CD BABY: BUYOUT OR BAILOUT?
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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 manufacturer want a to buy a CD e-store/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
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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 MySpace account, 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, Snocapand 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:
Nielsen 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 CD sales fulfillment 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, this business 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, CD Baby’s CD fulfillment clients, will, for once, have to cast their loyalty using factors that are not emotional. Now, they will have to base their allegiance 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.
–Other secrets revealed.
END
11 responses to “CD BABY: BUYOUT OR BAILOUT?”
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Jeff Price- CEO Tunecore.
Moses, you hit the numbers right on the mark, and your conclusions apply to any physical pick/pack/ship model: there’s simply no way the vast majority could be making money, and those few who have likely got there because of their own hard work, or they had a pre-established fan base. All the more reason why digital distribution levels the playing field, especially if starting and maintaining costs are reasonable (that is, no need to mail in a disk), and there’s no percentage sliced off the back end. More money is put into the hands of the artist, who can use it to market or make more music. GREAT WORK!
Hey Moses. I really enjoyed the read on this one. Very insightful but I’m not sure I agree that CDBaby was ever anything more than a place to go if you could not get a “real” deal. It always seemed a little hokey to me and got less attractive as digital became more and more the mainstream.
CD Baby has (had) the same problem as Burger King. The name (and origin) is limited in scope and will always have the stigma of being so “yesterday”. The math is amazing but, as you state, most people never did the numbers. I have many friends who were major label artists and have extended their careers by starting their own labels and “distributing” through CD Baby. These are not sophisticated business people. They are artists and, to them, this was the infrstructure that they lost or walked away from when their major label run was done. I hope they all see this article of yours and realize that the numbers are really not in their favor. There is a better way although it remains to be seen if Discmakers will change the formula.
Look forward to part 2.
Regards. Ivan F.
Alvarez CdA Group
http://www.CdAGroup.net
Man, I always from day one thought CD Baby was a giant waste of time for my band, I gave them a test of selling 10 cds, and we are a popular band, especially on the internet, and it took them over a year to sell all 10!
What a crap company. I didn’t need them really for anything that I wasn’t already doing and doing much better too. They just never made sense to me. Like paying someone to work for you because you are too dumb, ignorant, lazy, or too trusting, and them doing it badly in the first place. What they wanted you to do was to tell everyone to buy your records from them.
Makes no sense, you just need to tell these exact same people to pay them from you, via paypal or whatever, or even via amazon.com (thank god for Amazon.com, as they indeed really do sell many thousands of our records and we get a commission, WORLDWIDE). And, then you simply mail them out to the people that ordered a CD directly from you (plus you get to learn who your fans are that are buying your stuff so that you can hit them up to get your back catalog).
At least with amazon.com you can either have them warehouse your cds and send them out and you get the sales money, or they sell your cds that they got from other distributors and you set up a link to your amazon.com page that pays you a commission for every sale. So, you get paid twice for their sales!
CD Baby was never that smart, nor convenient, nor efficient, nor effective.
It was a “Rube Goldberg invention” way of selling records at best. At worst, it was a “nice” way to exploit poor selling bands.
Sal – Electric Frankenstein
Dude, this is the most compelling read I’ve come across in eons! I couldn’t look away from the monitor. I dropped everything.
Jer Olsen, CEO
http://MusicBootCamp.com
Hi Moses,
I’m excited about the Disc Makers acquisition of CD Baby. The idea that Disc Makers is going to get into aggressively marketing new music is a great angle. There are many music fans out there that love to spend their time discovering new artists. I agree with you in that, if marketed correctly, CD Baby could be the iTunes of brand new music.
Disc Makers has brought in a real businessman in Tony Van Veen. We just don’t have enough of them in the music industry. We need guys like Van Veen who are trained in business (not music) and are focused on the bottom line for music artists and their companies – profit.
I have attended several panels where Derek Sivers spoke and heard him make many non-businessman statements such as when questioned about illegal file downloading, his response is flip. “Don’t worry about it. Artists need to worry about exposure not theft.” It was clear to me that he didn’t understand or care about the income of his CD Baby music artists. They need exposure, yes, AND they need to protect the music they have out there.
At the same time, it appeared my concerns were not shared by others as I heard several people say that they hoped people WOULD steal their music. As if somehow, by people stealing their music it would validate them as artists…?
Thanks Mo!
SG
Moses,
Man,you are the shit! I knew somethin wasn’t vibing when my band,ThirtyRound Clip, joined the Baby in 2007….I heard all this hipe….4 us….nada (we r in that 96% range).Most our sales via CD Baby come from peeps seeing us on My Space and clicking our “CD Baby banner”….Thanks for the real story….I can’t wait to read Part 2….I can tell u one thing that sucks:It seems to take FOREVER to get reports from itunes,etc to our CDBaby digital distribution…We did an experiment:We purchased 3 tunes at the end of 2007….it didn’t show up as a “sale” until March 2008 (at itunes)….if this is “normal”,well,it still sucks!
Ok,L8
Dear Moses,
Thanks for the eye-opener. In regards to CD Baby and marketing, you’re right. CD Baby tried to educate the artists to be self-marketing, and CD Baby did more than Amazon used to, and more than the other online distros (that have come and gone), but that was only in comparison. For their cut, CD Baby did not do real-world marketing, and some of their web imagery was downright clunky.
I also noticed the CD Baby excitement has been waning. For the record, I’ve sold at least 40 units of 4 different CD titles (not counting downloads) on CD Baby since 2000. It goes in spurts.
The only detail I’d argue with you about is saying the Myspace provides superior social marketing. Yes, it’s social, and there’s lots of traffic, but it’s not really marketing. I’m still (stubbornly) of the opinion that Myspace is nothing but The Borg with a Happy Face. No one has yet reported any major profit or tech-advantage by being on Myspace. Myspace buzz is limited to the Myspace universe. If I want to network/rave with another musician and all they have is a Myspace page, I have to become a member, which I’m too busy and focused to do as I’m already getting plenty of web traffic just from surfers or people who come to my gigs. I’d rather have 1000 meaningful web-contacts than a million that just take up valuable time and are hard to vet for fraud, incompetence or lunacy. I’m better at Realspace.
That aside, thanks again for looking behind the screen and taking time to break it down for us.
All the Best, JJB http://www.johnnyjblair.com
Look – his site is like the clubs : they expect you to bring the entertainment AND the audience!! Not only is this unfair – most importantly, it DOESN’T WORK. If you have a fan base, have the show at your jam space, and keep ALL the money – similarly, if you have an online audience, then funnel them to YOUR site, not some pony tailed George Carlin wanna be!!!! (ok, so maybe that makes no sense, whatever…. I’m running low on insults here)
There’s no point in paying to be there or most any other similar sites unless you bring a fan base with you to cover the costs, but if you have a fan base willing to buy your stuff, then WTF do you need CD Baby for?!?! Put a Pay Pal button on your home or MySpace page, hook it up to your debit card (you don’t even need a credit card anymore), and stop letting these leeches and confidence men convince you that doing all the work and giving them a piece of the pie is somehow furthering your musical aspirations!!
Whatever – he’s a sad example of how disingenuous this industry can get. He plays it like he’s helping people out, but he’s just a parasite with the same motivations as the people he claims to offer an alternative to, as far as I’m concerned.
Yes, I’m cynical and bitter, I know it – but at least I told Sivers he was a twat 5 years ago!! ;-D Adam The Beggarz
Moses,
Thanks for the insight. As I understand Disc Makers also owns Oasis CD manufacturing, we do seem to be witnessing the dawn of another corporate empire and another nail in the coffin of independent music.
Hi Moses,
Read your article, and it pretty well outlines what has been my experience on CD Baby.
I kept writing to Derek and suggesting that he needs to market to the “buyers of new music,” and not to the creators and sellers of new music. Trying to sell music to others, who are also trying to sell music is not the right approach. And, the math, and the results, underline this. The records I sold on CD Baby, were entirely as a result of shows I performed.
Moses, I am really looking forward to your assessment of the digital distribution practices of CD Baby. I find it very wrong that many of the digital sites contracted by CD Baby to distribute my music, are giving away free downloads of my music. This is not what I signed up for, and not what I agreed to. They have no right whatsoever to be givning my hard earned work and valuable product away for free.
I am very interested to hear your response. Please do write me back, or give me a call.
Thank you Moses.
Moses,
Great article. Can’t wait for the second installment. A couple of things:
1. Why would DiscMakers want to buy CDBaby? Because DM is a big, hungry machine that needs food. CDBaby supplies that food in droves. Few folks with ‘real’ record labels/careers use DiscMakers because they are not set up for that type of customer (one that has street dates, custom packaging, etc.). They are in the business for the long tail customer: The band that is doing their first CD and gets the lovely color catalog every month or so from DM. The artist that believes that DM is going to do so much more for them (Taxi is a classic example of this) that they won’t have to lift a finger and they’ll sell millions. And something inside me believes that the DM model doesn’t rely on repeat business or represses. It’s always fishing for new guppies. It matters very little whether any of their big marketing promises work. They don’t need to. They’ve already got their money and there are plenty of other new bands needing their CDs made that they don’t even have to worry about it. Especially if we make a big enough deal about it, have seminars, and so forth. And CDBaby isn’t a magnet for sales so much as it’s a magnet for artists to hang their store.
2. Tony VanVeen did NOT buy CDBaby, Corinthian Capitol did. Tony reached out to his friend (or vice-versa), but rest assured, the guys that wrote the check were serious venture fund guys; guys that likely have musical taste that ventures to edgy when they put the new Barry Manilow CD in the player in the Benz. They are in it for one thing: ROI. Not music folks, not retired execs, just people looking for a successful business model that they can throw dollars at and grow it to sell it again.
Footnote: I’m a broker with offices in [location withheld] and believe me, all of us out here in the brokerage world that feeds the real music business (and there are 10 or 12 of us), we’re talking. We’re looking toward what the future holds for us and are frankly somewhat dismayed that the playing field has been turned on end. Or very likely could be. We’re a group that has pride and ethics in what we do, likely spend time in clubs seeing the artists we create goods for. Music people. Small business owners. And what doesn’t kill us only makes us stronger.
Keep up the good work!
Mike