Audible Cranks It Up
An acclaimed writer turned entrepreneur tries to remake the art of storytelling for the digital era--and boost the volume on a huge new market he helped to create. Will his tale have a happy ending?
By Paul Keegan

(Business 2.0) - This is a story about the power of words, and about an entrepreneur named Donald Katz who stands at a podium in a conference hall outside Los Angeles on a fall afternoon, telling a gathering of podcasters that they are in the vanguard of a major cultural transformation--one he saw coming 11 years ago when he founded his company, Audible--in which words as a marketable commodity are being liberated from the prison of printed text and are finally free to speak with the music of the human voice, as they did for millennia before Gutenberg.

"The world of words consumed in a day, just on a paid basis, is unbelievably large--it's hundreds of billions of dollars, if you take all the different disaggregated media formats," Katz tells the crowd, adding the sort of kicker that makes venture capitalists stand up and sniff the air: "Dwarfing, frankly, video and music by a large degree."

Most consumers, of course, are far too busy to keep up with this vast outpouring of words. So Audible offers recorded versions for downloading and listening to on portable players while we are otherwise occupied--stuck in traffic, for example, or grinding away on the StairMaster. What Katz doesn't have to tell these Internet radio entrepreneurs is that Audible, after struggling for survival for a decade, is finally starting to catch fire. The company turned in its first profitable quarter in 2003 and more than doubled its number of new subscriptions (to 237,000) and its annual revenues (to an estimated $63 million) last year. With a vast archive of more than 90,000 hours of books, magazines, newspapers, interviews, and speeches, Katz's company has discovered a potentially enormous new market for what might be called "spoken word on demand."

If you are listening to this article on a digital audio player, of course, you probably already understand this point. You just heard Katz deliver that quote in his own voice, and now you're hearing me reading my own article aloud. On the other hand, if you're reading this story in print, let's just say you're a bit behind this particular curve and are invited to download the audio version for free to see for yourself how "what we now call reading," as Katz puts it, may be changing in a profound way. (Go to www.business2.com/audible.)

This remarkable double life of words--existing as both inert smudges on a page and fleeting sounds--is mirrored by the double life that Katz himself has led. Before founding Audible, he was one of the top U.S. writers of literary nonfiction, publishing magazine articles in Rolling Stone and Esquire and writing highly praised books about Nike, Sears, and postwar American culture. In late 1993, a $400,000 advance sent him researching the nascent "information superhighway," and Katz became so excited by the possibilities of distributing audiobooks over computers that he ditched the book idea and decided instead to start Audible, which he launched in 1995.

For a while it seemed that Katz would join the parade of naifs who chucked great careers to chase dotcom dreams in vain. Despite impressive technology--Audible invented the first Internet-ready audio player, now enshrined at the Smithsonian Institution--the company was left for dead after the tech bubble's collapse. Today, thanks largely to the iPod explosion and Katz's tenacious refusal to give up, Audible is the leading contender to inherit the estimated $900 million market in audiobooks as it migrates to the Web and perhaps grows many times larger. Some analysts predict that the company's subscriber base will top half a million by year's end. In fact, for a few glorious days last fall, Audible's download of Thomas Friedman's book The World Is Flat was the No. 1 album on iTunes, outselling music by pop stars like Ashlee Simpson.

Audible faces immense challenges--it lost money in 2005 because of heavy investments in new markets, and goliaths like Microsoft and Amazon are now eyeing the spoken-word market. All of which makes the Audible story precisely the kind Katz would have loved to write, complete with its big ideas about how an audacious 54-year-old writer turned businessman hopes to spearhead a literary revolution by reviving the ancient art of oral storytelling using modern technology. But Katz himself is the story now. And as the Internet makes it easy and cheap for the masses to consume the oceans of words now washing across the mediasphere, the stakes could be huge. "There's no in-between," says Paul Hawken, the consultant and noted entrepreneur who co-founded Smith & Hawken. "Either Audible will be wallpaper or it will be a billion-dollar-plus company."

At Audible's headquarters deep in the strip-mall barrens of Wayne, N.J., Katz sits in his modest office and proudly shows off his latest literary effort. "Dear Tina," it begins, "I'm writing to thank you for being an Audible customer over the past month ..."

It's an odd sight. Could this possibly be the same man who spent 20 years traveling the world in search of Ethiopian revolutionaries and Louisiana catfish grapplers just for the thrill of composing fairly brilliant sentences like "Catfish can bleat like wounded mammals at times, and if you stare hard enough, you can easily become convinced that an angry cat is just a half an evolutionary step from rising up, kicking your ass, and eating you whole"?

The most obvious explanation for why Katz would make such an abrupt career shift--that he hoped to make a quick Internet killing--doesn't quite fit. Anybody who's perfectly happy seating his high-powered literary friends around a ping-pong table when they come over for dinner is hardly motivated by material lust. Rather, people who know Katz well say he's primarily driven by a curiosity that can quickly escalate into obsession. "His interests are what motivate him," says his wife, Leslie Larson. "Writing always came second."

Katz had completed work on his first two obsessions--The Big Store: Inside the Crisis and Revolution at Sears and Home Fires, the story of post-World War II America through the eyes of a single family--when Random House called in 1993 offering him a contract to write about the convergence of the computer and telecommunications. After poking around, Katz concluded that it was still too early for a book, but he became fascinated by how compression algorithms for sending audio files over computer networks might transform the publishing industry.

As a former investment columnist for Esquire, Katz knew something about business, and he could see that the high costs of manufacturing and delivering books and magazines were bleeding the profits out of the industry. But he discerned a deeper social problem too: Nobody had time to read anymore. Katz felt this most painfully when Home Fires was published in 1992. Despite glowing reviews, it didn't sell. "People who were the perfect candidates to read something that I spent six years writing were precisely the ones who were too busy to do so," he recalls. Meanwhile, Katz had stumbled upon a startling statistic: More than 90 million Americans drive alone to work every day, their eyes occupied but their ears and minds mostly idle.

The notion of listening to audiobooks in the car was nothing new--companies like Books on Tape had been around since the '70s. But they still had to manufacture and ship a physical product. Using the Web for distribution, Katz figured, could not only increase sales and profits for publishers and writers alike but also unleash a surge of creativity and diversity of content. After all, digital audiobooks need to sell just a handful of copies to become profitable, and they never have to go out of print.

His mind afire, Katz hustled back to his office on the third floor of his New Jersey home and began laying out the pages of a business plan while knocking out his book Just Do It: The Nike Spirit in the Corporate World. Creating a company, he discovered, was not unlike the making of a book. But instead of selling his proposal to publishers, he pitched investors. And instead of persuading story subjects to cooperate, he had to win over business partners.

Katz is whip-smart, but perhaps his most potent quality is the way he can make people feel they're becoming part of an epic historical journey simply by cooperating with him. Edward Telling, the famously tight-lipped CEO of Sears, gave Katz unheard-of access for The Big Store after hearing the writer's vision of how the company had transformed America by making what he called the "elite artifacts" of the wealthy, such as washing machines, affordable to ordinary people. Nike's Phil Knight, even more reclusive, was seduced into sharing the secrets of the company's pioneering approach to marketing.

Katz's gift was perfectly suited to doing business as the digital revolution loomed. Teaming up with Ed Lau, an old college roommate working in Silicon Valley, Katz persuaded Tim Mott, co-founder of Electronic Arts, to put up $400,500 in seed money in 1995. Mott became so excited about Audible that he helped the company raise another $28.5 million over the next four years from AT&T, Intel, Kleiner Perkins Caufield & Byers, and others.

Katz rented a former dental office and hired Bell Labs researcher Guy Story to help solve the big technical challenges: inventing a portable audio player and a secure system for delivering audio over the Web. Katz, meanwhile, began seeking licensing rights from publishers.

At the time, Katz figured he could build a successful company in the same time he typically spent on a book project--five or six years. Never mind that he was promising not merely to overhaul the economics of the publishing industry but also to shift the culture's locus of literary perception from the eye to the ear. "I mean, how long could it take?" he recalls thinking.

Audible did get off to a promising start. In 1997, four years before Steve Jobs conjured up the iPod, Story and his team came out with the MobilePlayer. The world's first Internet-ready portable digital audio player was about the size of an electric razor, held just two hours of audio, and cost $215. But Katz was confident that declines in component costs would soon allow the company to simply give away far more capacious versions for the price of a $20-per-month subscription.

Story's team also created a pioneering antipiracy system that allowed the book business to enter the digital age relatively smoothly, in stark contrast to the record industry. "Nobody could get deals with the record labels in those days," Story says. "We were really the only game in town for other content."

Katz won over publishers by convincing them that audiobooks were not a threat to their income but a supplement to it--small at first, but potentially huge as portable audio players became widely adopted. HarperCollins signed on first, and others quickly followed to avoid missing out on the 12 percent royalty (now more than 15 percent) on each audiobook sold. (Audible also has business deals with Time Warner, the publisher of this magazine.)

Despite these early victories, the wear and tear of creating a company was taking a toll. Katz would fly to Silicon Valley on Monday mornings for meetings, then take the red-eye home in time to make breakfast for his three children on Tuesday mornings. On Wednesdays, he'd do it all over again, which left him exhausted. "There came a point when even when he was home, he wasn't home," his wife says.

Katz decided he needed help. In March 1998 he brought in former Novell executive Andrew Huffman to take over as CEO of the company, which had grown to 35 employees. Katz remained chairman. The following summer Audible launched a successful public offering, and for a while it enjoyed a market valuation of $538 million. A few months later, it struck a key partnership with Amazon.com to become its exclusive provider of audiobooks. (Amazon also bought a 5 percent stake in the company for $20 million as part of the deal.)

But disaster struck in October 1999 when the 39-year-old Huffman collapsed and died while playing pickup basketball. Katz took over as CEO again but found that Audible was still stuck in first gear. The MobilePlayer was still far too expensive for the mass market. With only about 13,000 paying customers, Audible halted production of the device, hoping that the next generation of players, like the Rio, would catch on. By then the tech bubble was bursting, and within months Audible's stock had plunged by 73 percent and was trading at less than $6 per share. Later, blaming some of its woes on problems with the Rio player, Audible decided to get back into the hardware business with a device called the Otis, produced with a Korean partner, but abandoned that contraption after only a year.

By early 2001, Audible was clearly on life support. One day two senior executives told Katz that it was time to think about shutting down. From a business point of view, their argument made perfect sense. But to Katz, Audible was never just a business. It was a story, an epic tale about a man whose company changed the world--like Telling at Sears and Knight at Nike. And in such stories, the main character never doubts himself, not for a single moment. "I can't believe we're even having this conversation!" Katz yelled, and he stormed out the door.

About the same time, Random House published a collection of Katz's magazine pieces. On the back cover, his characters are described as brimming with "obsession, delusion, perseverance, creativity," which at the time seemed to describe the author pretty well too. Even the ferret in the book's title story, "The King of the Ferret Leggers"--an uproarious tale about a man who enjoys the priapic perils of stuffing live ferrets down his pants--has a defining trait that sounds very familiar: "a tenacious, single-minded belief in finishing whatever it starts."

Katz emerged despondent from the meeting with the two execs--"I never felt so alone," he says--but immediately grabbed his trusted colleague Story and flew to Redmond. Audible had already discussed with Microsoft the possibility of selling a stake in the company, but now Katz was desperate. "We're here," he told Microsoft executives, "and we're not leaving until the deal is done." Within days Microsoft had agreed to buy $10 million in preferred stock. That money kept Audible afloat for a while, but in the second quarter of 2001, the company announced an $8 million loss and the layoffs of 40 percent of its workers.

Remarkably enough, despite all the turmoil, Audible's sales and customer base continued to grow at a healthy pace. While the dotcom graveyard was piling high with startups that fell for their own hype, Audible kept plugging along, consistently ringing up double-digit revenue increases. The service itself, which offered a choice of annual and monthly subscriptions or books à la carte, was getting rave reviews in the technology press, and Katz kept insisting that only one ingredient was missing: an affordable portable audio player.

Enter the iPod. Katz had been waiting for the prices of audio components to fall far enough, and by 2001 they finally had--enough for Apple to introduce its revolutionary device. The iPod needed content, and Apple executives approached Katz about making his spoken-word trove available on iTunes. Jobs became a big fan of Audible after testing the service by downloading Lincoln at Gettysburg, by Gary Wills. At Macworld in 2003, he introduced Audible to the crowd by saying, "You will not be able to listen to this without tears coming to your eyes," and firing up a recording of E.B. White reading Charlotte's Web in his flat Yankee diction.

All the pieces were coming together for Audible. In 2003 the iPod began to reach a mass audience, and by the end of the year--nearly a decade after Katz first sketched out his business plan--Audible managed its first-ever quarter of profitability.

Whenever the scent of real money begins to waft across the business landscape, of course, competitors emerge. Amazon, which in 2003 chose not to renew its deal with Audible, announced last spring that it will develop a new Internet store devoted to audiobooks. Microsoft, which sold its stake in Audible in 2003, has a pact with MediaBay to provide audiobooks through MSN. And the possibility always looms that Apple will drop its deal with Audible when it expires next year to pursue its own deals with publishers, a potentially crippling blow to Katz's little company.

To counter, Katz launched AudibleAir, which allows customers to bypass their computers completely and download books directly into their Treo smartphones. He also started an Audible service in Britain to gain a toehold in the international market, made deals with educational giant Pearson so students can listen to study guides, and offered podcasters tools that document how many times customers actually listen to podcasts, so advertising rates can be set accordingly. Today, Audible has grown to nearly 200 employees, and 187 devices are being shipped from factories Audible-ready, including Palm OS products and Pocket PCs.

Wall Street, however, remains ambivalent. "The knock against Audible is that it's only made money for seven quarters," says analyst Mark Argento of Craig-Hallum Capital Group. Investors are impatient for profits: In February 2005, when Audible announced that it would reinvest an estimated $13 million of cash flow to fund its ambitious new plans, the stock plunged 35 percent in a single day, to $17.35. Lately the stock has been hovering around $10 a share.

Given the challenges that still loom, the Audible story figures to be a cliff-hanger. Characteristically, Katz foresees a happy ending. "Taking cash flow and reinvesting it to grow your business is right out of Economics 101," he says. Though some analysts believe that Audible must soon show consistent profits, others think Katz is on the right track. "You can run the business for near-term profitability or for longevity," Argento says, "and I think Katz's approach definitely has the potential to be the smarter move."

If Audible can fight off its enormous competitors--or resist the temptation to sell out to the highest bidder--even a small share of the growing spoken-word market could be lucrative. Katz compares the opportunity to the VCR- and DVD-triggered explosive growth for Hollywood after the film industry had languished during the 1970s. "If you go back to 2000, household penetration and cost of DVD players is about where penetration of digital audio players is now," he tells the L.A. podcasters. "And what happened between 2000 and 2004 is that the movie industry rode this positively disruptive infusion of DVDs to create a $27 billion home-collectible market."

Perhaps the most surprising statistic about Audible is that fully 50 percent of its customers have never listened to a recorded book before. Which means the very existence of Katz's company is creating fertile new markets--precisely the kind of cultural transformation he had in mind from the very beginning. "The fact is that text and silent reading was a cultural practice and a technique based on specific technological innovations of the moment," he says. "People didn't want or need text for much of human history, and there was a very rich intellectual life going back to cave days."

With that, Katz is off and running--rhapsodizing in long, fully formed paragraphs about the history of literacy and technology, about how audiobooks helped his college-age daughter overcome learning disabilities, about the vast amounts of intelligent, entertaining audio out there just waiting to be discovered. To Katz, building a successful company is a highly creative act--at its most sublime, perhaps even a work of art. He may have abandoned literary journalism 11 years ago, but as you listen to Katz riffing about his latest obsessions, letting his words fly through the air where they can breathe and dance, it's hard to disagree with his wife when she says, "In a weird way, I feel like he's still writing."

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Paul Keegan is a contributing writer for Business 2.0.

Click here to find the spoken-word version of this article.

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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.