Small Business
Starting a sound business
February 28, 2000: 7:04 a.m. ET founder Michael Robertson discusses his revolutionary company
By Staff Writer Hope Hamashige
graphic graphic
NEW YORK (CNNfn) - A successful Internet business, according to founder Michael Robertson, only starts with a good idea and superb technology. It takes off when, as he put it, the stars align in your favor.
    "Timing is important on the Internet," Robertson said.
    Speaking from experience, the 32-year-old Robertson will tell you that Internet companies, even ones with sound technology, may flounder first and fail later if they come together at the wrong time. Robertson launched a digital photo production company that had only a short life because, as he put it, "not too many people had digital cameras back then."
    For all same the reasons that company failed, (MPPP: Research, Estimates) took off following its November 1997 launch. Using the MP3 audio compression technique, Robertson created an Internet site on which musical artists can put their music up for sale, take 50 percent of all revenue, promote their work and keep the rights to their repertoire. In doing so, started a musical revolution that turned the music industry and its traditional power structure on its head.
    There was no way to anticipate the reaction was going to elicit graphicfrom the music industry, Robertson said. The Southern Californian said he got hooked on the idea of downloading digital music not because he wanted to take on the music industry, but because he thought it was "really, really cool."
    Apparently, so did a lot of other people. Investors liked the concept, too, and sank millions into when it was about a year old. Today, more than 400,000 unique visitors browse the more than 300,000 songs on every day despite the fact that no big-shot talent is putting its tunes on the site.
    The dearth of top acts has been little comfort to the music industry, which believes Robertson's company and digital music have illegally loosened its control over the distribution of music. In January, the Recording Industry Association of America filed a lawsuit alleging violation of copyright law against after it launched its Instant Listening service that allows customers to store CD collections and listen to newly purchased CDs through a password-protected online account. (Time Warner Music, a related company to, is a party to this lawsuit as a member of the RIAA.)
    Although Robertson says he never set out to shake up the music business, now that the battle is on he has vowed to fight the RIAA, which he now refers to as "a bunch of bullies." He called the onset of a major legal battle with a powerful industry a huge disappointment.
    "There are ways you can embrace the technology instead of resisting it," he said.
    Robertson, CEO of, spoke with about starting a fun Internet company, the good fortune that comes with good timing, and taking on the Recording Industry Association of America.
    How did you come up with the idea for
    My third company was a company called Z Company and we were building search engines. I noticed that a lot of people were searching for something called MP3. I didn't know what it was or anything about it. But that's how I got started in it. It was just a collision. The stars were aligned. We bought the domain name from a guy for $1,000. He had the domain because those were his initials. I went home after I had bought the name and my wife got really mad because we had no money at the time.
    Did you know at the time you were on to something big?
    With the Internet, until you actually do it, you're moving on instinct. All you can do is move and, when you're in it, you will know that you're on to something that's going to work. You have to make decisions very quickly.
    If you took the time to research it and analyze it, you would miss the window of opportunity. If you're not in the water, you're going to miss the wave.
    So, what did you know about music before you started
    I knew nothing about music or the music industry. Initially, we had nothing to put up on the site. But here was my brilliant idea. I started aggregating all the news articles on MP3. We decided to write our own news articles, so I was learning about the music industry as I wrote about it. I figured out that the real opportunity is music and we had to be innovative about collecting music.
    graphicLater, we started searching the Internet and found about nine bands that had put up a song on the Internet. We contacted them and asked if we could put them up on I realized we needed to house all the music on because they were linked to bad technology. It was very unorganized and inconsistent.
    That is how we came up with our model of letting artists sign up on the site and promote their music. They keep the rights to the music and they are non-exclusive so they have the right to leave any time. Artists never had those rights before.
    In the last few years you have moved from a self-described techie starting a small company out of his home to managing a public company with more than 200 employees. Has it been difficult to make the transition from techie to manager?
    It has been a challenge and I have liked it a lot. I have a great management team. They give me some direction. My president started his own company. Paul Ouyang, the CFO, had taken a company public before and that's how we went public so quickly.
    How did go about recruiting them?
    The first senior executive I brought in was from (TIXX: Research, Estimates). I was there giving them a sales pitch, telling them this would be a great place to advertise. We spoke later and he said he wanted to come work with me. That was Robin Richards. He was instrumental in getting the management team because he brought the CEO from That is how we got Paul (Ouyang).
    What was it like shopping around for venture capital?
    VC was a very unusual experience because we weren't looking for money. We were really operating on a shoestring. We were paying for everything with credit cards. We didn't have a phone system. We couldn't afford a digital phone system. We were just trying to focus on growing the business. Sequoia Capital called us and we ended up taking $11 million at a $50 million valuation.
    What do you tell people who want to start a technology company?
    I have been talking to a lot of business students. The first thing I say is (that) times are changing. I always tell them to forget about writing a business plan. In the time you take writing a plan you can launch a business. It is more important to go build it. You can start a business, especially an Internet company, on a very small amount of capital. Our entire business plan was three pieces of paper. We didn't have any final projections. It just said here is what we are doing.
    Forget about everything you learn in business school. It's true. The rules of business are different on the Internet. The classic thinking is too restrictive.
    Also, don't take anyone's money. When you take someone's money you can become arrogant. If I have $5 million of someone's money I don't have to listen to the consumer. But if you don't have money it keeps you in tune with where there is demand on the Internet. We took money only late in the process. You save a lot more of the company for the founders. Because of that, I have the largest stake in the company.
    Tell me about the early days. You said you had almost no money.
    We cut corners wherever we could. There were three of us and we started working out of our bedrooms. We each had a speakerphone and cable modem, so it was a virtual office.
    We bought almost everything with credit cards, but we used to buy things really late in the month so we could miss a billing cycle.
    We used to go to Fry's (a discount electronics store) and get cheap parts and we made our machines, one at a time. We would torment the Fry's salesmen because we brought all the catalogs with us to get the best prices. We bought computer parts really inexpensively. We still build our own machines.
    When we got a fourth employee, we moved to a small office. All new employees had to buy their own cell phone. We would pay the bill, but we used cell phones because we couldn't afford a digital phone network. New employees also had to order their own chair and desk from Office Depot, get their own electric screwdriver and build it themselves.
    It was kind of fun.
    Are you concerned about the lawsuit that the RIAA filed against MP3?
    There is a lot at stake for our company and our consumers. Our technology allows consumers to take all the CDs they have bought and store them on the Internet. That means I can play all my music anywhere I go. They (the RIAA) think it violates copyright law. We disagree.
    We don't make any money from this service, so there's no immediate impact there. It will be interesting to watch. They want to sue for up to $60 billion.
    Our contention is they are trying to bully us. They are aggressive big bullies and they are throwing every attorney they can find at us. I think they'll find out we're pretty tough down here in San Diego. We are on the right side of the law.
    The music industry has a history of suing every new thing that comes along. The only way they confront new technologies is to sue. It disappointed us because there are enormous ways for people to make money using this. Back to top


AOL to sell music online - Aug. 16, 1999's market debut a smashing success - July 21, 1999

Liquid Audio IPO makes sweet music - July 09, 1999

Cox Interactive invests $45 million in - June 9, 1999

Record industry tackles Internet distribution - May 15, 1999



Note: Pages will open in a new browser window
External sites are not endorsed by CNNmoney