Derek Sivers

Interviews → Venture Voice

while running CD Baby, thoughts on beginnings and operations

Date: 2005-11

Download: audio (mp3)

Link: http://www.venturevoice.com/2005/11/vv_show_19_derek_sivers_of_cd.html


Greg:

Welcome to Venture Voice, show number 19.

I’m Greg Galant, and today I interviewed Derek Sivers, the founder, president and programmer of CD Baby.

Derek’s original ambition was simple - he wanted to sell his band’s CD on the web. When he found out no music store would let him because his band didn’t have a label, he built his own music store on the web and named it CD Baby.

Today, CD Baby has 25 million dollars in sales. Nowadays, it’s hard to find an independent musician who doesn’t know about CD Baby. As Derek points out, his company is now the largest distributor of digital music on the web. But if you’re not in the music business, you might not have heard of Derek, even though Derek’s an old gun in online business - he started his business in 1997.

But during the high-flying dot com days, Derek wasn’t taking venture capital money and expensive office space in San Francisco. He might have named his business CD Baby, but he never played the dot com poster child. He located his business in Portland, Oregon, and focused on shipping CD’s.

Today he takes a break from his business to chat with us.

And as a bonus, stay tuned until the end of the show to hear us play some of Derek’s own music. Enjoy.

Alright well Derek, welcome to Venture Voice.

Derek:

Thanks.

Greg:

So tell me a little about what your career was like before CD Baby.

Derek:

Before CD Baby, I’ve been a musician my whole life, it’s all I wanted to do, and all I did do. I went straight from high school into Berklee College of Music in Boston, I was there ’87 through ’90. Graduated Berklee college, got a job at Warners in NYC. I was working inside the music industry just enough to know that I didn’t like that side of things. It was a great job but just depressing to see how the big giant music industry works at that level, where you’d see amazing albums get completely shelved and ignored, just because Janet Jackson’s album was coming out on the same month and the budget only allowed them to promote Janet’s album so this amazing brilliant album just got shelved, you know, pressed a thousand copies, took no promotion, and just shelved it because Janet was a priority.

It made me cringe enough that, I quit my job on good terms in 1992, and I’ve just been a full-time musician ever since. Living in New York, doing the musician-entrepreneur thing, whatever it does to make a buck as a musician: producing peoples records, playing on peoples records, going on tour. 1996 or so, I had actually even bought a house with the money I made touring, I was really living the dream of being a self-employed musician. I was doing it, I had just been a full-time musician for all those years, and around 1996 I put out my own CD, 1500 copies at concerts and stuff, and I went to go sell it online, because I was doing a radio promotion campaign, where we getting little pockets of airplay, in Alaska, and New Mexico, and Michigan, and Arizona, and we were living in NYC, and there was just no way we were going to be able to play those places. I was enjoying the DIY route - I didn’t want to get a record deal, but I did want to get it up and selling online.

So here’s the funny thing, in hindsight it’s funny to think that it was only a few years ago that there was literally not a single place that would sell your CD if you didn’t have a record deal or a distribution deal. In 1996 or 1997 I was trying to find ANYBODY who would sell my CD, but every online record store would say the same thing, which was: “Who’s your distributor?”

I’d say to them: “I don’t have a distributor.”

They’d say: “Sorry kid, this is just the front end of the distributors. The only way someone gets into our store is by being in the distributors database.”

And I said: “Can’t I just mail you a box of CD’s, and you just put them up on your site and sell them and pay me?”

And they just laughed, and said you know, it doesn’t work that way. So I decided to just - not start a business, but decided to just put a shopping cart on my own band’s website. Back in ’97, this was much harder than it was now. There was no PayPal back then, and the only shopping cart scripts are some crazy CGI-bin Perl script, and I wasn’t coming from a computer-savvy background, so I started squinting at some books on how to put in a CGI-bin shopping cart Perl script into my website, and I spent about 1000 dollars in setup fees, and three months in red tape to get myself a credit card merchant account. But three months and 1000 dollars later, I got my credit card merchant account with a shopping cart.

It was so much work that, when it was done, I told some of my friends and said: “Hey man, if you want you can sell your CD on my site, because that was really, really hard to do. If every musician had to go through that that would be hell, so feel free to use this stuff that I’ve already built.”

Still, it wasn’t meant to be a business, I was just doing a favor for some friends, and that grew through word-of-mouth. I started getting calls from strangers, like friends of friends, asking if I could sell their CD on my bands website. Finally, it got to be so many that I took these other twelve bands off of my own website and put them on a separate website that intended to be a store. And that was CD Baby.

It was still never really meant to be a business, just doing this as a hobby. You have to remember I was making my full time living touring, producing peoples records, running a recording studio, running a booking agency, living the life of a full time musician. CD Baby was just a little hobby I was doing on weekends. But friends told friends, and word of mouth grew, and now CD Baby is the largest seller of independent CDs on the web, with over 100,000 artists using it, and 25 million dollars in sales.

Greg:

Let me just jump back in your career here - you made it as a musician in New York. A lot of people don’t, a lot of them end up being waiters, or doing the day job and hoping to play at night. What do you think made you successful? Was it just the quality of your music, or was it something else you did?

Derek:

I think it’s a matter of being versatile in your musical skill. There are some people who are just like amazing bass players and thats all they know how to do, and even with that you can make a living with if you’re smart and you’re persistent - if you know how to turn on your extroverted side, even if you’re not that way by nature, for practical use.

But I definitely think the thing that helped me was that I went to musical school, and I learnt how to do lots of things. I had this business card that said: ‘guitar, bass, keyboards, drums, producing, engineering’, whatever.

I was in a circus for 10 years, I would play classical piano at a mime show, I would play disco guitar on a dance song and then go on tour with a Japanese pop star. So it was whatever it took to make a living, I would do it.

But I was also very driven and ambitious. The job I had at Warner Brothers was very comfortable. I quit on purpose to force myself to make a living doing music, and I’ve been doing it ever since.

Greg:

Where do you think your ambition to sell came from? It sounds like this was hard work coming from being a musician, and dealing with setting up websites back in the early days of the web. What drove you to spend those three months setting this thing up?

Derek:

I don’t think anything’s been hard work. I saw a quote that said it really well, once. If you can find a job you really love, you’ll never work a day in your life. When you’re doing something you really love, nothing seems like work. You’re just following your muse, following whatever interests you.

To me the excitement has always been about the learning. That’s why when you asked my title, I’d call myself ‘President’ and ‘Programmer’ these days because after starting CD Baby, or rather in the process of starting CD Baby, I really didn’t know anything, about computers. I just knew some real basic HTML markup. I never took a programming class or anything like that, but at CD Baby, I really got fascinated in learning how I could make my own job easier through automating things. I learned about server-side databases, SQL, server-side scripting languages, and having the ultimate inspiration to learn these things because every time I learnt how to automate something I was doing manually I was making my job a hell of a lot easier.

For the first year of CD Baby it was just me. I didn’t hire my first employee until a year later, and even once we had employees it was constantly trying to find a way to make their job easier, so I wouldn’t need to keep hiring more people - instead I could find technical ways of doing what we do more efficiently.

Greg:

So what was an example of something that was a real pain in the butt to do and that you automated?

Derek:

Oh man, there’s so many! If you could see this giant factory type setup we have now, where it’s 50 employees in a big plane hanger size warehouse - every order used to come in just by email, and although we were running a database, it was Filemaker Pro - a little application on the mac, and so every order would just come in sent to me by email, and I would have to highlight the mouse over the first name, click copy, alt-tab into Filemaker and click paste. Then highlight my mouse over the last name, click copy, alt-tab, click into last name, hit paste. Highlight my mouse over the address line 1, click copy, alt-tab, Filemaker, click paste.

We’d have to do that for every single order that came in - and granted it was only 5 to 10 orders in a week, but I think we did that even up until it was 30 orders a day, we were still importing them in by hand. You spent an hour in the email box, importing the days order into the database. Things like that, all the way down to the bottom level.

This might be a little early to transition to a related topic here, but it’s one of the things I tell people that are starting new companies. We get contacted by people all the time that are saying: “Hey! I was thinking about starting a music recommendation service, or something like that.” and every now and then people ask my advice. One of the main bits of advice I give people is, give yourself a 10 day deadline, and just launch it. Just whip it up in 10 days, and just do it with almost no features.

Don’t do a ‘coming soon’ that sits there in a year while you try to perfect something. Just whip up something quick and ugly, in a week or two, with no money, and just start doing it even if you only have one client and one customer, then just improve on it from there. Because I see too many people that get paralyzed into thinking ‘oh god, we’re going to need 10 million dollars in venture capital, and to make this thing perfect we’re going to need a team of 20 engineers to make the most amazing software ever.’

They sit in development for a year, and meanwhile they spent that year in hiding while the world has changed around them. The idea that they had a year ago might not be so happening a year later. I really think that there’s a huge advantage to just slapping something up quickly, and getting it back to world and improving it from there. Also, it helps you because if the world is not into your idea, you’ll know it a lot earlier, before you spent ten million dollars.

Greg:

It sounds like you really know your stuff on business now, but you started CD baby as your first business, and you didn’t go to business school or anything. From your life running a band, did you notice that running a band was at all like running a business, or was it a totally new game?

Derek:

Before the band, I started in the circus, where it was actually a really good training that I had a boss that was just an idiot. That actually really helped because he was the boss of the circus that booked all the gigs, but he was some kind of forgetful Mr. Magoo that just didn’t know where anything was and he say: “Oh, you guys are booked in Albany, in New York this weekend. I forget, it’s either Saturday or Sunday and I don’t know which time so just drive to Albany this weekend and drive around and hopefully you’ll find the gig.” Seriously, that’s not an exaggeration. That kind of stuff happened all the time, so it made me, at the age of 18, have to be the responsible one in the circus that would drive the truck, make sure it had gas, call the person who booked us even though it wasn’t my job to do so. I kind of had to step into the role of responsibility because I had a flakey boss.

Even at the age of 18 at the circus, if you were to see the way things ran, it would have felt like I was the guy running it, just out of necessity. So when I started a band when I was 22 or something, I was already kinda used to being the responsible one. The rest of the musicians would kinda flake, people wouldn’t show up or people would quit. People would have personality problems and I was the one who was ambitiously holding the whole thing together. I guess it was because it was my music too, and I really wanted to get my music out to the world so I had more inspiration than anybody to be the one to make this thing happen.

So then six years later and I’m starting a company, it felt like anything else. I was very used to the role - and I joke sometimes when people ask me if its weird to be the boss, and I say: “I’ve been a boss since I was 18, so I’m used to it.” I’m just usually the least slacker-like one in the crowd.

Greg:

I guess that’s something thats necessary in music and business - to have one person that’s not being a total slacker.

Derek:

Yeah! And understand that, I mean, I read a hell of a lot. I just devour books on music business - sorry, not on music even. I’m just so used to saying the word music before business. I devour books on business, strategy, whether it’s more kinda management, like Peter Drucker, or Good to Great by Jim Collins, or the guerrilla marketing series, or Seth Godin’s stuff. I’ve always just been a real fan of business books because I saw how they could apply to a band, or a booking agency or a recording studio was doing. I think its a shame that a lot of people in music only read music business books, and they don’t understand that reading a book like Good to Great, or anything by Seth Godin or Jay Conrad Levinson or whatever can really help them with what they do, even though the book isn’t about music.

Greg:

It seems to be a big part of the culture of the music industry is to have this view that we’re not corporate, we’re rebelling here. How do you reconcile that, reading these business books, and being a musician - is there any contradictions there in the culture?

Derek:

Not at all! I think that everything I do is about rebellion. CD Baby is a total rebellion against the traditional world of distribution. Me being the only musician in the crowd into reading a book on marketing is somewhat of a rebellion against the people I was surrounded with that wanted to just watch TV, get high and hangout or whatever, and I’m the one going: “We gotta work!” So I’m always just rebelling against whatever is around me.

CD Baby is a perfect example of that - before 1998, the world was just set up in a way where the only way a musician could get distribution was by signing their music away to a record label, just giving their rights completely to a record label, or at best case signing a distribution deal, which was still an awful deal. Distribution deals were notorious for never paying. They would give you a two to three month window to prove your sales, and if you’re not selling well they kick you out forever. That whole world is filled a pay-to-play mentality, where anyone who has the money can come on and buy up the space and drown out the people who don’t have money.

So, CD Baby was really set up as a rebellion against all of that. When I took these 12 artists that were on my bands website and put it on a separate website, I realized that, like it or not, I was starting a business - I tried to make the very core of the business itself an idealistic rebellion against traditional distribution. I decided to rethink what a distribution deal would look like from a musician’s point of view:

1. I want to be paid every single week, no matter what.
2. I want to know the full name and address of everyone that buys my CD, because in my mind, those are my fans, not the stores fans. They’re not a fan of the store, they’re a fan of me. They’re using the store to get me, so I should be able to know who they are.
3. I’ll never be kicked out for not selling enough. Even if I’m making some obscure tuba classical music that’s only going to appeal to one person every year, the perfect distribution would keep that one copy there for the one person a year that wanted it.
4. There would never be any paid placement. It wouldn’t filled with advertisements, paid for the people with money, or there’d be no buying of chart space, where the people with money gets the top results. That kind of thing isn’t fair to people who can’t afford it. The perfection distribution system would just never allow that kind of stuff.

Those were my 4 idealistic points on starting CD Baby. And all of that is just a real rebellion against the traditional system. Honestly, even the way we run the company internally is a rebellion against the way most companies are run.

Greg:

I was looking at your website and I see that people have titles - there’s a VP of Operations but there’s also a Count Warehouse, a kicking, screaming, gold teeth professor - how do you come up with building a business in this unconventional way? It’s hard enough to build a business in a conventional way.

Derek:

When I was six, I lived in England for a year. The school I went to was just awful. You realized why, if you ever saw Pink Floyd’s ‘The Wall’, they’re railing against the British school system. So I was in the British school system at the age of six, and I remember that there was a kid who brought orange juice one day, and spilled it. And the teacher yelled: “There will be no more orange juice for the rest of the year!” And one day a kid brought in a tomato and dropped it and stepped on it and made a mess and they said: “There will be no more tomatoes for the rest of the year!”, and as the year went on they started banning everything that ever caused any kind of a problem. And I feel that a lot of business are run like that. Because someone once, two years ago, stole a file, they’ve put some hyper paranoid restrictions on all employees that ‘no employees are allowed to hereby, forthwith, allowed to look to the right when entering door C.’ They’ve put these totally stupid restrictions because of one little problem in the past. You realize that most of the stuff isn’t necessary. You don’t punish everybody because one person fucked up.

The joke is that CD Baby is run with all the corporate formality of Bob and Jimmy’s Tackle Shop in Key Largo. You realize that there are plenty of little bait shops in the Florida Keys that seem to stay in business just fine, even though they’re run by a bunch of slackers, so if we can do anything a step better than that, it’s good enough. I’m sure we could probably be a little more profitable if we were to really buckle down and create some super strict requirement that everybody hated that would drive them like workhorses, but you just realize that there’s a quality of life factor and a happiness factor to it, and I’d rather do something that makes me feel proud and happy and be surrounded by proud and happy people, even if they’re perhaps 10 percent less effective than they could be.

Greg:

And it sounds easy the way you that you describe it, you built this business, you had these ideas, people just joined. Is it easy as it sounds, or did you at any point have to put in 100 hour weeks and really drive yourself?

Derek:

Well, I put in 100 hour weeks anyway, because I found what I love to do best in life. I was up at 5 this morning, you and I emailing at 5:30 this morning. I’m up at 5, and I turn on the computer and this is just what I love to do all day. And yes, I pry myself away from the computer for an hour in the middle of the day to go and ride my bike and get outside a little bit, but then I usually sit at the computer doing more of this until midnight. I don’t know know if it’s a 100 hour week, but at least. This is just what I love to do, so it doesn’t really feel like work.

Of course, there have been some frustrating things, but it’s the same as running a band - it’s frustrating when the drummer decides the night before a big gig to quit. It’s frustrating when someone at CD Baby decides to flake out, or freak out, or turn into an ass, but it’s life! Maybe it’s from working with a circus for 10 years and a band for 5 years but you just get used to the fact that there’s going to be unexpected things and chaos and personalities, and you just get used to it.

Greg:

Sounds like you’re quite bold and you’re quite unconventional when it comes to building a business. What are some of the big mistakes you’ve made along the way?

Derek:

Believe it or not, I don’t have any. I don’t have any regrets, I don’t have anything I would’ve done differently. I’ve thought about this a lot, and I think the reason I don’t feel there’s I would’ve done anything differently or any mistakes along the way is a matter of ambition. If my goal was to rule the world, or become a billionaire or something like that - then yeah, I would’ve done things differently and I could look back and say I made some mistakes, because I’m not ruling the world yet, and therefore I must’ve messed up. But since my only ambition was to do a favor for some friends and help them sell some CD’s, everything that’s happened since starting CD Baby, everything that’s happened since the first year, has just been a surprise.

To help put it into perspective, there’s an email that I sent John, who was the first employee back in 1999, when it was just him and me, and we had 50 artists using CD Baby, and we were getting around 10 orders a day, or something like that - a part time hobby thing, just me and him on two PC’s in the living room. I sent him an email one night, after he had left and I was thinking about the future of CD Baby, and it said ‘man, we gotta get ready, because someday there’s a chance that this business might be big. We might have a hundred artists using CD Baby. We might need to get a third computer and network the 3 of them together, which I know nothing about.’ That was my idea of thinking big - we might have 100 artists and 3 computers in the living room. And now it’s 100,000 artists, and 50 or something computers.

The entire business is just way, way more than I ever expected it to be, so it’s hard to think in terms of any mistakes, because it’s just far beyond anything I ever expected. So I just take it as it comes when everything is a surprise like that.

Greg:

How big is it now? How much in revenue and how big’s your team?

Derek:

It’s 25 million dollars or something in sales, there are 50 employees. The largest seller of independent CD’s on the web. The other stuff we haven’t even mentioned yet is two years after Apple iTunes launched their music store, a few weeks later they sent us a private invitation to their office to talk about how to get the CD Baby catalogue up and selling in iTunes. I kinda thought we’d just be meeting with some marketing guy, or some tech guy, and Steve Jobs himself walked out in full presentation mode.

It’s funny to think about in hindsight - when it was that first month that iTunes launched, a lot of record labels were still dubious that this thing was worth doing at all. So he was in full presentation and convincing mode, saying: “We really want to get every song ever recorded up for sale on the iTunes music store. There’s no reason not to. It’s just digital, there’s no lack of shelf space. Let’s just get the most complete archive of music ever, here and available for 99 cents a song. Even the stuff that’s not selling too well - we don’t care. Let’s just get it up and available.”

Since Apple can’t deal with thousands of musicians calling their main number and asking how to do this, they wanted to work with a company like us, and a few others similar to us, that would help pipeline musicians of the world into iTunes. So all I had to do is say: “Uh, okay!” We set up our whole digital distribution program. Luckily, we were already doing 90% of it already. There was just this additional 10%. The musicians were already entering all of their metadata into our database for every album and every song. We were already paying the musicians every week, we were already digitizing their incoming CD’s and scanning their album art, and encoding their music into WAV files and such. We were doing all of that already before iTunes launched, just for the matter of making the CDBaby.com website.

When iTunes said they wanted us to be a digital distributer for them, all we had to add to our assembly line was to encode these files into their AAC format they needed it to be in, and upload it to Apple’s servers. They’d send us the payment in one big giant chunk, for all of our artists in one big check per month, with a detailed report of what was contained inside the check. I just had to write a program to parse out that report, and add the appropriate dollars here and there onto a musicians’ next check, which went out the next week anyway.

The cool thing was, we were able to set up this amazingly efficient digital distribution system, because it was piggybacking on our existing retail system. That’s why we’re able to do this for only a 9% cut. So if you know any musicians that want to get their music up and selling on the iTunes music store, just tell them to go to CDBaby.com. They can sign up, just send us their album and we’ll take care of all the ugly technical work of encoding it to Apple’s specs, exporting the XML metadata just the way Apple needs it, and syncing it to their servers just the way they need it to be. We take care of all the technical stuff, and take no rights to the music, just a distributor. So we just distribute it to Apple, and all of the other online big music stores, like Napster, Rhapsody and Yahoo music, and all of those kind of places. And for doing all this work, we only keep a 9% cut from whatever income is generated by your music.

Greg:

Now, it sounds like you’re doing this and some other people are getting into it, since it’s a really new thing in the market place. How much o you think about your competition?

Derek:

Actually, the cool thing is, we’re friends with them all. We all have different niches. There’s a good company, in San Francisco called Iota, and they’re specialty is working with labels that have 10 to 20 releases on their label. Our speciality is working with individual musicians, that are putting out one on one. So every now and then, if a label with 20 albums contacts CD Baby and wants to work with us, we tell them that they should also consider Iota, because Iota is more setup to handle record labels. When an individual musician with one album contacts Iota, they say you’re probably better off working with CD Baby, because they’re more designed to work with you. So there’s really not that much competition - we each have our niche, and CD Baby is definitely far and ahead the best at working individually with musicians.

Greg:

How do you make the decision - I mean, it sounds like you must’ve been tempting to say “hey, we’ll also work with labels.” How do you decide to not do that, to pass up that opportunity?

Derek:

Did you read Good to Great?

Greg:

I haven’t, no.

Derek:

Oh, you should, man. Good to Great, by Jim Collins, is seriously one of the best business books written in many years, and I read lots. I read maybe 10 or 20 a year, and even though this was written three years ago, I still think it’s one of the best things written in years. In Good to Great, there’s - well, you can read your own book synopsis on what the book’s about on Amazon.

There’s a chapter called the hedgehog theory, that talked about how all of the companies that survived and thrived for many years and been around for 50 or 100 years, all of them had defined their niche. And the reason why it’s called the hedgehog theory, it tells the Aesop fable of the fox versus the hedgehog. Everybody thinks the fox is fast and sly and cunning and stronger, and the lonely little hedgehog only knows how to do one thing - it knows how to curl into a ball with its spikes out. But the thing is, no matter what the fox tries to do, no matter what cunning trick it tries to get into the hedgehog, every time the hedgehog just curls itself into a ball and it always wins, because being very good at that one trick, is better than a hundred of the foxes sly and cunning tricks.

So he apply the Aesop’s fable to business, and said that the companies that survived and thrived the best over the years is the hedgehog. The ones who knows their niche and specialize in it, usually even letting go of everything else - not doing anything else, not trying to dabble in aspects of other businesses, not trying to spread out, but to just stay a specialist of this one thing.

I believed that anyway, for a different reason. You gotta remember, since I started CD Baby in ’98, it was really before the real dot com boom. I really started it at the end of ’97, so it was before the dot com booms. And during those fucking crazy times, during ’99 and 2000, there were so many companies out there that were just fog, that couldn’t tell you what they do! They would say “we empower end-tier solutions providing peer-to-peer customer solutions to help empower your driven development services.” And it’s like, well, okay, what do you do?

The way CD Baby was able to cut through that fog was to say: “We’re a record store!” And people would say: “So, do we upload music to you and you recommend it?” and we’d say: “Nuh-uh, we’re a record store.”

“So we send you a CD and you manufacture it?” “No no no, we’re a record store.”

“Well, do you do reviews and recommendations?” “Nope, we’re a record store.”

You say it enough, and people would go: “Okay, I get it.”

It helped, a lot, to be the sharp knife in the fog. When everybody else was trying to be everything else to everyone, we were there saying: “We’re just a record store.”

So I believed this hedgehog theory anyway in my gut, because it helped cut through the chaos. It helps to really make it clear what you’re about. Innovation is about saying no to most things, not saying yes to everything.

Now that the cloud of the dot com days are over, I think it helps to understand what your specialty is, and stick with your specialty, to drive that deeper instead of trying to spread out and try to be everything to everyone. So CD Baby is still just sales and distribution to music. I took a step back in saying ‘just a record store’, but we’re just sales and distribution for independent musicians, and that’s it. We don’t want to work with record labels, we don’t want to get into being a radio station or a recommendation service or editorial reviews or all that kind of stuff.

Man, I swear, we get an email a day that wants us to be something else, that says something like: “You guys should start a booking agency! You should book a CD Baby tour across the nation! You should start a bus with a satellite dish that would drive to neighborhoods and blah blah blah, you guys should start a radio station, you should start a magazine! You guys need to start a record label and take the best of the best!”

We get all these well meaning suggestions everyday, but seriously, 365 a year for 7 years, you just have to say no to everything, and just say: “No, we’re a record store.”

Greg:

This sounds like you almost have to rebel to BE just a record store.

Derek:

Yeah! I swear, you really have to stand firm and know what you’re about. It’s tough to say no to everything, especially when the people who are trying to get you to say yes to something are really doing so full of flattery and the best of intentions. You have to rebelliously stand firm and say no, we’re just sales and distribution. That’s all we do, and the way we can continue to be great at it is to say no to everything else.

Greg:

Sounds like you have a lot of control there. Do you own the whole company, or have you ever taken investment to grow?

Derek:

No. I own the whole company, never any investors. During the dot com days you had to whack them off with a stick. People trying to shuck money at me, and I would just shut them up and bring the phone call to a quick close before they could get too involved. I saw too many of my friends back in New York, even ones that started like me, with a good idea and passionate about what they were doing, I saw them take some investors money, and all of a sudden they lost their focus. All of a sudden their focus turned into pleasing their investors, or showing a healthy returns and they weren’t thinking about their customers first and foremost.

The thing I like about not having investors and maintaining sole control of it is that I get to do things that business-wise seem very stupid but I know in my heart is correct, and I’ll give you the most obvious example of this. When we first launched our digital distribution program, just a month or two after meeting Apple, actually, it was like the day after meeting Apple, I sent all of our clients an email saying we’re going to do this thing. Then it was just a few weeks later at the launch, and I said: “Ok everybody, sign back into your account, and if you want us to deliver your music to Apple, and other online music stores yet to come, just log into your account and we’ll get it set up.”

At the time when Apple brought us to their office and we asked them about the deadline, they said that it was just a few weeks away. It turned out that deadline was way off, 6 months away from being ready, but because they told me 3 weeks, I told our clients 3 weeks. We caught all of the heat from all the musicians that signed up to do it. Also, anticipating that it was going to be a lot of work to go back and re-digitize and deliver all of their music, I was charging 40 dollars to be a part of this. So I said: “For 40 additional dollars, we will encode, deliver, do all of the legal and technical work necessary to get your music up and selling on Apple iTunes.” 5000 musicians said yes, and gave us the 40 dollars and the permission to be their digital distributer. So we collected 200,000 dollars from the artists, and had it there in the bank. We were using it for the legal costs, and the extra hardware necessary. But then 4 to 5 months went by, and Apple still wasn’t ready. And we were calling them and emailing them every day or two and saying: “What’s going on?” and they just said: “Oh, we’re not ready.”

And the musicians were really starting to get mad, thinking that this was some big scam that we had pulled on them, and I just sensed that this tide was turning and there was getting to be all this ill will, where there was previously celebration. I felt that sometimes theres an ill will that, whether it’s deserved or not, can be irreversible, and let’s not even get past that tipping point, let’s not go there. So what I did was, even though we had already spent 50,000 dollars in legal fees and almost 100 grand in hardware, I gave everybody’s money back. I said: “Alright everybody, I know I said it’d be a few weeks and it’s been a few months, here’s your money back. I’m really sorry that it didn’t turn out the way I thought. We’re still going to continue to do this, but here’s your money back.” And we refunded 200,000 back to the artists.

And I swear, by some kind of fucking serendipity, the very next week Apple said: “Okay, we’re ready!” So the CD Baby digital distribution program has been a free service since then, and lots of people tell me I should be charging more, but I know just by charging more, it raises peoples expectations. And the problem is, up until that point, up until we did that deal with Apple, CD Baby had been entirely self contained. You sent your CD to CD Baby, and we sold your CD for you. We were 100% responsible for everything that happened. Once Apple asked us to be a distributor, and all these other companies too, all of a sudden we were somewhat out of control. We were just a distributor, but the end result was still in their court. All of a sudden, I couldn’t absolutely 100% guarantee the way things were going to go. I could say: “We will do our best. We will send your music to them. But I can’t guarantee that they will sell it. I can’t guarantee that they won’t go out of business next week, because it’s not up to us.”

And because we couldn’t offer that guarantee, I decided to lower people’s expectations, by making this a free service. But also, there was a slight business savvy behind that decision because I realized that all of those legal and technical expenses we had upfront were fixed costs. They were the same amount of money no matter if it was one artist or a million artists using our service. Realizing that, I said: “Well, hell, why go through all this trouble just to have 4000 people using it, whereas if I make it a free service we can have so many more using it.” So I decided to make it free.

I guess the other, numbers-wise way of looking at it, is simply with fixed costs, if 100 artists are using it, then I’ve already spent 100 dollars per artist building this thing. But if 100,000 artists are using it, then my cost is really only a dollar per client to do all the work we’re doing.

So I made it a free service, and now we do have 50,000 artists using our digital distribution program, which I found out later made CD Baby the single largest digital distribution service in the world. I found that out when the guys at Napster said that the CD Baby catalogue is larger than the major record labels, like Universal and all that stuff combined, we’ve got the single largest digital catalogue in the world which is kinda nice.

An unexpected side-effect, but also there’s strength in numbers. Now there’s not any legitimate music service out there that can start up that can afford to not have a CD Baby catalogue. We kinda make them do all or nothing, so there’s strength in numbers, where anybody that has music they want to get out in the world can get it in CD Baby and we can get it to all the big online music services.

Greg:

All the artists who are using your system, do you view them as customers of CD Baby, or suppliers, or partners? Where do they fit in?

Derek:

We think of it as two groups of people that we deal with: the clients, which are the musicians, and the customers, which are the people that buy music. So I guess we could’ve called them our vendors, but the musicians are our clients, and the people that come to CDBaby.com to buy music are our customers. Although I guess now we have the third group, which are the companies like Apple iTunes, and Napster and all of those that we also supply music to. Profit is about 50/50, we make about half our income from selling the music on CDBaby.com and half of the income from the musicians directly, who are paying us to do everything we do on their behalf.

Greg:

When you’re dealing with these clients, these musicians, what’s it like? Are these people who are entrepreneurs, where they’re doing their own thing, but they’re responsible in doing what they need to do to be a part of this, or is it not quite that way?

Derek:

It’s all across the board. You can’t say there’s a typical person. We also get the question: “Qhat does the average musician sell on CD Baby? How many does the average musician sell?” And we have to say, well, there isn’t really an average musician on CD Baby. There are so many different types. I’ll give you the gamut:

We have people like Al Jardine, one of the original Beach Boys, or Thomas Dolby, from She Blinded Me With Science, people that have been famous for decades, that are choosing to put out an album directly from musician to fan, and using CD Baby’s system to do so. We have ambitious bands, five 20-somethings that spend every waking moment on tour, and all five of them are ambitiously pursuing a career in music. And then we have people that are film composers, where this is their career already, and they’re just putting out an album on CD Baby on the side. They’re experts, they know what they’re doing, they’ve been doing it for 20 years and they’re just using CD Baby to sell an album directly. And then you have the total amateurs, where it’s their first time putting together an album. Sometimes they’re brilliant musicians, that’ve just never done this before. And we’re having to teach them, you know: “What’s copyright? Do I need to trademark my songs? What’s a UPC barcode?” Stuff like that, we do handholding for the people that’ve never done this before. To me, that’s one of the beauties of the CD Baby system, is that it was designed from the ground up to work one on one with musicians no matter where they’re at in their career.

Greg:

You guys are in Portland, Oregon. How did you end up there?

Derek:

I started the business in Woodstock, New York, in 1998, and I’d only been living in Woodstock for a year or two. I moved up to escape the hectic life of Manhattan. I’d been living in Manhattan for 7 years, and decided to move up to quiet, little Woodstock, New York. But the downside of quiet, little New York was that the internet was raging all around me and I was up in the mountains with a 56K modem. There was no broadband coming for years. They very clearly told us, we’re not scheduled to bring any DSL or cable into this area for another 4 years. So even as CD Baby grew, it was me and John and this one other guy, all sharing a 56K modem. It was slow, and it was painful.

But in the end, it was the winters. I just couldn’t handle the winters anymore. So the upstate New York winters and no broadband made me pick a city on the map. I was about to pick San Francisco, and then I realized what it would cost, and then I said “Hm, maybe Portland.” I’m really glad I picked Portland. It’s a high-tech city with a low cost of living, and especially in the last couple of years, has just got this incredible open-source movement! Linus Torvalds, that wrote Linux, is there, and their open source development lab is there, and now, I don’t know if you’ve heard of Ruby on Rails that’s been getting a lot of buzz…

Greg:

I just interviewed the 37Signal guys recently.

Derek:

Oh, right! So Portland, for some reason, had more Ruby on Rails programmers than any other metro area, anywhere! It’s just got a really great creative vibe to it where people seem to do things out of love, not money. Portland isn’t the kind of place you move to to go get rich. People do things because they’re interested in them. And because of that, it has this great, open source community feeling to it. I’m just really glad that CD Baby accidentally landed there. It’s been really great for the company.

Greg:

It sounds like you’ve done your fair share of rebelling and you’ve been very successful, but what are you rebelling against now?

Derek:

Damn, that would be such a great question if I had an answer. You know, these days I feel like I’m rebelling against the crazy greed of the major labels. You hear the stuff where someone feels that 99 cents per song on iTunes is too high. Now Sprint announced a couple days ago that they’ll be selling digital music direct into your Sprint phone, for two dollars and fifty cents a song. And you know that it’s just so many middle-man layers of greed along the way, where Sprint wants to get their cut, but so does the company that’s providing the service, but then so does the label, and so does the publisher. So you have, like, five companies taking their cut between the musicians and the fan.

I guess you could say that I’m still on a constant rebellion to help the musician to reach those fans directly. To just reducing the number of people in between the musician and the fan. I think, in the end, the musician is happier, they’re more in direct control of their career. They’re definitely happier on the money level, where you can make more money selling 10,000 records on your own than you can selling 1 million records on a record label. I think as time goes on, more and more musicians will realize this and they’ll opt to do things themselves, instead of signing away their life to a label.

Greg:

That sounds really good, and congratulations on all your success, and best of luck, keeping it up!

Derek:

Great, thanks a lot!