COVER STORY

MP3—It's Not an Android or Robot

Interview With Lane Elliott of MyNetMedia

by Don Hamilton

What is MP3, and why is it one of the most searched-for terms on the Web—even more so than "sex"? It is the standard for compression of music files, the rocket being used to propel the music industry into the future. People are downloading files for listening, and recording from their own PCs at a phenomenal rate. And the rate of this change will be accelerating. The complex and expensive process of downloading music to CDs has become simple and inexpensive, thanks to MyNetMedia. The company has built a software product, for the computer-illiterate, with a one-button CD-burning process by which a non-geek can make a CD that will play in the car or at home. Just click on the songs you want, and they move to your play list. When you have finished making your selections, push the button—the system takes over and creates a CD from your PC that you can play anywhere. Sony liked the program so well that they have signed a deal to bu! ndle it with their CD recorders.

We interviewed MyNetMedia CEO and President Lane Elliott to learn more about this start-up.

WWWiz: How did you start this process of writing the software?

Lane: It's a combination of proprietary stuff, and licensed and royalty-based technologies. One is this MP3 technology that everybody has to license from the guys who invented it it's called the Fraunhofer Institute, they're owned by Thompson, out of Germany, which makes RCA types of products. Anyway, Sean [Reyes, the president of the company] is a young guy and the opportunity here was to take what was already kind of a busy field with a tremendous amount of buzz.

WWWiz: How did you get connected with the people who put the software together?

Lane: A friend of mine introduced me to Sean, because my friend has a good ear for opportunity, and he felt that what I was good at and what this guy needed made some sense.

WWWiz: What prompted you to get in to the MP3 music arena?

Lane: This whole downloadable music segment has been so hot that for example, today "MP3" as a search word is a more highly searched word than "sex," interestingly enough today. The upside to that is that when you are in that segment, there's a lot of activity, and there's a lot of buzz and you can attract attention. When you have companies like MP3.com, which went public two months ago, with trailing revenues of less than half a million dollars, and went public at a market cap in excess of a billion dollars, with a business model that has no possibility of making money for a year, it's a pretty exciting space to be in.

The number-one content site, called Emusic.com , basically they're in the business of selling music. Not creating software, but just selling music. They had their annual meeting in June, at their year end, to excitedly report that their prior three-month quarterly revenues had reached an all-time high of $51,000. They're publicly traded, and their current market cap, as of a couple of days ago anyway, was over $300 million. So, knowing those kinds of things, I got excited about the segment, got excited about the basic thesis of the idea. I came in and put some water and fertilizer on the seeds that were planted, went out and created some strategic relationships on behalf of MyNetMedia, and brought in the original amount of funding, the seed funding that it took to really position it in the marketplace.

WWWiz: How much funding is seed funding?

Lane: Seed funding is $300,000. People wanted to give us a whole lot more, but I knew that for $300,000 we would be able to prove the point and create some strategic relationships that would be undeniable proof of the point, and then when we go for the next amount of money, which is what we're in the process of doing right now, that we could charge a whole lot more for it. So it was very selfishly motivated at the time. It's not without stress, because when you shoestring something that tightly in today's marketplace you can burn through that kind of money in a heartbeat. And we had to pay initial royalties and license fees out of that initial amount.

WWWiz: What do you have today to show for the $300,000?

Lane: Today we call the product the Digital Stereo, and what it's all about is taking three different parts of the existing marketplace as it relates to the first segment of multimedia content, which is music, and dealing with that. I think it's important to understand that the Internet's position, we believe, is founded upon one basic premise and that is that at the end of the day, people are looking for personalized content. It's kind of anachronistic in a way. I want what I want when I want it. I really don't want or care what's on channel four at eight o'clock. Right now I want to deal with Bengal tigers, for example, and I want to know everything there is to know about Bengal tigers, and I want it now. As it relates to entertainment, it's become the same thing.

WWWiz: Why MyNetMedia?

Lane: Because of where the technology is, the reason the name of our company is MyNetMedia and not MyNetMusic is that personalized multimedia content is where commerce is really going to take off, and is one of the real draws that, as I'll explain in a moment, is exciting the investment community. Multimedia starts with music because now audio files can be handled with the compression technologies and the other things that are there in an effective way with 56K modems that people are getting bundled in their computers. You can't handle video that way anymore. Anyway, broadband has enabled music to be first. What's next will be music videos, video games, and then ultimately movies. Full-length, feature-length movies. What that means, however, is that up to now, all the technology on the Internet that's been there, and this is what we see, almost forces you to stay at your computer to enjoy it. Now, if you're in the workplace and you're pounding on one all day long, the l! ast thing you want to do when yo u get home is spend another four or five hours sitting in front of the computer.

The ultimate objective of the Internet or commerce is to be able to source, acquire, and either have delivered because it's something tangible, or be able to use the Internet backbone to download that information, that digital entertainment file, and be able to use it and enjoy it. Really, to be able to use and enjoy it means, if it is music, music videos, movies, you want to be able to enjoy it somewhere else other than your computer. We're probably four or five years away at least from where what's lovingly known as the set-top box, which will sit on top of your television, will become the appliance that will deliver this stuff to your family room.

Recent announcements, for example, from Sega and Sony, in the video game business…they've anticipated the fact that this little box where you're playing your video games now could be one of the ways in which you could, in a hardware way, bridge the gap between your PC in your study or your bedroom, and your television in your family room, because the Sony Playstation, in the next iteration, will be able to not only do video games, but it will play music CDs and it will play DVD-ROM movies, interestingly enough. We've seen this coming, and we have the relationships to get there to do that, and so our business is simply this: we're here to bridge the gap between Internet content and those hardware appliances that enable you to enjoy that content portably, away from the computer.

The first one is music. Our product, Digital Stereo, enables you to locate, and acquire through download, music files in compressed formats. Today the most often used format is MP3, although there's a handful of others that are coming, that are all jockeying around trying to become the de facto standard for new music that can be secure, that can protect artists' rights. When that comes, we'll obviously embrace and endorse all that. But to acquire those files, to be able to play them and enjoy them and to organize them on your computer and, when you're ready, to be able to create a customized collection of songs that you want to make your own CD of, that you can take and use in your boombox, your car stereo or your home stereo, that's our first product. And that product has been exceptionally well received.

Our first major Internet portal company that is utilizing this under our OEM strategy is NetTaxi.com. The first major hardware company that's bundling our software with all of their CD recording equipment is Sony. Now we've taken that whole idea of what is populated in our segment by people like RealNetworks , MusicMatch, and LiquidAudio, and we've gone at it a little bit different way. We've decided that instead of trying to compete on a brand-centric basis, with RealNetworks, for example, in their space, that we would take the strategy and turn it around a little bit. We've gone to people like Sony and NetTaxi, and said, "We will wrap our technology in your skin, so that as your customers—your Netizens if you're Internet portal, or your customers if you're a hardware vendor of any kind—are intera! cting with this kind of Internet -based content, they're seeing your brand name right on the front of the player. That's been a very exciting strategy for them. We also, because we do this both for Internet portals and content sites, basically on the Internet, as well as hardware vendors like Sony and a number of others, major names that everyone will understand, become the bridge that enables this content to get to this hardware.

WWWiz: How many people have CDRs?

Lane: One thing that's pretty exciting is that when the content sites, the portal sites, post their version of our product on their site for download, when people download a demo, they have to give us personal demographic information. One of the questions we ask is "Do you currently own a CDR?" Meaning a CD recording device. Yes or no? Right now, over 65% of those responses say no. Sony, as you can imagine, is real interested in those people who don't have one, because they'd like to sell them one. The flip side of that is that in the Sony player we have a button, where you go to add music to play or to acquire…Sony wants to be able to bring value to their users, so when their users press the add button, they have this nice selection of Internet content sites to go to, to acquire music.

Their Internet guys really love that. So it's very synergistic. The hardware guys get hardware leads, the content guys get content leads. And it flows through us this way. And our economic model depends upon selling software, either through a direct OEM kind of master license, to print it and bundle it, which is like what Sony does, to licensing a demo version of our software, that when people really like it, they pull out their credit card and upgrade to the full version and then we do revenue share opportunities over here. So we provide additional revenues from our software to these guys and provide additional value over here to the hardware guys. That differentiates their product from their competitors. And in the meantime we make revenues on either side of the game.

WWWiz: What's the difference between your software and the others that are out there?

Lane: There are basically three levels. Right now in the music segment, you have what's called the MP3 player marketplace, and there's probably two dozen players in the marketplace that will play and provide interesting graphics at your computer, in these compressed music files. It is technology that is easily obtainable; you just pay a license fee to MP3. The second layer takes that player and adds some feature sets to it. They add feature sets like the ability to take your own personal CD collection and encode it to your hard drive to create a kind of digital jukebox. The buzzword in the industry for that is "ripping," where you're effectively ripping the tracks off your own CD collection to your own hard drive, and that way you can then mix and match your play list on your computer. It compresses those files down to about a ten-to-one ratio, meaning a normal song, for example, is about 65MB of hard disk space. In MP3 format, it's about 4.5MB.

So it's about a twelve-to-one compression rate. So that makes storage capacity more viable, one, and two, it also enables you to attach that file to an email you might want to send to somebody to say, "Have you heard the latest Eric Clapton song?" That's obviously what all the record producers are upset about. So you have the basic players at level one, you have the players with additional feature sets, and the competitors in that space would be RealNetworks and MusicMatch, the two biggest, and companies like AudioSoft and a couple of others, like Sonique, that was just acquired by Lycos for about $78 million. WinAmp was acquired by America Online for $65 million. None of them have any revenues; they just wanted this kind of technology. And they include at that layer great graphics, the three-dimensional images some of them have. Some of them will let you be looking at the actual cover art for that album that you're listening to, and it's pretty innovative stuff. But you're!  stuck to your PC.

WWWiz: So what makes your version stand out from the rest?

Lane: Where we come in is we take all that functionality…we do not include all this graphics stuff to look at, those images and everything, but we do get all the player functionality and the ability to incur from your own personal CD collection to the hard drive. And then we add one more feature. And that is the ability to take it off your hard drive, to decode it—in other words, expand this compressed file—and record it directly to CD. Any songs in any order, any way that you want, so that you can take it with you. Now we're raising the bar to that standard in a feature set.

There are a couple of others doing that already, in various ways. LiquidAudio has a make-CD functionality of their own kind of special file format, a company called AudioSoft out of Germany offers that. I'm sure that Real and MusicMatch will ultimately offer that. But the versions of that technology that they're offering are inferior to what we do because they primarily require you to first, if you want to copy a song to CD, go to your hard drive, grab that file or group of files, decompress them to your hard drive, and then effectively cut and paste them to the CD. It's slow, and it also requires you to have a whole bunch of hard drive space available to be able to expand these files, even temporarily, to be able to do this.

There's a third thing that's kind of interesting about that, and that is that functionality requires you to be fairly computer literate. In fact, more than fairly computer literate. We counter that with two things. The first is speed. Our record-to-CD functionality does not require you to expand it first to your hard drive—it does it on the fly. Number two, it does it at full 8x speed, which means if you've got the right hardware, you can record a whole CD's worth of music—65 minutes' worth of music—in less than ten minutes. So we've raised the technology bar.

But that's not nearly as important as the last one. Where we really think we have an advantage is we recognize that there's a whole new segment of users coming to the marketplace. When you bring PCs, good technology, down below $1,000 for a whole setup—in fact, now, with rebates, and if you sign up for Internet service for some period of time, you can get them for less than $500—that, number one, brings a whole new demographic to the game of home PC users. People who probably don't even know how to type, let alone how to navigate and to cut and paste. You add to that one other part of the game, and that is that next year, floppy drives will no longer exist. The price point of CDRW, meaning the ability to use a CD to store and retrieve information, just like you would a floppy disk, except that instead of one-and-a-half megabytes you get 650 megabytes' worth of stuff, is what the computer manufacturers are all going to be bundling next year because it just no longer makes se! nse to have all these different form factors, and they get a bigger kick for their buck.

When you understand that the demographic is changing to someone who's never used a computer before, and that the ability of the hardware to copy the CD is going to be built into all of these boxes, the opportunity for us to meet that user where they are with an interface, in other words, the ability to deal with software intuitively and quickly without having to be a propellerhead, and to understand how to do this is an extraordinary opportunity, is the foundation of what we have built. Our software is such that is you can run your car stereo, you can run our software, including the very complex process of recording music files to CD, effectively with the press of one button. All of it's done for you. In fact, it's so bulletproof that we lock you out, once that button is pressed, from doing anything else on your computer, so you can't mess it up. We just don't want you to mess it up, because we know that demographic, whether they're younger children, or adults coming to the!  computer for the first time…you 'd better give them something they can use because that's where the satisfaction comes in.

It is because of that interface and the power of the software that's under the hood of that interface, that people like Sony, for example, who can buy anybody's product they want, have selected ours as opposed to major names in the marketplace who've had record-CD technology for some time, not bundled with a player, but as separate software like Adaptec, for example, who's the biggest in the marketplace. We feel that this thesis will apply, and this basic user interface is going to be the foundation for dealing with all kinds of multimedia content, all the way down to DVD-ROM movies. We're fortunate to have two of maybe eighteen guys in the world who really understand record-CD technology and DVD technology.

WWWiz: Can you take music directly from a Web site and put it on a CD, or do you have to put it on your drive first?

Lane: It has to go on the drive first for the following reasons: streaming audio is still a technology looking for perfection. The problem with that is that once you start the recording process, you're now not only dependent upon your hardware, but you're dependent upon the reliability of that Internet connection to that other guy's site, and record-CD is true garbage-in-garbage-out. Whatever you give it is what you'll hear. So if it breaks down or if there's static or whatever, the broadband technology's not there yet.

WWWiz: That was my question, how do you depend on the connection?

Lane: If there was a secure server that had only these files on it, that you could connect to directly through your network, like if you had a business, and in your office there was another PC over here, which is what the Internet really is, it's just another data storage file, and you could go right to it with nothing in the middle, you could do that well.

WWWiz: How many people are actually working in the company or are on the project?

Lane: Nine today.

WWWiz: Are they employees?

Lane: There are five employees, two other engineers…we have this core…record-CD technology is a licensed technology, exclusively licensed to us today. We have an option to buy this company, which we are going to do probably before the end of this year, to merge the companies together because it's a very logical combination of technology skills and strategic marketing and user interface software skills that blend technology together so that at the end of the day, you and I can use it.

WWWiz: And your background is managing companies?

Lane: My background is finance and marketing, and operating entities. I got out of school, went into the insurance business for 12 years, got out of that, went into commercial banking, got recruited by one of my banking clients in the early '80s to come run a large commercial real estate brokerage operation, a statewide operation. Did that for a couple of years, sold my interest, went back to doing deals, merger and acquisition kinds of stuff, under my own company. Got deeply in the co-generation alternative energy segment in the mid- to late '80s here in California and across the nation, did a lot of merger and acquisition work there, worked on developing my own project in conjunction with Unical. It ultimately didn't work out, but the end result of that was the development of another company in Long Beach, a systems integrator that sold to refineries and chemical plants. I ran that for four and a half years, went back in the deal business in '97, and now I'm running t! his.

WWWiz: So did you just wake up one morning and decide you wanted to be in the Internet business?

Lane: No, I was here at Global Capital doing merger and acquisition and corporate finance work, and I found that that's a good place to go to see what's happening—to do deals, and you get to see deals. Obviously the Internet segment was there, but I hadn't seen anything that really excited me, because most of them are dependent on the ability to continue to sell shares, to stay in business. I was looking for the Internet business that sells product, that generates profitable revenues, because I'm too old to understand how you can stay in business by giving it away, although there are guys a lot richer than I am who've done that real well so far. This business model made sense because it delivered real value to the line. It brought customer satisfaction, it brought product that easily was worth the price point, it had a smart segment that had already kind of improved, but needed some adjustment. We thought we had a better mousetrap sort of thing. Not a brand-new revoluti! onary mousetrap, just an evoluti onary mousetrap.

WWWiz: So the company actually existed and was doing some business?

Lane: The software wasn't even written when I met them. It was a concept for the software. So I've really been involved in this from conceptualizing what the software would do, to what it had to look like, and who we need to create some strategic relationships with to prevent losing.

WWWiz: So was it your idea, to have one button and make it completely simple?

Lane: I certainly wouldn't take credit for that. It was really a team effort. We had some good, solid guys, but they used me for the test dummy. If I could run it, anyone could run it. So it was clear that would be the most powerful draw in the marketplace, because people pay for what works, and what works simply, and our thesis has been that the Internet is a wonderful, exciting new marketing tool, but it is not where somebody wants to live for hours and hours and hours a day. Give them something they can use and make it portable.

WWWiz: You're really saying your software is best for almost every use if you're making CDs. If you're going to make a CD and take it with you, your software is the best out there.

Lane: We feel it is. I think initially it has to do only with music. We are focused on expanding the functionality of our software to enable the end user to be able to accommodate all kinds of copy-to-CD functionality. For example, you know about digital cameras. Certainly scanners were here before digital cameras. But let's say you've got some images of your kids on your computer and you want to send Grandma, who's a with-it kind of lady, a very special gift. Why not create a CD that has images of the kids, effectively create your own slideshow with images of the kids, with music in the background, and the opportunity to have the kids talk right into the computer and say "We love you, Grandma," and send it to her with your own label on the front of it? Something you made specially for her. In the end you put a couple of Frank Sinatra songs because they're your mom's favorite, and you send it to her for a gift, and you do it easily. You don't have to be a propellerhead ! to get it done; it's just so int uitive. It's what I would do if I were doing it by hand. That's the objective here: to create a platform for the user to create tangible representations of all this digital data. Tangible, meaning I can hold it, touch it, give it away to somebody.

There was an interesting article in the Wall Street Journal about two months ago, under this MP3 segment about what's being used here. The writer said he interviewed some teenagers and this one young guy had a very cool strategy: "I walk around and I say to all the girls 'What's the latest music that you really like?'" The girl tells him and he goes home, spends all night looking over the Internet trying to find the latest Brittney Spears or Back Street Boys song or whatever, puts a compilation on a CD and gives it to her the next day, and asks her for a date. The whole idea is that the content that you've acquired, it needs to be tangible. You need to make it something that you can use away from the computer. That's a very powerful thing, personally, to be able to say, "I created this for you. I created it for myself." To say to your friends, "Look what I made on my home computer. How about this? Have you heard this? These are my favorite guitar players." Whatever. We beli! eve it's where it's going.

WWWiz: How many software packages have been downloaded so far?

Lane: I think now, just from NetTaxi alone, we're up to 40,000. We've only been in the marketplace about six weeks.

WWWiz: These are demo. They haven't paid for these?

Lane: We haven't sold 40,000. We've sold…at last count last week, we've sold about 1,800 of them. But it takes people a while, because a lot of the downloads, 60% of them don't have a CD recorder so there's no reason to buy that functionality. The demo continues to stay live for as long as they want. They have the opportunity to encode to their hard drive, a certain minimum number like 40 tracks, and that part goes away. And they can record maybe one or two CDs and then that goes away. But they can continue to play music on their PC, and just enjoy the player functionality and get used to it. So this has been the most successful software download program that NetTaxi has ever had, by far, by multiples, and they're very excited by it because what they want is eyeballs to their site. They're buying six figures' worth a month of banner advertising on a variety of search engine sites that say "MP3 to CD—click here" and it takes them to their site. Their version of our playe! r is on their site.

WWWiz: You've struck a deal with Sony, you've got some others in the works, and you mentioned that you're going to go for another round of financing. What's your plan after that? I don't know how much you're planning to get in your next round, but you must be thinking IPO eventually.

Lane: Very frankly, we have already been approached by a company that is connected in this Internet multimedia content segment, who anticipates being public by the end of this year, worst case, first quarter, as well another New York Stock Exchange company that is already talking to us about acquisition. Very frankly, we're listening, and we're creating relationships, but in the meantime we're adding value because the conversion rate, the company's value, is what makes us all money, and that's the objective.

WWWiz: So are you saying that you might be up to be acquired, rather than maintaining a separate company?

Lane: We're open to all of that. In the meantime we're focused on adding value every day. We're in the kind of market segment that gets a lot of attention. It's very, very visible, when you have clients like Sony. In the Internet-based business the whole objective is to go out and grab some real estate and hold onto it. That's what we're all about—getting the broadest possible coverage as quickly as we can.

WWWiz: Where did your initial funding come from?

Lane: The initial funding came from angels. Very carefully selected individuals who brought more to the table than just a checkbook. Our investors include people who are connected to the cable TV industry, because they tell us everything that's going on with broadband before it happens, so we'll know where that technology's going. Our investors include people who come out of the entertainment side of the business, because on the content side they're connected high enough to get us in front of major players in that marketplace, to know what's coming, and what's going on, strategic understanding, as well as people who perform due diligence for very wealthy people, their investments…and we got them all to write their own checks.

A lot of these guys want to try to get a free ride, get some spiff for doing this or that. They either got pregnant and wrote their own check, or they didn't get in the game, because then when they got to see anybody else, and they say, "What's your deal?" they say "Well, I wrote my check." It adds a lot of leverage. That much I knew. Most of the money-raising I've always done has been institutions, so this next round, as we're talking to New York Stock Exchange companies, is not a problem since I've done strategic relationships there many, many times. However, I will tell you that this Internet segment business, the valuation algorithms…how do you value a company that has no revenues? How do you make MP3.com worth a billion dollars?

Since I had no clue, I talked to a friend of mine who's in a similar business, who got an investment by a big company, and he sold 20% of his company for seven million dollars. I said, "So Dennis, how did you figure that out?" He said, "Well, we took the trailing three-month revenues, annualized it, and multiplied it by seven." Okay, that's a new one. I never heard that one before. It's a new business segment. None of the old rules apply. That's the exciting part for me, learning this side. Most of my career's been dealing with privately held companies that do business with publicly held companies. I've never run a publicly held company, and frankly, that's not my objective here, either. There are guys who can deal with all of that much better than I can.

What's good about this opportunity is that the skill sets this company needs today is what I'm good at. What it's going to need tomorrow, whenever tomorrow is, to take it to the next level, may not fit my skill sets, and I can't wait to pass that baton to somebody who is the best at that, but my responsibility to the shareholders is to continue to add value, and if I do that, everything works. If we sit here and all we do is talk about it, if we spend all our time trying to sell shares as opposed to creating revenue for the company, then it's ultimately not going to work. It's no more complex than that.

You know, there's the new buzzword "Internet time." My birthday was yesterday, as you know, I turned 54. I don't feel 54, but nonetheless, it's a lot of years in the game, and it is a relentless pace. It is relentless. You really do not have time to think. You must intuitively react. And the guy who has the best instincts at the end of the day wins. That's a different model for me, as well. There's no time for deep analysis. There's a cliché in the marketplace that says if you have spoken to anyone—anyone—about an Internet idea, you had better be in business within 120 days, or someone else will. Think about what that means. It's an incredible truth, and I'm coming to believe it.