Orange Alley is a company built by musicians, for musicians. I first heard of Orange Alley on a really interesting Streaming Media program where their President and Chief Executive Officer Mark Erickson argued eloquently about the problems and opportunities created by digital download technology. Later, when in an email message he offered to “solve” the Napster problem, I called him to ask if he could explain what he had in mind.

When I finally interviewed Mark several months ago about their BootLegal program they were still one of the first companies that both facilitated file sharing and had a built-in structure of incentives to encourage folks to eventually pay for the music.

Why don’t we just encourage people to make copies and provide a system of incentives so that people can pay for them? Basically copying can be a very good thing because it spreads the word about a great band. The problem is then you are potentially taking money out of an artist’s pocket. — Mark Erickson, Orange Alley

J: What’s your history with music and technology?

M: My history with music? Well I’ve been playing guitar, singing and writing songs for years. I was in a very unsuccessful and not so good indie band called Two Doors Down for a number of years. We released a couple of records on our own and failed to sell anything beyond our college town. Basically at some point we just kinda got sick of each other more than anything else. At that point I started getting into technology kinda by accident. I’d been an economics major and wasn’t ever planning to program a computer, but one thing led to another and I found myself in Australia a few years later. I lived there for two and a half years developing software for a major telecom company. From there I went to Amsterdam and spent about a year and a half developing software for a big pension company. Then about a year ago I decided that I wanted to work on something that I would enjoy doing. So I conned a couple of friends into starting this business with me and I figured that between the four of us who work here at Orange Alley we could basically have the main functions covered. We can build a site on our own; three of the four of us are musicians. The main other programmer was the bassist in my band and in another band with the HTML graphics guy. So we’ve got all our own music up on Orange Alley. And actually, strangely enough Two Doors Down is one of the bigger sellers. It’s pretty funny because we’ve been defunct since 1992 or so.

J: Ah, karmic payback…

M: It’s something like that. It’s pretty wild. Yeah, I’ve come from this place — I never had the balls that you or Kristin did — because you did the Simple Machines/Tsunami thing full on for like 8 years.

J: Well, we had day jobs through most of that.

M:Still, I really admired that tenacity. We never took the next step. We never got out of Ohio, basically we toured around Ohio, Kentucky and Indiana…crap like that. When opportunities came for us to do something further afield there was always something that somebody had to do. Part of the reason is probably due to the fact that I was like 4 or 5 years older than some of the other guys. So I was like an old man and they were juniors in college.

J: How old are you?

M: I’m 31 next week.

J: So then I guess that means I’m your older sister.

M: Oh really! Well how about that?

J: Yeah, I’m 32. Let’s talk about Orange Alley. So you conned your friends into creating this company. What was the business model?

M: Well, to be honest our original business model was focused on something else. It was music related but it wasn’t selling music like this. What we were originally talking about doing was…have you ever heard of a company called acompany.com or mercata.com?

J: No.

M: Okay, well they’re reverse auctions where you get people together to buy the same thing at the same time and demand a group discount from the manufacturer. That was kind of our idea from about January ‘99. However, I was living in Amsterdam and one of the other founders was living in Switzerland and it was going to take us a long time to get back to the States and get something started up. In the meantime all these companies started popping up and doing the exact same thing. Plus, we decided that we didn’t really have any contacts in that area. What we were doing with that idea will affect some of the ways that Orange Alley is now going to expand.

The thing about getting a volume discount on something…you need to have a fragmented market where there are big margins on things. For example, volume discounts on Walkmen aren’t going to make much of a profit because there are such low margins in the first place. But on Tascam recorders there is a huge margin. I mean, who’s ever paid full price on something from a music store? You’re always getting 30 or 40 or 50 percent off the list price. So we figured that there is a lot of fat in there to play with and we were like, “Why don’t we focus on areas where we have some creative understanding, like recording equipment, musical gear, digital film equipment…stuff like that?” But then the capital requirements for a business like that are pretty amazing and then when it turns out that you have a Paul Allen funded competitor in Mercata that’s already doing TV ads, it’s going to be much worse.

So we got back to the States and we decided well, this is probably not going to fly. I’d been thinking since about Christmas 1999. I’d been racking my brain wondering how could we possibly use the internet somehow to keep the small independent record stores in business, to give the small independent bands a fighting chance, to connect musicians more directly to their fans and try to cut out some of the fat in the middle. One of the things I sort of took as a given was that digital files are easy to copy so any business model that is dependent on selling music is going to have to take that into account at some point, either by preventing the copying like SDMI or by selling a subscription so you don’t have to really worry if people are making copies.

Our solution was, “Why don’t we just encourage people to make copies and provide a system of incentives so that people can pay for them?” Basically, copying can be a very good thing because it spreads the word about a great band. The problem is that you are potentially taking money out of an artist’s pocket. So we are trying to leverage the natural features of digital files, which include the fact that you can make digital copies that will be perfect, and we combined that with incentives for people to pay for the content itself.

J: So tell me what these incentives are.

M: Well at this point the incentive is basically this: If you buy something from Orange Alley — say you buy a wonderful Two Doors Down song — once you download it, if you make a copy of it and forward it to somebody else and they pay for it, then you make money on that sale. You get a kickback. So it’s a “legal bootlegging” model that we’ve dubbed “BootLegal”. We are trying to add other incentives. One of the other ones…We feel that fans of bands at a certain stature, like fans of Metallica for instance, aren’t really concerned about ripping off Metallica at this point because they believe they are really just ripping off Warner Brothers or who ever their label is.

J: But that was part of the point of writing the ARS article as well because as soon as you look at the rotten deal that bands are getting from the majors you can see how important it is to pay *all* artists for their music.

M: Yeah, but you know the kids are like, “Who cares? They’re rich!” The people that listened to our band’s music — I mean we were playing to like 400 or 500 people at a time — those fans mostly knew us. There was a better connection between us and the fans. They weren’t going avoid paying us $10 for the disc by taping it or stealing it. So I believe there is a whole range of bands…probably up to as big as some bands that get dropped from a major label because they don’t sell well enough but they still have a fairly solid following. So I’m thinking of bands with like, 10,000 to 500,000 records sold. I think in that range there is a stronger connection between the artist and the fan. I mean, when you are a well-known smallish act the fans understand that you are not raking it in. You’re not driving limos and they’re not going to screw you. They realize that it’s not this big machine that’s taking the money. It’s actually you that’s getting the money. I don’t know. I just feel that the more ways you can connect an artist directly to their fans, the stronger that connection is, then the less a fan is going to want to do something that is going to hurt the artist. So we are working on other ways to cement that bond.

J: That leads directly to my next question. It’s the same question that I asked Aaron from Epitonic. Don’t you think the best way for a band or musician to connect with their audience would be to create their own website, have their own digital downloads and oversee that themselves?

M:I think that’s a good way, if the band has the time to do it. My own experience from playing in bands is that we were just a step above hopeless when it came to being that organized. I mean you guys were pretty organized. You started up a label, that’s organized, that’s admirable, that’s having your shit together. We were never quite that organized and most of the bands we played with were not that organized either. They didn’t have the time or inclination to monitor that themselves.

Another value that a site like ours offers is variety. I mean when you go to the record store, or if you’re buying records online, you can pretty much get anything you want all at that one place. I mean you don’t have to go to a separate record store to get each different band you’re interested in. So hopefully a site like ours could offer the same type of variety.

I think that’s also a problem with Napster. Napster is always saying that they give all these independent artists exposure. Well that’s true and not true. It’s true because if you offer your song via Napster, it is there for someone to get it but the music fans have to know to look for it. There is still this whole marketing component that has to be there to let you know that this band even exists in the first place.

J: That’s an interesting point. I just gave an interview to the Industry Standard. They were doing a piece where they were trying to figure out if the technology has democratized access for young artists. When you think about it, really, the majority of the artists that are interviewed about these issues are folks that established their fan base well before this technology came along.

M: Yeah, I respect Chuck D and I think his views are very interesting and really good. I agree with a lot of what he says. But at the same time he’s in a very different position than the *next* Chuck D, who no one knows about. Which is also a point I’ve been making to other people. You know Metallica might never sell another record but they can make money off their ARS (Ancillary Revenue Streams). In the future of music, the bands that are already established that have that bigger appeal stand to lose a lot less than a band that is a couple of steps down, a band that isn’t on their third in a row multi-platinum record. But at the same time, those smaller bands may be able to use the internet to find their audience.

I mean, are you familiar with the Afghan Whigs at all?

J: Yes, I am. They are from Ohio as well…

M: Yes they are. They are one of my favorite bands. Gentleman, their major label debut, sold about 80,000 or 120,000…I forget the exact numbers. Black Love, which was their next record and admittedly, was not as good, sold like 42,000 copies. So of course you are going to get dropped if you are selling 42,000 copies of your records on Warner Brothers. But if there are 42,000 people out there that dig your music, that should be enough to support your band. That’s a lot of people. If you get 10 bucks out of them a year, that’s $420,000 dollars to do something with. I mean, that’s a huge amount of money. So I think the internet definitely offers possibilities for bands to connect to their fans, for bands that don’t have that huge mass common-denominator where everybody likes their music and there is the mass market appeal. For bands with a niche appeal, the web can help them to find their fans and cultivate that relationship.

J: Do you believe that music is going to go completely digital?

M: No, I don’t think so. My big complaint about MP3 stuff is that I don’t have anything to look at when I’m listening. Partly this is just a function of working so much. You see because I work so much, and because I never leave the house, I don’t take MP3s with me. I just sit and listen to music at the computer. So there’s nothing to look at…

J: Is the great majority of the music that you listen to on your computer, MP3s?

M: When I’m working yeah. I haven’t taken my CD collection and turned it into MP3s so I can listen to it on my computer. I think that there will still be a demand for physical product for a long time. I think that digital distribution will just be another way for bands to distribute their music. I mean, vinyl hasn’t really gone away yet.

J: Yeah, I understand what you are saying, but largely it has. Vinyl has a fetish value in a couple of specific genres of music. I think the artists that can actually sell a thousand pieces of vinyl exist in a pretty rarified environment. It’s no longer the mainstream culture that it once was. Also, considering the price points, selling 1,000 copies of a vinyl release doesn’t guarantee much of a profit or offer the artist much of a living.

M: That’s true, but selling 1000 pieces of vinyl and maybe selling 1000 CDs as well. A thousand of anything isn’t going to be much of a living. Even if you are getting 10 bucks a piece, That’s not a heap of money.

J: And that’s not factoring in the high cost of manufacturing vinyl.

M: The beautiful thing about digital downloads is there is zero marginal costs effectively. It doesn’t cost you any more to make the next copy.

J: Can we step back to what you said about thinking that physical product won’t go away because people want the artwork? Isn’t that the same thing that folks said about vinyl — that the artwork was better and bigger? Still that didn’t keep CDs from taking over.

M: Well there is a huge convenience factor with CDs, there’s instant access to tracks, and they don’t wear out as easily.

J: That’s right, but that just makes my next point, that the convenience factor for the user, as well as the financial savings for the artists and labels of digital downloads, will drive consumers to accept this new model over the physical product despite aesthetic losses. I mean, people do buy polyester clothing.

M: Now don’t be doggin’ on polyester. I think you are right to an extent, but I also think that if it’s cheap and easy for people to pay for music then they will do it. Right now it’s not easy to pay for music online. There are only a handful of sites that are actually trying to sell digital music. We are one of the very few.

J: How is that going?

M: Well as far as actual sales…well you have to remember, we are not some VC funded thing looking for a big IPO. We don’t have any venture capital at all. We are totally self financed. We are looking for some more money, because we need it or we will not be able to sustain what we are doing. We have several models that address the major issues that are being talked about right now. For example, “How is music going to be delivered in the future? How are you going to get people to pay for it when you could just get it for free?” Our current BootLegal model relies to a large extent on honesty. But at the same time, if it’s cheap and easy to be honest, people will generally do it. If it’s not a pain to do the right thing, people will do the right thing. I’m not sure where I was going with this…

J: We were taking about whether you were selling any records.

M: We aren’t selling a heap right now but we are selling some. We’ve done, like, zero marketing as far as getting people to the site to buy stuff. We don’t have any advertisements anywhere really. Our marketing budget is like $50 a month…it’s tiny. So I’m not surprised that we aren’t selling more. We are also mostly dealing with bands that are smaller. We don’t have any label artists or anything like that at this point. If you look at EMusic, for example, who have been spending the money to get people to buy stuff, I think they recently just had their millionth paid download. Which is pretty cool but at 99 cents that’s only one million dollars. So it’s still not a ton of money. I mean, the convenience factor isn’t really like there yet, because broadband isn’t there yet.

J: Yes, I think once that happens we will be looking at a very swift turnover.

M:I agree.

J: I mean if download speed isn’t a factor, downloading isn’t any more difficult than using a channel changer.

M: When you’ve got DSL like we do it only takes a couple of minutes to download music. I mean, I do buy digital music, I do get free downloads, but a lot of people aren’t in that position. A lot of people don’t even know how to use their computer to listen to music.

Right now we are only selling digital but over the next couple of weeks, if everything goes as planned, we are going to start selling physical product for our bands from our site. So if you are interested in a band that is on our site, you can buy their music. We should be able to give you everything. If you want a CD, we should be able to give that to you. If you want to buy an MP3 that’s fine too. So we are expanding backwards into physical distribution because the market for digital distribution isn’t really quite there yet. I think that’s something that EMusic is finding out now as well.

I think that once people become familiar with downloading then it just makes sense that if you make it cheap and legal then fans will rather do it that way than to continue to do it illegally. If they don’t want to do it legally, it almost means that they don’t value the music in the first place.

J: I don’t know if that’s true. You said something very interesting to me in another interview that I just recently listened to. You said that a great number of Napster users are 13 year olds who have never had their own money and they have never had a history or association to paying for anything. So it’s not so much of a moral question for them, it’s just a cultural difference. For example it’s like living in a culture that is very sexual at a young age so there are no negative implications to that. It’s just how everyone behaves.

I bump into this a lot because I’ve been talking to many people who are completely committed to open source programming. There is a common assumption in that community that “information should be free”. That belief informs what they are doing to the point where they don’t ever think of trading digital downloads as piracy, even when some of these people admit that peer-to-peer trading could have a negative impact on record sales.

M: There’s an interesting debate about the concept of “free distribution”. Some people use that term to mean “freely available” as opposed to “free of cost”. I think that that point sometimes gets lost in a lot of the hype. I mean, there are also open source companies that are publicly traded companies that are attempting to make money by selling something else in addition to this open source software that they can charge money for, but you could also get for free. I’m not sure exactly how well those companies are doing, but it’s clear that they don’t expect everything to be free.

As to the 13 or 14 year old Napster users: we are doing this site called Paylars.com…you know Lars from Metallica…which is basically a parody site. We put it up after Metallica sued Napster. We just thought it was silly. Metallica should have been talking to Napster and they shouldn’t have attacked their fans. I mean if I’m Metallica and there are all these people out there trading my music online, that’s a lot of people who like my music. My first question should be, “How do we leverage that interest? How do we find out who these fans are? How do we use the exposure to sell more records, to sell digital files or to sell something else? How do we capitalize it?” But they looked at it as piracy and instead of taking a more constructive stance they just tried to put Napster out of business. What they did didn’t solve the problem, it just exacerbated it. Now all of the other file sharing sites are drowning in Metallica files.

Napster is kind of a funny business anyway because I don’t know if they understand how they can make money themselves. Somebody needs to figure out how they are going to make money at some point.

J: Yeah, well that seems like a common illness among web businesses.

M: Exactly, I mean to some extent it’s true. If you have millions of people using your software, there will be ways to turn that into money somehow. It’s important to put together revenue models. I mean, that’s what we are doing. We’re trying to figure out how our artists can make money, how can our customers make money or earn free music by participating in our incentive program.

So the Paylars site was just a response to the ridiculousness of the Metallica lawsuit. If you read the paylars manifesto there are three basic points:

• Napster and Gnutella software can’t be outlawed because it will have such negative implications regarding the privacy that should be afforded a computer user in their own home with their own computer. I should be allowed to store my music files in any folder on my hard drive that I want.
• The second thing was that file-sharers should not get arrested or given jail time because the law is not sufficient to address the effects of this new technology.
• The third point of the manifesto states that artists do need to get paid.

J: Well let me ask you about that because that brings us full circle and I think it leaves us at a good place to end. In a thread on the Musictech list you were discussing coming up with a payment system that could be applied to Napster and you said something to the effect of, “Well if they don’t do it, maybe I will have to go do it myself.” So my question is this, “Was that factious or are you serious and what exactly were you talking about?”

M: What I’m talking about is a Napster-like tool that makes it as easy to pay for a track as it is currently to download a track. Basically, what we’d be doing is looking to be able to identify the presence of a corresponding license in a download track to prove that the person you are getting it from is allowed to have it, so that we can distinguish the legitimate downloads from the illegal ones. Not necessarily restricting anything if that license doesn’t exist. Because in the beginning the legitimate licenses will only be coming from us and we’ve only got a hundred bands.

So if we create this technology that can detect the license that tells me where the music came from, if it can be shared and what the terms of that sharing are. In our case, the terms of sharing are that you can make and distribute as many copies of that file as you want as long as you also distribute the BootLegal license. The BootLegal license explains how the BootLegal system works and gives you a way to pay for the music that you already have. So basically we are just integrating all the payment information right into the player. There are a number of technologies that we are looking at right now along the lines of Paypal.com. I think that by combining the ease of use of something like Paypal with the ease of something like Napster we would have a system that would allow the downloaders to pay a small and fair amount for downloads without doing any extra work. If we could be sure that the downloaders would know that money would get to the artists that would be another incentive to download the “legal” way. It could be a pretty cool way to share music among your friends and make sure that the artists who created the music would get some of the money along the way.

J: Did you talk to Napster about this?

M: Yeah I talked to Napster twice about this. I never heard back from them. I think they’ve got their own troubles to deal with. They haven’t expressed a huge interest in what we are doing.

J: In what context have you discussed this with them.

M: Well, once in a meeting down in Santa Fe with them and a couple of other times in email correspondence. I mean, I think it would really help their credibility a lot if they would promote usage of the tool for independent music that wants to be distributed that way. I mean there are a lot of people that don’t mind giving music away. That’s MP3.com’s whole model. If Napster were to use the tool to promote independent artists by including a way to suggest music and not just help people locate music they are already looking for, that would help their case quite a bit. Furthermore, if the were to identify a business model that would actually compensate the artists then that would help their credibility a lot as well.

J: So you’re going to move ahead with out them.

M: We’re moving forward and trying to develop this type of a system. We’re right now trying to devise the criteria that it must meet. I’m actually interested in talking to you and Kristin about what those requirements are and I’ve also got some contacts as indie and major labels so we can see what type of requirements they would impose. I have no idea if all of the requirements can be met. For example, I’m pretty sure that major labels will want us to encrypt all the files in accordance with SDMI or something like that. I don’t think that is a workable solution long-term.

J: It doesn’t seem like it’s working too well even in the short term.

M: Yeah, you can not possibly crack down on every illegal copy that’s made, nor would you actually want to, because a lot of those “illegal copies” are working as promotion. It’s the same thing that happened to me with a cassette tape of “Life’s Rich Pageant” by REM.

J: Uh oh! You just admitted to piracy.

M: Fine, sue me. I didn’t make the copy, I just got it.

J: Yeah, right…I didn’t kill the man, I just held the gun! ;)

M: Michael Stipe can come over and get that tape back from me if he wants but if it wasn’t for that tape I probably wouldn’t have bought all those other records. I mean the point that’s been overlooked is the fact that this is not an either or proposition. Some people are using the technology in order to avoid buying music and others are just using it as a search engine to find music that they will then go out and buy. I mean neither of those extremes is true, they both exist and they exist in combination. Furthermore, if I hadn’t liked that REM tape I wouldn’t have gone out and bought any of their music.