role. And ego is the force that allows entrepreneurs to get comfortable with their powerlessness and learn to love the word “no” instead of panicking in the face of it. On the other hand, when allowed to run amok, ego keeps entrepreneurs from knowing what they don’t know and tempts them to believe their own press. Ego is also the culprit when entrepreneurs cling to their role as founder rather than turning their companies over to more capable managers. And ego is to blame when entrepreneurs can’t work with odd people who are clearly smarter than they are, or when they fail to remain calm and gracious in all business situations. Use your ego when it is called for, and check it at the door when you sense that it will get in the way. Unchecked egos are the most destructive force in business. I have often dreamed of a study that somehow measures the impact of ego on workplace productivity. The results, I imagine, would be staggering, with as much as a 50 percent increase in productivity resulting from the eradication of egos. In an ego-free company, all good ideas from all sources would be implemented. Managers would hire only people smarter than themselves, and would never spend valuable time worrying about who gets credit for what. Meetings would be shorter, as no one would feel the need to drone on in an effort to impress his colleagues and managers. In a business world devoid of egos, profits would rise, salaries would increase, and unemployment would plummet. In all seriousness: A number of the planet’s problems would be solved. But it will never happen. As it turns out, businesses consist of human beings, and most human beings have either tragically fragile egos or uncontrollably big ones. All we can do is make an effort to control our own egos. As hard as it may be, there are real incentives to do so. If I had let my ego go unchecked, I would never have let those crazy programmers put the Homepage Builder on Tripod. The Homepage Builder, after all, was not my idea. Moreover, it was the idea of people who were clearly smarter than I was. Someone who was insecure would have declared the Homepage Builder a distraction, a waste of time, inappropriate for the Tripod audience, too expensive, too risky, or any of the other excuses that those with fragile egos use to fortify their own power bases. But the fact is, the Homepage Builder was the foundation of Tripod’s success. The day we launched that little piece of software, we enrolled more members than in the entire previous month. It was like watching the Gold Rush all over again: The automated-membership counter ticked away as hundreds of strangers from all over the world signed up on Tripod and staked a claim to their little piece of Internet real estate. In the end, my original idea for Tripod — practical advice for college students — was completely consumed by the popularity of the Tripod Homepage Builder. At one point, Tripod was the eighth most trafficked site on the Internet. Our membership base spanned every age and more than 40 countries. Now, as part of the Terra Lycos network, Tripod has 40 million members, from virtually every country on the planet. Had I stuck religiously to my original idea, the best thing that could have happened to Tripod would have been my being fired as its CEO. More likely, it would have ended up on the pile of failed dot-com start-ups that now symbolize an age of ego and excess. Without the Homepage Builder, Tripod most likely would have failed, and my life would have taken a different direction. Without the success of Tripod under my belt, Village Ventures would probably not have received the funding and support it has. And without Village Ventures, the four other start-ups I helped found — Mezze, VoodooVox, Waterfront Media, and FilmFree Entertainment — would most likely not be flourishing to the degree they are. Was I lucky? You bet your ass I was lucky. But I was also smart: smart enough to realize that I was getting lucky. This article was adapted from Bo Peabody’s book, Lucky or Smart? Secrets to an Entrepreneurial Life (Random House, December). Peabody (bpeabody@villageventures.com) is the managing general partner of Village Ventures.
I got my laptop to boot up into Windows. This sounds idiot proof, but it’s not. My laptop opens by default into Linux. Certainly you’ve heard of Linux. It’s a computer operating system, an alternative to Microsoft and their Windows operating system. Technology is full of differing approaches. But Microsoft v. Linux goes beyond a simple disagreement. It’s a Hatfields-and-McCoys feud, a drama of honor and justice, a fight for the way things ought to be. You’ve got your Hatfields–Windows XP, 98, NT and Millennium–and across a gurgling Appalachian creek, your McCoys–the Linux clan. It’s not hard to find the Linux homestead. Wander two hills over and take a right at the old well. You’ll know the place by the flag of the pudgy, somnambulant penguin that hangs next to the satellite dish. Even in Appalachia, geeks gotta have their toys. From the outside, the Linux house looks like a decrepit shack. But appearances can be deceiving. Open the creaking front door, and you discover an opulent interior that stretches out spaciously. (It’s like the phenomenon of Doctor Who’s Tardis: On the outside, a tiny police call box, yet inside, a sprawling timeship.) But wait! The Linux house feels oddly familiar. Do you hear the words “see-ment pond” echoing in the marble foyer? Waddaya know! It’s Chez Clampett, the mansion that Jed bought after he discovered the bubblin’ crude, and they loaded up the truck and moved to Beverly Hills. Along with a stash of killer hardware. In the kitchen, Suzy May–she’s Elly May’s minimally-clad sister–and her posse of programmers discuss SuSE Linux 8.0. Jethro relaxes out by the pool with his buddies. He wears a scarlet fedora hat tilted at a jaunty angle–he’s the poster man-child for Red Hat Linux. Granny stands out on the patio boiling some clothes in a huge cauldron. She loves Caldera Linux and 802.11a wireless networks. And here’s Harry Potter in a Mandrake Linux magician’s hat! Before you can say “muggle,” he’s run off to join Uncle Jed and the Slackware Linux crowd. They’re watching Star Trek re-runs and eating Cheetos in the rec room. You’ve landed in paradise–if you’re a programmer or that strange breed of consumer known as the computer hobbyist. If you’re neither, the Linux lair might seem pathetic. But you’d be wrong. This is war, the Hatfields and McCoys duking it out for the future of the operating system. Some would even call it a holy war, with Bill Gates as the Antichrist and Linus Torvalds, writer of the Linux kernel, as the Messiah. (At the very least, Bill and Linus ought to face off on MTV’s Celebrity Deathmatch.) The key difference between Linux and Microsoft has to do with the open source movement. Let Granny explain with this homespun analogy: “Say yer known far ‘n’ wide for yer squirrel stew. Now Ethelanne Stafford asks ya for the recipe. Are ya gonna tell her ‘Nope, ya can’t have it ’cause it’s a secret?’ That she’s gotta come to ya for the stew, and pay for it? “Why that ain’t neighborly t’all!” Microsoft has their squirrel stew, which the Linux camp would deride as a cholesterol-laden mess with millions of lines of bloated code. In contrast, Linux is spa cuisine. It’s lighter and healthier, the flavor clarified through an economy of hacking. A programmer can change the code because he got the complete recipe–for free. Linux is a Stone Soup for the soul of the new machine. You make your changes, I make mine, and it’s a brighter, better operating system for us all. Except for me. I use Windows, something that I’m not particularly proud of. At times, I’m actively upset by my Windows “habit,” especially after I’ve had to restart my computer five times in three hours. But you can’t discount the prevalence of Microsoft’s Office software. I’ve compromised with my husband, a Linux man: My machine boots up into either system. Our “you like to-may-toe and I like to-mah-toe” approach doesn’t work seamlessly. Like today, when I was pushing to meet a deadline. My laptop got confused, so it took 15 precious minutes to boot into Windows. Things could be worse. When my toddler son starts to program, he may decide that he wants an entirely different system, one that some 19-year-old wiz in Helsinki is just now dreaming up. Then we’ll be a triple-booting family. And I might decide to boot the computer entirely and return to pen and paper. Nancy Peponis, a principal of Luminosa Consulting, focuses on marketing and business strategy. She can be reached at nancy@luminosa-consulting.com. Copyright © 2000-2002 MarketingProfs.com All Rights Reserved
Tunes on the Web A Little Net Music The way we listen to music is about to change. Again. But as usual, where there’s change, there’s start-up opportunity. Before 1997, MP3 was a little-known technology that computer geeks used to download compressed music files free off the Internet. But Internet time moves fast — so fast that by 1998 large pockets of the general public and the mainstream media were talking about MP3, not to mention taking advantage of it. At first the music moguls were afraid of MP3. Protecting copyrights was hard enough without easily accessible Web files enabling any old joes to access — and copy — their favorite music. But when the Recording Industry Association of America (RIAA) started filing lawsuits against the Web sites and technology companies responsible for providing that capability, it was clear the industry had started to take MP3 seriously. Music on the Web was going to be big. Today on the Internet, only the word sex generates more searches than the term MP3 does. Musically inclined Web surfers can purchase their favorite CDs and listen to the radio online, download their favorite songs, and even custom design CDs. And wouldn’t you know it, start-ups have begun springing up in a variety of niches to capitalize on the digital-music revolution. Hey, kids — what’s that song? During that rare block of commercial- and chat-free music on your favorite radio station, you hear that song. You know, that song, the one you hum all day during work. The one you just have to own. If only the DJ would stop the music long enough to tell you the name of that song. But alas, the music continues without interruption, and you’re left with a void in your CD library, and the record company with a void in its sales. That happened to Robert Goldman just often enough for him to identify a gap in the retail music market. Goldman, who has a degree in psychology, studied impulse buying — specifically, what drives consumers to purchase CDs. His findings suggest that the radio generates 95% of the impulse for buying music. “You listen to the radio, and if you like what you hear, you’re going to buy it,” Goldman says. That is, of course, if you know what you’re listening to. And that’s where GetMedia Inc., Goldman’s start-up, based in San Jose, Calif., comes in. Noting the emergence of Internet music sites and the popularity of E-commerce, Goldman saw the Web as the perfect environment to track radio-station play lists in. In 1997 he gathered a development team to create technology that would help radio listeners follow what their favorite stations were playing in real time. Further, he embedded a commerce option in it so listeners could purchase music directly from their trusted radio stations, bringing the point of purchase directly to the point of impulse. GetMedia launched its Web service in May 1999 and went live on a handful of stations, including Mix 93.3, the CBS/Infinity Broadcasting station in Kansas City, Mo., which started using the service in November. Now when Mix 93.3 FM broadcasts, say, “Learn to Fly,” a popular single from the band Foo Fighters, listeners can tune their Internet browsers to www.Mix93.com, click on the “Now Playing” link, and find a list of recently played songs, with their album titles and the time Mix 93.3 played them. Play lists also feature “info” icons next to each listing, where, for instance, Foo Fighters fans can get in-depth information about the band’s latest album, There Is Nothing Left to Lose. Site visitors can even sample songs from the CD. Of course, the real key to this application is the “Buy” icon. After just a few clicks and a credit-card number, GetMedia will ship There Is Nothing Left to Lose to a Mix 93.3 listener, and the station will pick up some extra cash. “This lets the radio station make money on music they already play for free,” Goldman says. GetMedia takes a percentage of each sale — a revenue model similar to that of major credit-card companies. And unlike online music retailers, GetMedia taps into established radio-station audiences and doesn’t need to spend millions on driving traffic to its own site. So far, 35 radio stations throughout the country have gone live with the service. Some 2,200 stations are on GetMedia’s waiting list, but Goldman doesn’t have the resources to set them up as fast as he’d like. Last September, GetMedia got some help to the tune of $10 million in venture capital from IDG Ventures, Menlo Ventures, and the Rosewood Stone Group. Goldman plans to use that cash to beef up his 60-person staff and outfit those stations awaiting the service. Record label goes digital There’s a part of the music industry that thrives on rock-and-roll renegades that lead the way to sweeping change. The current indie darling of the Internet music scene is Al Teller, who a few years ago was anything but independent. Since receiving two engineering degrees from Columbia and an M.B.A. from Harvard, Teller has had a 30-year career that includes stints as the head of MCA Music Entertainment Group and president of CBS Records. In February 1999, Teller took the plunge with his own capital and launched Atomic Pop, a fusion of music, radio, video games, and television that all comes together at www.atomicpop.com in what looks to be a model for the record label of the future. Teller’s label offers artists a better deal than they can get from the major record labels. Artists can use the site for promotion and distribution, and to supplement traditional retail channels with online sales. “The basic deal is a 50-50 split of the profits,” Teller says. “Majors’ star royalty is roughly 20% of retail price. Per unit, with us, artists can make twice what they’re making at the major labels.” By cutting the multilayered fat of giant marketing and promotions divisions, the 30-employee Atomic Pop hopes it can enjoy heftier margins than the majors do. This new way of doing business was music to the ears of rap giants Public Enemy, the first group that signed with Atomic Pop. Last May, Atomic Pop promoted Public Enemy’s new album, There’s a Poison Goin’ On, and sold it on the site for $10 before it was available in stores. Teller also sold digital downloads of the record for $8, a price that would be tough for majors and retailers to match. The real buzz for the album came with the prerelease single, which some 300,000 fans downloaded — free. Although Atomic Pop doesn’t have the marketing strength that major labels use to get new singles on the radio and on MTV, Teller notes that fans at his site have actively sought the song out instead of simply hearing it passively. “You have to proactively download a single,” he says. So far, There’s a Poison Goin’ On has sold about 90,000 copies — 10,000 of which were sold on the Internet. “And that ratio is going to change,” Teller promises. Still, those numbers represent about half the sales of Public Enemy’s previous albums. Teller blames the shortfall on a less extensive concert tour surrounding the new release. But he remains optimistic about future sales. Typically, he says, record sales fall off after promotional efforts cease. “We will continue to market and promote the record for months to come. The traditional labels will walk away from records after a short period of time.” For its first full year of business Atomic Pop saw revenues of about $2 million. The company has yet to turn a profit, but Teller anticipates one soon. By signing new groups such as the Gas Giants and creating a robust list of releases, Atomic Pop hopes to be aggressive in 2000. The company has also acquired the digital rights to 4AD — the British indie superlabel that boasts such 1980s punk stars as the Pixies and Bauhaus. Add that to its $10-million capital infusion from New Valley Corp. and a recent partnership with Microsoft, and Atomic Pop isn’t looking so indie anymore. The MP3 piracy police The RIAA is getting serious about piracy. It recently filed numerous lawsuits against music-related upstarts, claiming they’ve created a black market for illegal copies of digital music. But not everyone online is on the RIAA’s bad side. A handful of savvy start-ups have joined the antipiracy brigade by offering secure online distribution and easy-to-use licensing as a legal alternative to the MP3 free-for-all. Reciprocal Inc., headquartered in Buffalo, N.Y., operates on a simple principle: all music, whether it’s on CD, the Internet, or the Paleolithic eight-track tape, comes with an implicit license agreement. “You can’t legally make 1,000 CD copies and sell them on the street,” says Reciprocal senior vice-president Howard Singer. But online, it’s a different story. Music is far too easy to copy and distribute illegally, and sometimes consumers are entirely unaware of their own illegal activity. “You can buy a song from Emusic.com, put it on your computer, post it on a Web page, and send it to your friends,” says Singer. “There’s no technology in place to put any speed bumps in the way of doing that. And the major record labels don’t find that satisfactory.” Think of Reciprocal as a speed bump. It enables record labels to attach conditions to downloading and distributing protected intellectual property. Reciprocal handles the creation, storage, and issuing of licenses for digital property such as songs and research reports. Reciprocal then reports back to the content owners (record companies or publishing houses) on those transactions. The content owners in turn pay the recording artists any royalties due. Reciprocal started out as part of Softbank Corp., a Japanese holding company with interest in more than 120 Internet companies. It spun out in 1997 and has diversified its offerings to include services for the text- and software-publishing communities. But with the proliferation of digital music distribution, the market for such a service in music alone is huge. The concept has been a hit with the investment community. Last November, Reciprocal completed a $35-million round of mezzanine financing that included technology- and music-industry heavyweights like Hewlett-Packard, Xerox, and TVT Records. Microsoft had even made its own investment of $15 million in March 1999. Singer believes that although music currently represents the lion’s share of Reciprocal’s transaction-based revenues, its text-publishing division may ultimately become the company’s biggest moneymaker. And that’s just a simple matter of price point. Textbooks and research reports can cost buyers anywhere from $80 to $4,000. Even if consumers make a practice of downloading entire albums, Singer reminds us, “you’re still looking at a $10 to $15 item.” What the Heck Is MP3? Unless you’re a techie or a teen, you may not be familiar with MP3, the hot new method of music distribution. With MP3 the artist records his or her music in digital form and uploads the file for that music onto the Web. Consumers can then download files for their favorite tunes onto their computers and enjoy the music through their home sound systems. They can even store the files on special MP3 listening devices for their mobile listening pleasure. Q& A Music to Your Ears? To help sift through the hype surrounding MP3 technology and music on the Internet, Inc. enlisted Joanne Marino, CEO and editor-in-chief of Webnoize, a research company and news outlet based in Stoneham, Mass., that focuses on digital entertainment. Inc.: What are the basic challenges in the MP3 marketplace? Marino: The fundamental problem is that it’s hard to create a viable business in an environment where music is being given away for free. Young consumers are active shoppers and are easily swapping files. It makes it a tough environment to break into and actually make money. There are a lot of hot new music start-ups, and I don’t know if a lot of them will make it through the end of the year. Inc.: So who’s going to last? Marino: The businesses that are the most exciting in the long term are the ones that are able to build more meaningful relationships with the creators and consumers. They might offer higher royalties or increased market reach to the artist and maybe give consumers the ability to share music and information with other listeners. I’d be very wary of the so-called MP3 portals that are aggregating all these artists in one place but are not adding anything to the users’ experience. Inc.: Will we see a lot of acquisitions? Marino: A lot of these companies will have no choice but to sell. They don’t have viable business models. Right now, it’s a race. If you have the money and the means to make it through the full marathon, then you’ll do all right. A lot of these companies don’t have any revenues coming in, and they’ll either get bought or go bankrupt. You can’t give everything away just to get people to pay attention to you. Inc.: Do you think we’ll be listening to CDs in 10 years? Marino: No. We’re going to be wearing our music like our clothing. Our experience is going to be mobile, it’s going to be personal, and it’s going to be intimate. But for us to get these kinds of services, we’re going to have to put up with a lot more marketing and advertising. That’s the catch-22. Please e-mail your comments to editors@inc.com.
THIS PLACE Washington society adjusts to a new breed: the fast-moving, different-thinking, so very dot-com riche In a blaze of lights at the MCI Center Arena, the nouveau Madison Square Garden of Washington, D.C., basketball superstar Michael Jordan made his announcement. He was acquiring an ownership stake in the Washington Wizards and would serve as the team’s president of basketball operations. The news, widely anticipated because of leaks prior to Jordan’s January 19 appearance, played well in the capital. Neighbors couldn’t stop talking about it. Pundits had a field day. It was the knell that signaled an end to the district’s darkest days. There was a new Washington now, with a new, can-do mayor, Anthony Williams. The city’s financial crisis was over. Real estate was rebounding. And now Michael Jordan, with that perennial movie-star grin, had arrived. Only one way to go, everyone seemed to be saying — up — a direction particularly well suited to His Airness (and the loss-ridden Wizards, too). It hasn’t been that long since D.C. — besides being the seat of the most powerful government in the free world — was a ranking murder capital with a standing mayor who was an international embarrassment. The city government was so mismanaged that stories of payroll checks being issued to dead or nonexistent employees were daily fodder for the Washington Post. “We’ve taken such a bruising in the past 10 years,” says John Tydings, president of the Greater Washington Board of Trade, sort of a chamber of commerce for the Beltway. Now, though, the new mayor, the city’s comeback, and Michael Jordan — hell, even the Washington Redskins’ finally making the NFL playoffs — were like manna from heaven. But Jordan’s entrance was eye-popping in another, more significant way. The deal that brought him to town was done without any help from the usual suspects — the cabinet officials, career politicians, lobbyists, media stars, Georgetown Brahmins, society hostesses, policy heads, real estate barons, and well-connected lawyers who have made the town what it is for decades, if not centuries. No, the people who landed Jordan were outsiders, like Wizards part-owner Ted Leonsis, who helped build a local company called America Online Inc. into, arguably, the first dot-com Goliath. These new big-city players did the Jordan deal in their off-hours with play money, much of it from tech fortunes. They made a huge splash for guys who five years before hadn’t even been on the radar screen, let alone on society-party lists. But this is a new day, and not only in Washington. Now politicians are no longer the role models they used to be, especially when compared with the strike-it-rich business stars. On March 9 the Wall Street Journal likened the new era to the turn of the last century, when industrialists with names like Carnegie and Rockefeller led the first entrepreneurial revolution. “It was an era when the economy — with wildcat prosperity, businessmen as media superstars — was shifting like tectonic plates; an era when Wall Street, not the White House, drove events,” the Journal reported. The first big wake-up call for Olde Washington had come only a week before the Jordan deal went down. That’s when America Online — a once unknown speck of a company dabbling in that Internet thing from offices in the distant suburbs — announced it was buying Time Warner Inc. for upwards of $166 billion. The establishment movers and shakers were caught off guard by the hordes of tech millionaires making waves in “our city.” “They don’t know who these people are. They don’t know anything about them. They don’t even know enough to be suspicious,” says Sally Quinn, the Georgetown high-society hostess who offers a window on the elite and also helps shape its outlook through her writings in the pages of the Post. “The first moment anyone ever thought about it was the AOL thing, and they said, ‘Oh, my God! That’s what they do over there.” None of those people were bred in Georgetown. Nor did they attend St. Albans, the elite private school in northwest Washington. Most don’t even have degrees from Yale or Harvard. Worse, they couldn’t care less about the society way of life. They trade neither on their social connections nor on their pedigree but rather on their business exploits, which might include a flaming dot-com failure (it seems to give them credibility, of all things) as easily as a stunning success. Instead of considering social standing in the good old-fashioned meaning of the term, they measure one another by the growth curve of their companies, the size of their paper fortunes, and the global impact of their businesses. Washington, to put it politely, has always been defined by power and access — who’s got it, who wants it, who lost it. Money has never been a part of the equation; certainly not in the way it is in, say, New York. But now money is a force to be reckoned with, big-time, and it’s here to stay. Politics has always supplied Washington with a new crop of movers and shakers, who tended to assimilate into the standing social fabric, refreshing their own ranks with each election. But this new group of tech-fortune youngsters isn’t leaving with the next election. “The way I view it, this is the biggest thing to happen to this city since Washington was made the capital of the nation,” says Quinn, who notes that the recent arrivals are infusing much-needed new blood into a town where the old money kind of “dried up.” And she enthusiastically welcomes the transfusion. “It’s going to have a big impact in every way,” she predicts. Washington used to be quaint, run by a stable circle of friends. Not anymore. To understand how all that is playing out, you need to look at the people who made the Jordan deal happen. The aforementioned Ted Leonsis, now president of AOL Interactive Properties Group and worth an estimated $1 billion, came up with the idea. Originally, he’d been a marketing guy with a company of his own, whose operations were folded into AOL when the larger company bought him out, in 1994. The then-unproven online service paid $45 million, mostly in stock, for Leonsis’s CD-ROM catalog company. That brought Leonsis on board for practically the whole AOL ride, all the way from obscurity to megagiant. Now he’s using the resources he gained to have some real fun. In May 1999, Leonsis and two partners plunked down $200 million for the Washington Capitals hockey team and a stake in the holding company, which counts the Wizards basketball team among its multiple properties. Leonsis figured that snagging Jordan would be the ultimate buzz card, elevating the profile of both teams. He and his group took a meeting with Jordan at his Chicago restaurant. Under the deal they eventually cut, the one that was announced at the MCI Center, Jordan got the front office of the basketball team, a stake in the partnership, and a chance to play with the dot-com boys. ( Boys is not a casual term; modern as dot-coms may be, there are few women among their ranks in Washington.) The way Leonsis tells it, the Capitals’ Web site will be the foundation for building an “Internet distribution channel” for the team in the same way that Ted Turner used cable TV to promote the Atlanta Braves. Right now the Capitals are red-hot. If Jordan also manages a comeback for the Wizards in the next few years, it isn’t hard to figure the upside: valuable teams, Web channel, and then the eventual acquisition of the entire basketball franchise when its current owner, Abe Pollin, 76, retires. No doubt, this was a value investment for all concerned. Six days before Jordan made his role official, Leonsis brought in a partner, Raul Fernandez, to help design the sports-team-cum-Web vision. Fernandez immediately took a place on the roster of Washington’s new power players. Just 33, he is a card-carrying member of the current crop of dot-com millionaires. He is the founder and CEO of Proxicom Inc., a fast-growing Internet-consulting firm based in Reston, Va., that serves clients like General Electric Capital Corp., Mobil Corp., and Mercedes-Benz Credit Corp. And he’s a big sports fan. “I told Ted last summer, ‘If you ever need another partner, I’m in,” he says. Fernandez has gotten a lot of ink lately, being featured in the Wall Street Journal and on the cover of Fortune, where he appeared right next to Jordan (“America’s 40 Richest under 40″). His background speaks volumes about how diverse the new A-list in D.C. can be. Fernandez is the son of a Cuban immigrant who came to this country with $100. He grew up outside Washington, D.C., attended the University of Maryland, and then worked on Capitol Hill for Congressman Jack Kemp. In 1991, with $40,000 in savings, he formed his own company. It grew like crazy and went public in April 1999. Since then Proxicom has grown so rapidly that Fernandez’s 28% stake is now worth about $600 million. With that kind of money, he can afford to indulge his “love of competition, in any form.” Although he jets around the world all the time — Proxicom is steadily expanding — Fernandez calls the sports team his “night job.” It has raised his profile, as have his other local activities. Fernandez talks passionately about the importance of community service and appears on philanthropic panels. He is conscious of being a role model for his employees, many of whom are already millionaires in their late twenties and early thirties — the coming shock troops for the new establishment. The rise of a figure like Fernandez is just another signal that times are changing inside the Beltway. Talk to one of the society veterans, like real estate power broker Robert Linowes, about the Washington business world of the 1960s and 1970s. You’ll get a picture of a quaint, provincial town, run mostly by developers, bank managers, and retail executives, who would welcome the other power players — the pols and their minions — in full knowledge that eventually most would return to wherever it was they came from. By contrast, the old Washington hands Linowes recalls knew one another: they sat on the same corporate and philanthropic boards. In the evenings they hobnobbed with the ever-changing political-cultural elite. “It was incestuous, but no one even thought about it,” Linowes says, recalling the days when the landscape could be altered by a few words over dinner at the Willard Hotel. “Conflict of interest? If you didn’t have a conflict, you didn’t have any interest.” It was a cozy little community in those days. But that community has long faded away. The local retail chains were bought out or folded. The banks were gobbled up, the CEOs with community ties replaced by professional managers. And while Washington’s business world was devolving, the federal government was seeding a vast and entirely new industry outside the city’s borders. So-called Beltway bandits grew by feeding an insatiable demand for information technology, supplying all the computers, software, telecommunications services, and training that could fit into the budgets of federal agencies. The defense buildup and deregulation of the telecommunications industry during the 1980s fueled the growth of high tech so well, it now has more employees in the D.C. area than the federal government itself. By the mid-1990s, the local versions of Silicon Valley-style growth companies were primed like a tinderbox ready to explode. The technology, the communications, and the workforce were all in place. All that was needed was the economic spark — and then came the Internet. Mike Daniels, chairman of the Internet-domain-registration company Network Solutions Inc., based in Herndon, Va., is a prime example of a player who was brought into the game by the dot-com revolution and the explosion in Web businesses. He’s one of the “new” breed that was actually in the area all along, one of the tech executives who had worked for decades in obscurity under the shadow of the military- industrial complex. He started out as a naval research officer at ARPA (the Defense Department’s Advanced Research Projects Agency, which invented the Internet — first known as the ARPANET) and then formed his own technology-consulting company. He sold it in 1987 to Science Applications International Corp. (SAIC), an employee-owned company and one of the Beltway bandits. “We were very typical of what went on here in the Washington technology community, especially in the northern Virginia side, until the Internet revolution began,” says Daniels. In 1995 he convinced SAIC that it should buy Network Solutions for $4.8 million. Network Solutions was as close to being a world-dominating organization as there ever was, if you consider cyberspace to be the world. The company was the registrar for the Internet, the keeper of domain names on the Web. Daniels became chairman of the subsidiary and led its initial public offering. In March, VeriSign Inc. agreed to buy Network Solutions for $21 billion. Obscure no longer, Daniels is a made man. Now he appears with the Steve Cases and Michael Dells of the world on panels such as Governor Jim Gilmore’s 2000 Global Internet Summit, which was held in March in Fairfax, Va. The pace at which this new world has emerged isn’t lost on traditional power brokers like Linowes. In the past, he says, if he wanted to raise money quickly on behalf of some philanthropy, all he had to do was get on the phone. With calls to 20 close friends from the city’s business community, he could complete a fund drive. That’s all changed now. Trudging out to northern Virginia recently to seek funds for the Smithsonian’s National Air and Space Museum, Linowes met with a number of the new-wealth class of greater Washington: high-tech executives. “But I had to be introduced. No one knew me,” Linowes said afterward, briefly interrupting the interview to take a call from the governor of Maryland. And what of the old crowd in the Washington business world? Where are they now? “Either dead or out of business or both,” he said, laughing. Anthony Kennedy Shriver (a member of two of the “best” families in town) started the nonprofit organization Best Buddies in 1987, when he was a student at Georgetown University. His organization offers social and employment opportunities for the mentally retarded. In the early days, he says, he relied on his family’s circle of friends — Washington’s political and cultural elite — for the donations he needed. That all changed in 1995, when Shriver was introduced to Leonsis. The AOL honcho decided to make Best Buddies his charity of choice. Leonsis came aboard as cochairman of the Best Buddies ball, the nonprofit’s fund-raising event, and one that drew many famous names. But not the names Leonsis could draw. He brought in his contacts from the high-tech world. “Honestly, in those days no one had heard of Ted Leonsis, and when I told my mother, she was like, ‘Fine, whatever. It’s your thing,” Shriver recalls. “But Ted was willing to work and get involved, and that’s what we were looking for.” Now Shriver talks about the “pre-Ted” and “post-Ted” eras at his charity. “I try to avoid remembering the pre-Ted days, because they were very unpleasant,” he says. In those early days the charity typically raised anywhere from $200,000 to $300,000 from the establishment. But with Leonsis working the phones — or rather, E-mail — the northern Virginia tech crowd began to show up in force at the Best Buddies ball and to give generously. Last year, with Leonsis’s Wizards partner Fernandez serving as cochairman of the event, tickets went as fast as shares in a dot-com IPO. With the ball oversubscribed, Shriver expanded the tent at his aunt Ethel Kennedy’s Virginia estate, and then he sold out again. When the black-tie event took place, in October, limos got stuck in the driveway. Muhammad Ali posed for pictures. The Pointer Sisters sang. The Kennedys welcomed guests. “People showed up from my family, but they didn’t know anyone, which from my perspective was a great sign,” Shriver says. Best Buddies raised a record $1.1 million that night. “When we hold events in Hollywood with a good number of celebrities, or in Houston, Palm Beach, Miami, or New York on the Forbes yacht, we raise maybe $300,000 to $400,000 a night,” Shriver says. “Washington just blows them away.” He is calling the upcoming 2000 event the “dot-com ball.” And this year he plans to raise $2 million. It will be a real A-list event, especially in the tech community — a party “where anybody who is anybody in the Internet world will be,” he says. That example hasn’t been lost on the region’s cultural institutions, ones that have been at the heart of the Washington social circuit for ages but that have been at a loss to capture much of the new wealth. “In the 1990s, at almost every board meeting I attended, the question was always raised, ‘How are we going to get those people interested?” Linowes recalls. “Almost every major foundation and charity had a committee aimed at doing just that.” “Is it a conscious strategy to get those new people involved? Yes. Is it organized? No,” says David Levy. The disconnect makes sense when you think about it. Many of the new paper millionaires are young and simply haven’t had the time that the older crowd has had to focus on how to give money away. And many of the philanthropies have never had ties to a class of people who lived on the wrong side of the Potomac River. But that’s changing. The Corcoran Gallery of Art, which as the largest privately funded art museum in the capital also runs a college of art, recently lured Bob Pittman, president and chief operating officer of AOL, to its board; he’s the first major figure from the tech community to join at that high level. Why, you might say that Pittman — the New Yorker credited with creating the massive MTV phenomenon before making his high-profile move to start shaping the world in AOL’s image — had finally arrived. But you’d better have your tongue firmly in your cheek, because in this case it seems that Pittman brings as much cachet to the Corcoran and the society it represents as they give to him. “Is it a conscious strategy to get those people involved? Yes. Is it organized? No,” says David Levy, the Corcoran’s president and director. The way he sees it, people give money for two reasons: to support the arts and education and to gain access to social and cultural circles in Washington. “We provide that access, and they provide the support,” Levy says. What’s not clear, however, is whether access to society is something the dot-com crowd wants. Where a charity-board seat might have been de rigueur for the well-bred, it’s more of a fun option for the newly minted. As Linowes says, “We had a certain way of giving and a certain level of giving. These people want to do things in new ways.” Remember, many high-tech fortunes were spawned by battling the establishment business world. These start-ups exploited small niches and built new entities by going against the grain. The late Bill McGowan, founder of MCI, is a perfect example. In fact, he’s something of an Ôber role model for many of the established entrepreneurs in the region, because his Washington-based company battled giant AT&T for years. McGowan used to exhort his troops, Whatever AT&T does, do the opposite. That rattle-the-gates strategy worked for all who followed, and they prospered by it. Why change any of those attitudes now? Already, there are strong indications that Washington’s technology elite is treating philanthropy in a very different way from that of the establishment. Many even take umbrage at the word philanthropy, since it suggests a handout rather than an attempt at producing fundamental change in people’s lives. Mario Morino, chairman of the nonprofit Morino Institute, in Reston, Va., for example, speaks in no uncertain terms of the need for “social change” to correct the huge disparities in wealth and opportunity for youth in the region. He’s not going by Karl Marx; quite the opposite. He’s repeating lessons learned by virtue of his entrepreneurial experience, which some would term ultimate capitalism. Morino earned his first entrepreneurial merit badge building Legent Corp., a software company that was sold to Computer Associates International Inc. in 1995 for $1.8 billion. By then Morino had stepped back from day-to-day business affairs and embarked on an eight-year odyssey to figure out how to give some of his $140 million away. Oddly, he found it harder to properly give his wealth away than it was to build it in the first place. [In the interests of full disclosure, the writer of this article worked on speeches for Morino a couple of years ago.] “We took [MicroStrategy founder Michael Saylor] to lunch, and over the course of that lunch his net worth went up by $145 million.” –Lloyd Grove, society columnist fpr the Washington Post
