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http://www.mosesavalon.com/mosessupposes/monthly.htm
CD BABY: BUY OUT OR BAIL OUT?
=============================
One Indie Giant Takes Over Another.
A Community Of 150,000 Hang In The Balance.
By Moses Avalon
Derek Sivers, Founder of CD Baby, claims he sold to Disc Makers because
their VP, Tony Van Veen is his friend and would best serve the existing
client base. But upon closer examination, the reality might be a bit less
earthy. Sivers may have had little choice.
Was CD Baby financially healthy at the time of the sale? No question. The
company's profits were in the millions. So why then was the rumor mill
swarming for years of Sivers' desire to sell the company on the cheap? And
why is there no evidence of any other tendered offers to acquire CD Baby,
other than Disc Makers?
Could it be because most of CD Baby clients were losing money with the
e-tailing portion of the service; or the two separate class-actions (that I
know of) that were steeping (but never filed) over their digital
distribution contracts?
For those caught up in the financial metrics the debate is just about cash:
did Disc Makers overpay for a lemon, or steal CD Baby for a song? With an
undisclosed price, that many in-the-know speculate was in the low seven
figures, why would a CD duplication service want a CD e-tailer/digital
rights aggregator in an age where physical CD sales are diminishing and
digital distribution options are increasing?
But, for those still using CD Baby as the liaison between their music and
the public, the issue is as basic as a classic rock lyric, "Should I stay or
should I go, now."
What changes will Disc Makers implement? Will they be forcing CD Baby
artists to use Disc Makers for manufacturing? Can the new owner possibly
walk in the legendary shoes of the beloved creator, Derek Sivers?
If this community of 150,000 clients (not 250,000, as cdbaby.com misstates)
wishes to extract any usable data from this event, they will need to put
down the bong, put business first and take a hard look at Mr. Sivers' track
record over his ten-year reign. In other words, it's not Sivers' strengths
that lie in understanding how the take-over will effect CD Baby clients, but
his weaknesses, versus those of Tony Van Veen.
PRE SCRIPT: MY PROBLEM
The web has given everyone a level playing field for opinions and many in
this space don't seem to be able to separate constructive un-spinning
analysis from antagonistic ranting. So, how can I do my job, be critical,
but without sounding as if I am making it personal? Answer: I don't know. No
matter how professional I've tried to make my analysis in the past, somehow
a CD Baby fanatic always seems to twist it into hostile blog-fodder.
Reality can be a bitter pill to swallow, but all I care about—ALL I CARE
ABOUT—is your money and how you can make more of it with your music.
Sometimes that means taking an unpopular stand, like when I (and many
lawyers on this list) disagreed with Derek over some language in his digital
distribution contract in 2003. My article, intended only to help people
make an informed decision, started an avalanche of lies that put many of you
in a bitter, "choose sides" scenario.
Hopefully, this time around, if we disagree, we can keep a level head and
maybe—just maybe—we can all learn something from each other. Kumbaya.
NOTE: This is a big subject. To break it up, I'm writing two articles. The
first, this one, will focus on CD Baby's past and their actual, un-spun
track record for the physical CD fulfillment service.
Part II, in the next issue of Moses Supposes, I will focus on CD Baby's
other services: HostBaby; digital distribution and who is behind the deal
and how the company will now function differently.
And away we go…
PART I: UN-SPINNING THE CD BABY DREAM BOOTY
============================================
Or, "E-tailing… Distribution…
Whatever you call it, it's all good (for me)."
What CD Baby offered in terms of their e-tailing/fulfillment service (which
was often inaccurately referred to as "distribution" of physical product)
was pretty damn good; they paid consistently and there was a time when they
were the best fulfillment solution available on the cheap.
But those days had past years ago. Since 2004 many things CD Baby offered
could be replaced simply with free plug-in e-commerce solutions, or a
MySpaceaccount, which offered superior marketing opportunities through
social networking.
Founder, Derek Sivers knew this and did his best to come up with ways for
clients and prospective clients to be excited about being "on CD Baby";
largely announcements on his blog that touted how much money they were
distributing; a number that rose each year, without fail, as did the number
of clients. Then there were the pseudo deals with MP3.com, Soncap and
finally, Best Buy—we'll get to that one later.
Regardless of the success or failure of these "deals," the idea of them was
smart. It created client confidence and helped the CD Baby client forget an
important fact: CD Baby was pricey. So pricey that most clients didn't
profit.
It would be an absurd stretch to imply that Sivers didn't want his clients
to make money on CD Baby—I'm sure he did. However, it's not a stretch to
point out that helping them sell more CDs would have seriously re-shaped his
bottom line and thus the selling price of the company. This may have
affected his priorities.
It is mathematically impossible for you to be making more money off of me,
than I am making money FROM you. Think about auto insurance. How can an
insurance company make a profit if you pay them $50/month and they pay when
you have an accident that costs $2500 to fix? Don't they lose money? Well,
no, because most people don't have accidents, and for those that do, the
deductible offsets the loss. The CD Baby business model was similar. Let's
look at some numbers.
--Cost of CD pressing: $1.50 (assuming you order between 500 and 1000 units)
--Shipping to CD Baby: $1 per unit (five unit minimum)
--CD Baby's fulfillment fee: $4
Total cost to the client per unit: $6.50.
On top of this, CD Baby's start up fees (the "deductible" in this
comparison) per title of $35 plus $20 for a bar code (which was a "sub-code"
not an actual UPC code) puts the client into a scenario where presuming a CD
sells for an average of $10, they have to sell between 12-18 units per title
to just to break even.
Think that was easy to do? Here are some alarming statistics:
Nielson SoundScan--the leading company that tracks retail CD sales (and
whose data is chiefly responsible for how the Billboard charts are composed)
in 2004 reported that of the CD Baby titles they tracked, only about 700
titles registered more than 12 units sold on the popular service that year.
CD Baby claimed about 70,000 titles at that time. Meaning, 69,300 titles
lost money. In other words, only 1-4% of the titles were in the black.
Quadrupling the numbers over the following three years, to track with CD
Baby's expansion, we still get only 2800 titles passing the profit threshold
and over 247,200 titles-- not. (Note: it is possible that there were
titles NOT tracked by SoundScan that sold a great deal and, therefore, would
upset these metrics. But it's not likely.)
Did Sivers ever misrepresent this fact? Not really. He promoted heavily
that CD Baby disbursed about $4,000,000 a year in CD sales. Most simply
didn't do the math. With about 250,000 titles in their current CD catalog
(not "artists," as misstated on cdbaby.com), that nets out to about $16 per
title, while taking in between $35-$55 for the set up fees for each title
and charging $4 per unit for fulfillment.
At an average of $45 in set-up fees per title and $4 fulfillment for each
sale, CD Baby should have been making about $5.4 Million a year from CD
sales and set up fees. (Before overhead.) If you include digital sales the
number rises to between $10-15 million a year. Van Veen confirmed this
range.
These margins beat most auto insurance companies. Meanwhile, the vast
majority of their clients were not realizing value, they paid their average
employee something around $15 an hour and their average senior executive
less than $100K a year. So, for CD Baby's owners it was VERY lucrative, and
in my opinion should have been sold for something just shy of $30,000,000.
(If my information about the sale price is true, Van Veen stole this puppy
from his "friend.")
And what happiness do the top 4% of CD fulfillment clients have to look
forward to? I know, because several of them are my clients. One emailed me
about this article and wrote, "I'm concerned [about the take-over]. We sold
about 10 CDs a week through them and I considered CD Baby partially
responsible for our success."
I wrote back, "So you paid CD Baby $40 a week for five years-- $10,400
basically to make trips to the post office ([$4 per CD] X 10 X 52 X 5). CD
Baby did little to drive traffic to your site or help sell those CDs and for
about half the price you could've paid someone to run to the post office,
saving you about $5,000 for promotion or your next production."
And that's not even including my client's costs for sending the CDs to CD
Baby's warehouse. (About $1 each— tack on another $2,600 in costs.)
When speaking to Van Veen about these statistics he seemed shocked. He
confessed that he had not done an analysis for the 96% stat prior to the
purchase but said, sounding skeptical, "I would be surprised if only 4% are
breaking even or making money."
How will Van Veen make more clients profitable? Because of the lateral
integration between the two companies he could now offer CD baby clients a
deal on manufacturing. "We'll never force [CD Baby] artists to make their
CDs with Disc Makers in order to use CD Baby. Never ever." But he might
offer an incentive that could cut the vig back about $1 or so. Van Veen
told me he is contemplating such an offer.
But this is nickels and dimes. Van Veen has something sexier on his
agenda. He will do what the old CD Baby apparently never did much of for
their clients—market.
PARADISE LOST
Some of the large failure rate could have been remedied years ago if only CD
Baby had invested just a little of their considerable profits on mainstream
advertising.
Now, I can hear you screaming through the web, "But CD Baby advertised
everywhere."
Did they?
In the old regime, CD Baby advertised in music trades. Result: the general
public was not that familiar with CD Baby's e-store. From CD Baby's own
site: "That's why as a [CD Baby] customer, I usually end up discovering new
music and buying it from Amazon or iTunes and not CD Baby" Ask an average
Joe, if you need more proof.
Why didn't Sivers, whose marketing prowess seems formidable, confront this?
The logical deduction is because he was not trying to compete with, well…
his competition: Amazon, Barnes & Noble, etc. Marketing music to the
general public is very expensive, requiring ads in main-stream papers and
pricey banners on key sites. Rather, Sivers' choices for advertising were
targeted at the music community, selling essentially a "sense of belonging"
to emerging artists. It worked. He's good.
Many CD Baby clients were outspoken about the fact that they didn't care if
they sold product. They simply liked being part of the "anti-label
community." It was way cool to say "I'm on CD Baby." Shoot, you could have
made a mint just selling a t-shirt with that tag line in 2003. Sivers had
tapped into a zeitgeist. A cultural commodity much needed in the indie
space: the desire to feel like you're not alone with your music in the
swallowing sea.
But according to sources, in Portland, behind the scenes at CD Baby Central,
the staff had serious concerns.
Around late 2005 Derek was starting to resemble less than the charismatic
front man and more of an absentee landlord. His role in the day-to-day
operations of the company diminished and many ideas for improvement advanced
from staff passed over. One of which was partnering with a big retail
outlet. Then, in 2006, Sivers announced a deal with Best Buy to carry CD
Baby product. This created a bit of buzz.
But pushing CDs in 2006 to a company that uses CDs as loss leader seemed to
be investing in a decaying system. In addition, my sources close to the
Disc Makers acquisition told me that no evidence of a deal with Best Buy was
revealed during the due diligence process.
Much like the rumors of several important entities (like Amazon.com) bidding
to buy CD Baby, the deal to have Best Buy distribute CD Baby product was
largely a specter of wishful thinking.
Van Veen: "There are certain ways that Derek ran the business that were non
conventional. You need to offer guidelines and be there to support your
staff and help do the day-to-day strategy. We will be more hands on and
on-site… [and] we will spend more on marketing than the previous ownership."
LAND OF TONY
If Van Veen is going to keep his word, he'll need to address the look & feel
elements of cdbaby.com and bring them into the web 2.0 spectrum.
Van Veen: "[Right now] when you visit cdbaby.com there is no enticement to
stay and browse. We need to do a better job of making the store an
attractive place to come and discover new and exciting music, with best
seller lists, featured artist spotlights, promo tracks, and more."
(Sounds like iTunes junior. Could be fun.)
Van Veen: "We will also be focusing on partnerships that make CD Baby
artists available on sites beyond just cdbaby.com. One of the first things
we're going to be doing is pursuing a partnership with Amazon, giving our
clients far greater traffic potential."
Another idea advanced from CD Baby staff that Van Veen will be implementing,
"…a 'buy my CD' or 'download this album' widget that can be dropped into
MySpace and Facebook pages and makes CD and download sales easier."
In addition, there is a new initiative by Disc Makers: Elite Artist
Services. This division's mission is to supply an alternative for Heritage
artists whose long-term contracts on major labels is up for renewal.
Instead of re-signing another plantation grinder, they will now be able to
sell CDs and downloads directly to their established fan-base.
If Van Veen links the CD Baby artists to this platform, they will be getting
residual exposure to people shopping for acts like Crosby, Stills & Nash,
making a move on the Indie tip.
APPLES TO APPLES, DUST TO DUST
Is it fair to make comparisons between Derek and Tony? Probably not. Tony
Van Veen went to the prestigious Wharton School of Business. Before
starting CD Baby, Sivers, from what can be gathered, worked in a circus.
For this expert's money, that means Derek is far more qualified.
That's why it seems obvious that CD Baby's greatest asset might have been
Sivers himself-- an asset that was not part of Disc Maker's acquisition.
What kind of leader will Van Veen be to this new minion 150,000 strong?
Will he be emulating the Sivers MO; showing up at every music business
shindig, pimping the Baby, being your friend and buying you dinner?
Probably not. He's more of a behind-the-scenes deal maker.
And so, the bottom line here: CD Baby clients, will, for once, have to make
their decisions based on factors that are not so emotional. They will now
have to base them… on results.
The Kool Aid has left the building.
--Moses Avalon
PART II: (in the next week – or there abouts)
--What up with HostBaby: will it still suck?
--Digital distribution: Will the contracts and service improve? How will
Van Veen fend off the lawsuits?
-- What companies are behind the take-over and who stands to profit in the
long run?
--PLUS – Your questions to Van Veen answered.
leflaw
gdZiemann
