Gatekeeper of the MP3 blogosphere
Can the aptly named Hype Machine find investors and avoid a major label showdown?
NEW YORK (Fortune) -- Anthony Volodkin ran into trouble last year when he tried to raise money for the Hype Machine, a digital music startup.
That's because venture capitalists worried they might be sued by the big record labels if they funded the Web site, created by the 22-year-old recent Hunter College graduate, that enables music fans to search for songs - not all of which are posted legally - on MP3 blogs.
A lot has changed since then. The Hype Machine, based in New York, has become one of the most talked-about music sites in the Internet. It attracts more than one million monthly visitors. Valleywag, the widely read technology blog, reported in April that Viacom offered to buy the Hype Machine for $10 million. Volodkin says this isn't true. (So does Viacom.) But he says people approach him "all the time " about investing in his company.
There's only one problem: The Hype Machine is still operating in a gray area legally. So it will be interesting to see if Volodkin can attract outside money now. It will require a leap of faith on the part of his investors that the major labels are finally willing to tolerate a certain amount of unauthorized downloading in hopes that it will stimulate their sales. It's not clear that the big record companies are ready to embrace this notion.
It's easy to see why there is so much interest in Volodkin's company. The aptly named Hype Machine is rapidly becoming the gatekeeper to the influential MP3 blogosphere. Just as the political bloggers are altering the outcome of elections, MP3 bloggers are changing the way people discover new music. These music writers don't just rhapsodize about their favorite bands. They post songs online that users can download for free. This is often done with the blessing of artists and their labels - but not all the time.
Some independent labels whose acts can't be heard on commercial radio or MTV couldn't be more supportive of the Hype Machine. Adam Farrell, director of new media for Beggars Group, whose acts include the Breeders and Sigur Ros, finds the site's lists of the most searched songs invaluable. "It's almost like a buzz meter," he says. "It's a great way for someone who works at a record label to gauge the awareness of an album."
"I don't really know about the legality [of the Hype Machine]," says Sam Valenti, founder of Ghostly International, a respected independent record company in Ann Arbor, Mich. "But I think a lot of labels like mine aren't going to be antagonistic. If people discover an artist they like, they are going to make an investment - go to a show, buy a CD or a T-shirt. It's better than having them not find the artist at all."
Ultimately, though, the Hype Machine needs the blessing of the four largest record companies: SonyBMG, Warner Music (WMG), Universal and EMI. The Recording Industry Association of America, their trade group, is keeping a close eye on start-ups like this one. And the RIAA is quick to sue Internet music companies if it feels its members' rights are being trampled.
The RIAA declined to comment on the Hype Machine. But it just sued Project Playlist, a promising Web site that allows users to create and share their own digital mix tapes. The threat of such major label litigation is likely to give some venture capitalists pause. "It's a very difficult climate right now," says lawyer R. Bruce Rich, co-head of Weil Gotshal's intellectual property and media practice. "It doesn't tend to favor entrepreneurship."
Volodkin, who has since graduated from Hunter with a computer science degree, genuinely sees himself as the music industry's friend. He created the Hype Machine because he wanted to hear new music. But he felt he couldn't find it listening to the radio or reading music magazines. Then he stumbled on popular MP3 blogs like Music For Robots and Stereogum. "I couldn't believe there were all these people writing about music just because they liked it," he recalls. "That's a really cool filter for finding new music."
It wasn't hard for Volodkin to create a music blog search engine. Sorting out the legal issues that the Hype Machine raised was more vexing. Early on, Volodkin decided he wouldn't send users to blogs that refused to play by his company's rules. That meant no blogs that posted entire albums as free downloads.
Instead, the Hype Machine encouraged users to sample songs on blogs and buy them on iTunes and Amazon (AMZN, Fortune 500). This turned out to be a boon for the fledgling company. It gets a referral fee from the Apple store and its rivals each time a users clicks on one of the links on the Hype Machine and purchases a track. The Hype Machine also sells ads. These two revenue streams enabled the five-employee start-up to stay afloat without venture funding.
Now Volodkin wants to grow the business. He thinks he can help record labels keep track of how their artists are received in the blog world. He also wants to work more closely with bloggers so they can make more money, too.
But the Hype Machine creator needs outside money to make this happen. He says plenty of other companies would like to buy or merge with his start-up. But he's not interested. "We're happy being independent," Volodkin says.
What about the threat of lawsuits? Volodkin thinks the record labels have figured out that they can't solve their problem on the Internet with litigation. After all, the RIAA suit against Napster didn't stop illegal file sharing. Even some people in the industry now believe it would have been better to license music to Napster than to wage war against the service. "I think the industry is getting to the point where they understand they need companies like the Hype Machine to reshape their business model," says Kenneth Parks, a former top EMI executive who is now digital media consultant.
Then again, look what just happened to Project Playlist. The days ahead may be rougher for Volodkin than he expects. 
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