Sample Business Plan SoundFuture

SOUFIDIZUTUrQ Business Plan Confidential January 2000 SOUFIDI_UTUI'_I_ Plan # Confidential 2 cGounol=UTUla_ Table of Contents Executive Summary Why is Sound Future Different? Product Strategy Distribution Strategy Marketing Strategy Sound Future Network Management Team Financial Summary Market Background Information ............................................................. 3 6 11 14 15 16 24 35 36 Confidential Memorandum This document has been prepared by the management of Sound Future Music, Inc. solely for information purposes. This is not an ot't_rto sell securities. This document includes certain statements, estimates and projections provided by Sound Future Music, Inc. with respect to the anticipated future performance of the company. Such statements, estimates and projections reflect various assumptions by Sound Future Music, Inc. concerning anticipated results, which assumptions may or may not prove to be correct. No representations are made as to the accuracy of such statements, estimates or projections. For more information, please contact: David Kusek Sound Future 216 North Lucerne Blvd. Los Angeles, CA 90004 soundfuture.com Confidential 3 c_OUNDI=UTUI_I= 781-383-3058 phone 781-383-9439 fax dave_soundfuture.com Confidential 4 SOUFIDPUTUI'_ Executive Summary Sound Future is a digital music company formed by a provent and talented management team of music, entertainment, Internet and direct marketing experts. The company is creating a new model for a music company with a unique new method for promoting and selling music combining the best parts of a traditional record label with the speed, promotion, feedback and distribution offered by the lnternet. Sound Future identifies, signs and develops musical talent and distributes its product through lnternet distribution channels and via conventional retailers. The founders of Sound Futurelar.=-._ dedicated to defining and developing the digital recorded music company of the future. (P_enuesss_ will flow from on-line and retail sales of CD and DVD discs, merchandise, webcasts, fan clu s_b'W'-, downloads, radio channels and via innovative new applications in music publishing. A recent Jupiter Communications study stated that Internet sales of music will represent one-tenth of the total $46 billion music market in the year2005. Sound Future has been designed from its inception to be a lean and powerful, self-sufficient and innovative digital music company that will harness the lnternet and exploit the limitless new opportunities presented by what is unquestionably the single most revolutionary re-definition of the music industry. The whole premise of this venture is to promote and distribute new music, artists and products using creative marketing and distribution that exploits the Web. This is not merely a technology play or an on-line distribution play. Instead Sound Future is a redefinition of a record label that profitably develops and sells exciting new music products by taking full advantage of the massive sea change occurring in the music business. In this regard, the Sound Future team's track record speaks for itself. Sound Future Music's creative teana is responsible for pioneering entirely new music genres and signing multi-million selling artists such as Mary Chapin Carpenter, Blues Traveler, Jonny Lang, Heart, Neville Brothers, Cheap Trick, George Winston, Alex deGrassi, Shadowfax, Michael Hedges, Tuck and Patti, Extreme, Foxy Brown, Kenny Rogers and Toad the Wet Sprocket. Sound Future's A&R team has directed the careers and coordinated the recordings of many different artists including Michael Jackson's "Thriller", Sting, Amy Grant, Sheryl Crow, Bryan Adams, REO Speedwagon, Charlie Daniel's Band, Molly Hatchet, Sade, Sound Garden, Soul Asylum, Etta James, James ingram, Earl Klugh, Jeffrey Osborne, the Rippingtons, Janis lan, Tom Scott, Peabo Bryson, Michael Franks, Sinead O'Connor, Pat Benatar, Jeff Beck, Monster Magnet, Eddie Money, Toto, Kenny Loggins, David Wilcox, Roseanne Cash, Rick'3,Van Shelton, as well as producing Woodstock '94 and other projects. Sound Future Management Team Will Ackerman- Chairman Larry Hamby - CEO Sound Future Music Dave Kusek - CEO Sound Future Networks Founder Windham Hill Records Senior VP A&R BMG, A&M Records, CBS Founder Passport Designs - co-inventor MIDI Confidential 5 SOUFIDI_UTUB(_ Chris Stone - Executive VP Operations Marna Grantham - President SFN Greg Rogers - VP International Ned Hearn - VP Business Affairs Harry Gold - CTO Founder Record Plant Recording Studios Senior VP Marketing - UPN Senior VP/VP MCA, Walt Disney, RCA, CBS Music Industry Business Attorney VP Interactive Media - Mullen Advertising In addition to Sound Future management's music experience is its background in developing and marketing web sites. Listed below are some of the many different web properties that members of our team have worked on or been responsible for including web site design, implementation and various Internet marketing initiatives: berkleepress.com bose.com bostonacoustics.com bostondirect.com boston.sidewalk.corn clubmed.com cozone.com ft.com (financial times) hifi.com mediaone.com oxygen.com rpm.com windhamhill.com upn.com Sound Future is the digital music label of the future. The company will establish its web properties as the premier destination for new and emerging artists. The label will sign new artists with the widest possible demographic appeal to recording, publishing, merchandising and distribution contracts. Sound Future will develop innovative and entertaining quality music and DVD video products and push the boundaries of digital delivery. Its interactive DVD discs will both promote the artists as well as providing additional revenue streams. The Company will actively pursue strategic relationships by partnering with media companies, Internet Radio sites and on-line retailers to promote and distribute Sound Future products. Sound Future will transcend and improve upon the traditional record label model by employing the latest technology and digital marketing methods. Sound Future is in a superior position to the major record labels by being technically savvy, lean and able to readily adapt to and exploit the changing marketplace. Sound Future is also in a superior position to pure lnternet music sites through its use of traditional marketing and distribution methods that augment and support its online sales and strategies and through its focus on creating and delivering high quality musical content. The founders' Internet, music and direct marketing expertise are being leveraged to develop a proprietary promotion and distribution platform for marketing new releases. The Sound Future Network will offer new product releases to customers and serve as an lntranet between the artists, the fans and the label by partnering with radio stations. Radio is a proven driver of sales of new music and also a proven driver of Internet traffic. Our promotion strategy is to develop the Sound Future Network in conjunction with major radio station owners. This new network will become a proprietary promotion and distribution platform for new Confidential 6 i; SOUFID_UTUI_ independent releases. The company has hired one of the founders of UPN to help with this effort and the IT Consulting firm Razorfish to build out the web properties. In partnership with major radio station groups, Sound Future will create a new media network of web sites tied directly to the radio stations. The radio stations promote the network as a source of new music in exchange for equity in our company. The Sound Future Network will be used to promote and distribute (CDs) new releases on an exclusive basis. Sound Future plans to open this network up to 20-30 other indy labels. Sound Future will build the online network for the radio stations for free in exchange for airtime promoting the network and the new releases. The network will promote a limited number of new releases each month on an exclusive basis. The indy labels (including our own) sell their new releases to the network on an exclusive basis and at a discounted price for a 30-60 day period. In turn, the network promotes and sells this new music in a focused manner and generates market research data for the labels. After the exclusive period, the labels take their releases to retail armed with marketing data derived from the network. The benefit to all parties involved is the creation of a proprietary platform with which to sell independent new releases that is directly tied to radio. The benefit to the indy labels is that they get guaranteed promotion in exchange for a discount on the product. They also get demographic data as to who bought the records, where they are, what else they are buying, etc. The benefits to the radio stations is that they get a free co-branded web network that can carry new music, as well as local news, weather, sports, etc. The benefit to the radio owners is that they share in the equity appreciation of the Sound Future Network, which is driven by the promotion that they provide, and the resulting sales of CDs. Sound Future will achieve profitability primarily through sales of CDs and DVDs and digital deliveries generated by the creative promotion of exciting, unique and original music. Its products incorporate a networking component that connects the CD and DVD discs directly to our Web properties via the Internet. This allows us to identify our customers and create direct relationships with them. The company will use the lnternet and its Web site in a three pronged strategy Promotion, Distribution and as a Product itself. Customers will be attracted to Sound Future because the music is innovative, fresh, accessible and easy to purchase. The soundfuture.com site will provide direct access to artists via subscriptions, fan clubs, chats and Webcasts. Customers will be able to purchase CDs, DVDs, downloads, music auction items, merchandise and concert tickets directly from the soundfuture.com. The Company has researched the market and identified the resources it must possess to achieve its goals. Over 30 artists have been identified and are ready to sign to the label. The core team has been assembled and key industry partners are being contacted. The Company is exploring strategic relationships and completing its initial financing which will be used for the development and launch of Sound Future. Confidential 7 sounoPuTUF_ Why is Sound Future Different? First - the company will develop the Sound Future Network as a proprietarypromotional platform and community for independent bands and artists by partnering with media companies including radio stations and on-line properties catering to regional markets. This co-branded network will be developed and managed by Sound Future in co-operation with the media companies and will serve to promote local bands and artists, build loyalty in the local community among musicians, provide national exposure for independent bands around the country and build a proprietary database of musicians and fans. Sound Future will use the Sound Future Network as a platform on which to develop a national database of people interested in music by region and genre and promote its artists, sell records, concert tickets, merchandise, fan clubs and other products and services to this user base. The Sound Future Network will be used to establish new releases and break bands on an exclusive basis in cooperation with its media partners. The essence of the network will be to use radio promotion to drive traffic to the lnternet web site to sell and promote new nmsic. Sound Future Network Artists @ Oistdbutor/ Fulfillment F.-- Local Bands ] ork Networks 1 Music F Music from Independent Labels and artists represents approximately 22% of the worldwide market for new music. It is from these pioneering labels that new musical trends emerge and where new acts are broken and nurtured in the market. Ironically, promoting and distributing new music, and in particular, getting the exposure for new music is the greatest challenge to any Independent Label or artist. Confidential 8 SOUFIDPUTUI_ The Sound Future Network is designed to provide a platform for new music that combines promotion for new releases and promotion for the artist or band, with an e-commerce model for generating revenue. The labels provide the network with an exclusive time period in which to promote and distribute the new releases. Instead of a an undifferentiated glut of products such as one finds on most MP3 sites, this network focuses on a smaller number of quality releases, using the lnternet to test and qualify, and then magnify and target sales of a given release. This Sound Future Network will be used to test market artists and music before any major marketing push. The network will allow the company to identify artists and position them according to regional tastes and traffic. This information will be used to guide the launch of new projects, retail sell-in and regional touring schedules. All of the development, hosting, maintenance and technology will be provided free of charge to the participating media companies and musicians by Sound Future. Free band showcase sites will be presented through a wide variety of aesthetically pleasing templates that will include: Features of Band Showcase Sites: • • • • • • • • Band photos and graphics Streaming audio and video MP3 downloads Show schedules Band news, announcements, fan clubs Free email list management services Free promotion kits Browser based update and e-mail management applications Confidential 9 sOUnDPUTUI'_ Second - Sound Future will market artists from its own label, Big Wisdom, to a broad international distribution network that exploits the Internet in combination with traditional retailers. Sound Future is a unique company focused on the lnternet and World Wide Web and strategically related to traditional retailers, concert venues, radio stations and off-line promotion. This is the exact opposite position of the major record companies and a model not available to the pure-play on-line music download companies. Sound Future Integrated Marketing and Distribution • Innovative Content Database Marketing Connectivity On-tine Managed Technology Hybrid Model On-line Retailers Off-tine Concert Venues Traditional Retailers Radio Stations On-Line Strategy Create the Sound Future Network Create the Sound Future Player Create Internet radio channels Create on-line "street" teams Create the "Tell a Friend Program" Run contests, giveaways and other promotions across all Sound Future properties. Work the College market on-line Create a comprehensive Link database Register and market multiple domains Build multiple communities and join other on-line communities Send out SFM E-Newsletters Advertise in other Music Newsletters Off-Line Strategy Provide tour support for its artists Provide print advertising ad PR support to artists, new releases and events Confidential 10 SOUIqD;UTUr_ Provide Sound Future Samplers to retailers Focus on creating awareness for SFM music outside the industry Create off-line "street" teams Work the College market Confidential 11 Q SOUFIDPUTUI'_E Third - Sound Future provides artists with a very attractive environment, including contracts in which the artists share in a larger percentage of profits on electronically distributed products, and the immediacy of on-line promotions, fan clubs and Webcasts. Artists will be attracted to Sound Future because of its creative team and their collective experience and the company's ability to provide fast electronic distribution, fair treatment, superior royalty rates, real-time accounting of sales, and Web based and conventional promotion. Contract Comparison Traditional Record Co. Traditional Retail CD Royalty Rate (net) Direct Mail CD Royalty Rate (net) Electronic Royalty Rate (net) Fan Club Share Traditional Retail DVD Royalty Rate (net) Direct Mail DVD Royalty Rate (net) Merchandising Royalty Publishing Royalty (album) $ 0.99 $ 0.49 12% n/a $ 0.49 Sound Future $ 0.99 $ 1.29 25% 25% $ 0.96 $ 0.25 n/a $ 0.53 $ 1.23 25% $ 0.71 Confidential 12 SOUFID_UTUI'_E Fourth - Sound Future is a digital music company providing all the services and products that are required to maximize the revenue potential of a given artist. Sound Future offers its artists a digital record label that produces and markets CDs and DVDs, a publishing company to exploit their compositions, an on-line distribution network that will grow with the expansion of the Internet, and a merchandising company that will manufacture and distribute t-shirts and other. The artist can take advantage of all that Sound Future has to offer, or can pick and choose the products and services that they require. There is no other company that offers all of these services in a single integrated environment. Sound Future, Inc. consists of 3 integrated operating divisions. Sound Future Music Sound Future Networks Sound Future Operations Record Label, Publishing, Merchandising New Music Distribution Network Legal, Finance, Operations, International Sound Future, Inc. i Sound Future Networks I Sound Future Music i Sound Future Operations i Recording Co. Big Wisdom I Publishing i Merchandising Artist asis ] I Sound O FutureI Sound Future is the digital music label identity for the 21st century that combines the artist development and promotional aspects of well run record companies with technical imagination and creative foresight that exploits the digital music marketplace. Its team of proven talent has the experience and inspiration to start a fresh new business model unencumbered by the inertia and bureaucracy found in the major labels today. As a focused and integrated digital music company Sound Future will be responsive to new opportunities as they become available in the market and be able to affect change as a major new player in the exploding digital music scene. Sound Future is different from many of the new on-line music companies because it is focused on identifying, signing, developing and promoting original music and DVD discs using modern digital marketing and distribution techniques. In the vast sea of MP3 and other digital formats, only great Confidential 13 SOUF]D_UTUI_ music that is properly promoted will ultimately stand out, succeed and sell. The company will package and promote our artists directly to fans that will be interested in them via the Sound Future Network and other marketing vehicles. Sound Future marries the best parts of a traditional record label including A&R with the speed, promotion, feedback, market research and distribution offered by the lnternet. Confidential 14 I. SOUFID;UTUI2_ Product Strategy Musical Content Sound Future's strategy is to produce and promote exciting, unique and original music. Music and video content is the product. Sound Future is focusing on the most popular forms of music across many genres - particularly those which appeal to Web-savvy audiences including, Rock, Singer/Songwriter, Adult Contemporary, Electronic and World Music. Sound Future's A&R executives have an incomparable track record of signing artists that produce hits, with record sales in the many millions of units. Through the Music Producers' Guild of the Americas, the Resource of Producers and M,anagers Directory, the World Studio Group and years of record "] -7 making experience, Sound Future s network of producers, engineers and recording studios is among [ _ ,t the best in the business. ......_1 _,/1_ With these connections, Sound Future's products will be highly competitive in sound and video quality yet reasonably inexpensive to produce. In addition, the music will be clearly targeted toward the lnternet audience demographic: affluent, in-touch, loyal, tech-savvy people who are open to new technologies and forms of music delivery. These customers are enthusiastic about Internet shopping, MP3 downloads, streaming audio, Internet radio and whatever the future brings to the delivery and enjoyment of music. Sound Future's creative team will be responsible for finding the artists that will form the basis of all of its products. Where is the music going to come from? Why will Sound Future's A&R team be able to identity and deliver hit music to this venture? How can Sound Future guarantee that it will be successful? When specifically addressing the juncture of the creative world with the business world there can be no perfect coalescence. In the music business, as in the film, TV, publishing world, the only significant identifier of future results is a proven track record of past results. Why will the Sound Future A&R team be able to successfully identify and deliver hit (sale-able) music to this venture? Because its team members have repeatedly and quantifiably demonstrated their ability to do so over a long period of time, including the present. Sound Future's A&R team have been trained and have the talent and know-how to discover major artists and the networks and the ability to form the networks to discover major new talent. Will Ackerman has even invented a successful new genre of music, new age. Where is the music going to come from? The Sound Future A&R network. The Sound Future A&R network consists of every music publisher, song plugger, performing rights society executive, record producer, recording engineer, studio owner, studio manager, artist manager, entertainment attorney, agent, video director, MTV programmer, VH1 programmer, radio programmer, record promoter, record executive employed or unemployed, music journalist, nightclub, nightclub owner, nightclub bouncer, bartender, songwriter, drummer, midi programmer, tambourine player, trade publication Confidential 15 sounoPwTUI_ publisher, entertainment editor - national and local - in every English and non-English speaking country of the world. What will the A&R team do that is different from what they have done in the past in the pursuit of new talent? Sound Future will add an additional component to the A&R arsenal in its creation of the Sound Future Network. By encouraging local Indy bands and artists to promote themselves on this network, SFM will create a showcase of talent across the globe that will be available to our A&R team before it is released to the general public. The Sound Future Network will present the opportunity for our A&R team to find some gems for the our label. Artist Friendly Label Sound Future will offer artists an integrated suite of product opportunities and services to aid them in developing their careers as quickly and profitably as possible. The label will offer more aggressive/ royalty structures than those offered by traditional labels, particularly in the on-line space.._--_,_ Sound Future will provide a complete package of artist services including: • CD and DVD Production • Aggressive on-line and off-line Marketing Programs • Connected Artist Web Site • Tour Support • Merchandising • Publishing Multiple Genres The music that Sound Future will identify will be a reflection of individual tastes taking into account common sense and mutual purpose. Genres that will be pursued include Instrumental, Rock, Blues, Singer/Songwriter, Adult Contemporary, Electronic, World, New Age, Word of Mouth Music, Cult Music, "got there first" music, unclassifiable music. Great music, fun music, grown up's music, kid's music, and mass appeal hit music. Sound Future will also explore Soundtrack opportunities as well as seek to sign popular established and developing artists in other genres. Addressing multiple genres is an integral part of establishing a diverse and attractive artist roster. Sound Future's A&R team is poised to begin testing, signing and promoting acts. Interactive DVD Content Sound Future DVD discs are a unique new form of audio/visual expression for creative artists and producers. The company will release performance and promotional videos as well as interactive compositions, artist showcases, samplers and other unique video experiences. These DVD discs will deliver high-resolution audio, the artist's music videos, song lyrics, interviews, liner notes, photographs, back catalog and other content. Sound Future's DVD products will also complement its musical products by supporting the sales of CDs with promotions and direct ordering on the disc. Confidential 16 _ _/"2 _N,/_._,,- ,-zJr-2, / SOUFIDI_UTUI_(_ Electronic Product Sound Future products will be physically distributed as CDs, DVDs - yet also as electronic files, such as MP3, Liquid Audio, Real Audio and other emerging downloadable formats. Sound Future CDs and DVDs will also be sold on-line and music will be downloadable in a secure format from the Sound Future and other music Web sites. Product Connectivity_ Each Sound Future CD and DVD contains software that lets customers directly connect to the Sound Future Network web sites and directly to radio station web sites in their area, providing gateways to our artists. This connectivity will feed the customer database and provide unique cross-promotional opportunities. Digital Extensions Each CD and DVD will carry a digital music player that will allow customers to download additional songs, videos and other content for playback on their computers. This branded digital music player will play popular electronic files and provide direct links to other Sound Future content. This digital music player will make it easy for people to find and enjoy other Sound Future music and will be a key component of the label's viral marketing program. Web Based Products Sound Future's strategy is to use its Web site to not only promote and distribute its products, but as a Product itself. The Web site will provide customers with direct access to artists via chat rooms, forums and live interviews and studio and live Webcasts. These areas of the site will be available to customers via subscriptions and fan club memberships. The Company will use its Web site to help promote and distribute its products, and also to develop Sound Future's brand identity as a 21 st century record label. Innovative Music Publishing Applications Each CD and DVD will carry digital sheet music that can be unlocked via the Sound Future Web site by the customer and printed on demand. This technology will provide a tremendous service to the customer while creating additional highly profitable publishing revenue for the label and its artists. In addition, the Sound Future Web site will include a publishing area that will provide direct access to its music for use in video, television, commercial, feature film, location and other applications using downloadable files and secure transactions. Confidential 17 sounDPUTUI_ Distribution Strategy Creating hybrid sources of revenue and channels is the key to profitability Ibr Sound Future. The label will distribute its product globally through traditional record and media distribution outlets and emerging lnternet channels. Product will reach traditional retail storefronts including record and video outlets via independent distribution. The company will manage retail channels but not be entirely dependent on them. In addition, the company will distribute music direct to the consumer on CD and DVD. A key element of the label's strategy is to begin selling direct from day one, developing a database and direct relationships with its customers. The company will also distribute its product through popular downloadable formats accepted now and in the future. The company will distribute its products via many highly trafficked on-line stores such as CDNow and Amazon.corn as well as through its own Web store. Sound Future will contract with an independent call-center and distributor to process, warehouse and fulfill direct orders. In addition to these channels, Sound Future will pursue corporate and premium sales channels as well as the gift market for its products. Hybrid Distributio n Channels Confidential 18 SOUF]D_UTUI_ I Distributors Internati°nal ,, I I I Distributors Domestic _tconco_ I I_r'c_,Moo_,l__ Venues I Retailers I ...INon_tradition Retailers al I...,,..._! / On-line Retailers -t Retailers Catalog Music Fans Confidential 19 @ _OUNDPUTU_ Marketing Strategy • Identify pools of customers • Find out what kind of music they like and how they like to buy • Get their attention • Deliver on the music and tap into what they like The marketing plan for Sound Future is to help people find great new music. Sound Future will follow the music fans. They are already buying product and Sound Future will stay acutely aware of what they are buying, help them to be aware of what others are buying and make it easy for them to get what they already want, namely Sound Future products. Sound Future will employ database-marketing techniques to identify and service its customers and to link its artists to their fan base in ways that generate revenue and increase sales. The Company's marketing strategy is to use targeted genre-specific direct marketing methods to support its artists in reaching their audience. In addition, Sound Future will continually work to develop brand awareness for the company's Web sites. It will create a high profile identity among music buying consumers and build a worldwide network of affiliations to promote Sound Future and its artists. The Sound Future Network will be billed as the best place to find and buy exciting, new, unique and original music. Instead of providing customers with the glut of undifferentiated product one finds on MP3 and other sites, Sound Future will focus on making it easy for people to find and purchase music that they are passionate about through local media tie ins and direct and database marketing techniques. The company will build a large database of customers interested in Sound Future music. Key components to building the database are the Sound Future Player and the Sound Future Network. Sound Future will nurture premium talent employing creative development techniques that take advantage of the Internet's ability to provide instant feedback and artist-consumer interaction. For example, the label intends to test market artists and songs prior to launching full-scale production and marketing efforts, by taking advantage of the community and instant feedback it will establish on the Web. Using the Sound Future Network and the company will use the lnternet to get market feedback on its acts before a major marketing push is undertaken. By exposing new music to people on-line and measuring its popularity, the company can better predict the hit potential of its new releases, fine tune the marketing programs and determine which regions of the market it should sell-into. Confidential 20 sounD_UTUe_ On-Line Strategy ........ Create the Sound Future Network Sound Future proposes to partner with major radio station groups to create a unique new way to profitably develop, sell and market music on-line. This will be accomplished via a network of regional music web sites that operate in conjunction with radio stations and their web properties. The Sound Future Network provides radio station owners an exclusive turnkey promotional platform for driving traffic to the individual station web sites, for transacting e-commerce and releasing new music. Background: Music from Independent Labels and artists represents approximately 22% of the worldwide market for new music. It is from these pioneering labels that new musical trends emerge and where new acts are broken and nurtured in the market. Ironically, promoting and distributing new music, and in particular, getting the exposure for new music is the greatest challenge to any Independent Label or artist. lnternet music is an extremely hot area right now. It is being fueled by the availability of MP3 technology, which can compress really large music files to a fraction of their size while maintaining near-CD quality. Many MP3 related music sites have attracted large amounts of venture capital, but none of them combine the talent scouts of a traditional record company with promotion via the radio. Radio is a proven driver of sales of new music and also a proven driver of Internet traffic. Our strategy is to leverage these facts and develop the Sound Future Network as a proprietary promotion and distribution platform for selling new music. Network Business Model: The Sound Future Network is designed to provide a platform for new music that combines promotion for new releases with an e-commerce model for generating revenue through the sale of CDs and other products. The independent music labels provide the Network with an exclusive time period in which to promote and distribute their new releases. Instead of a glut of music files such as one finds on most MP3 sites, this network focuses on a smaller number of quality releases, using the lnternet to test and qualify, and then magnify and target sales of a given release. Sound Future will build the online network for the radio stations for free in exchange for airtime promoting the network and the new releases. The network will promote and sell a limited number of new CD releases each month on an exclusive basis. The indy labels sell their new releases to the network on an exclusive basis and at a discounted price for a 30-60 day period, in turn, the Confidential 21 Q SOUFID#UTUI_ network promotes and sells this new music in a focused manner and generates market research data for the labels. After the exclusive period, the labels take their releases to retail armed with marketing data derived from the network. The Sound Future Network is a proprietary promotional platform and community for independent bands and artists that is promoted via local radio stations catering to regional markets identified by genre. The essence of the network will be to use radio promotion to drive traffic to the Internet web site to sell and promote new music. Using a push-pull strategy, the network will "pull" a local following by catering to local independent musicians and their fans by providing a place for new music to be heard. The network will develop a database of music fans, including the genres of music they like, their buying habits, and other demographic information collected on the site. "Attention local bands, WXYZand Sound Future want your bamt on-line WXYZ will create an awesome web sitefi_r your band complete with streaming audio and video,MP3 downloads',gig infix,photos amt graphics plus hosting absolutelyfree "l at's no charge to your band/ For h details visit the WXYZcornor call toll free 1-888-xxx-xxxx" In turn, this platform will be used to "push" selected new releases to this base of fans and musicians from the independent label partners, directed to fans most likely to be interested in hearing and purchasing this new music. "Memphis check out dozem' of local band_'playing here in town on WXYZcom and whileyou're there be sure to sample the sound_" Super Plush with their new single "Dazed" on Big Wisdom of Records Also be sure to sign up to win a $1000 dollar shopping spree/Sample the tzmes,play to win, Sound Future on W)_TZ corn". The Sound Future Network will be managed by Marna Granthanl, one of the founders of the United Paramount Network. This network will be developed and managed by Sound Future in cooperation with the local radio stations and will serve to promote the stations, build loyalty in the local community among musicians, provide regional and national exposure for independent bands around the country and build a proprietary database of musicians and fans. Revenue will be generated through sales of CDs, concert tickets, merchandise, tan clubs and other products and services. Network Description Confidential 22 SOUFID_UTUI'Q_ The Sound Future Network will be promoted via radio airtime, local print, direct mail, on-line and event marketing. The network will be linked to existing station web sites and will serve to drive traffic directly to radio station web sites for information about new music and how to purchase it. The Sound Future Network provides free web hosting and development for local bands of all genres. The free service will be offered to a wide variety of markets and will provide information tbr music fans about local bands. The service will grow based in the local music scene across a consistent International network. Free band web sites will be presented through aesthetically pleasing templates that include: • • • • • • • • Band photos and graphics Streaming audio and video MP3 downloads Show schedules Band news Freeemail list management services Free promotion kits Browser based update and e-mail management applications After posting their web sites, bands will receive a promotional kit with instructions on how to use and get the most out of their showcase site, marketing tips, stickers, cards and other promotional materials provided by Sound Future in conjunction with the local station. The local band directories and individual band sites will appear as part of the radio station's web site but will be seamlessly served through a global backend network provided by Sound Future that acts as the content provider for the participating on-line properties. Simple to use browser based update and e-mail management tools exclusively developed by Sound Future will allow the bands themselves to instantly post their shows and news directly to their sites as well as maintain e-mail lists and send electronic newsletters to their fans. These easy to use tools will keep the music network's content fresh, promoting repeat traffic to the radio stations web Confidential 23 SOUFIDI_UTUI_I_ properties. properties. Sound Future will contract with IT Consulting firm Razorfish to build out the web _.. _ _5./L7 Benefits: The benefit to all parties involved is the creation of a proprietary platform with which to sell new music releases that is directly tied to radio. The benefit to the individual radio stations is plugging into a free web network that can carry new music, as well as local news, weather, sports, etc. and benefits the local community. The benefit to the radio station owners is sharing in the equity appreciation of the Sound Future Network, which is driven by the radio-based promotion, and the resulting sales of CDs. The benefit to the indy labels is that they get guaranteed promotion in exchange for a discount on the product. The labels also receive market data as to who bought the records, where they are, what else they are buying, etc. Confidential 24 SOUDDFUTU_E Opportunity for Radio Station Owners Sound Future is seeking to partner with major radio station owners to establish a proprietary kt¢'_\ /genre ! plattbrm on which market. music.station will be able stations will be the exclusive promoters for their within each to sell The Target groups of _porate citizenship by This also adds a new advertising vehicle to the participating station's arsenal of products and on the _,_ , k,,Sound Future Network. [ providing ava ua le free and consistent service to their local music community at no cost to them. Customer access to the Sound Future Network will be done through the station's web sites adding deep, community based content to the station's site as well as increased bann____eer page views space, and sponsorship content. All of the development, maintenance, backend technology and hosting will be provided by Sound Future. All directory and menu pages presented to visitors will be branded to reflect the currentJook and feel of the local radio station's site, the specific genre being served and the advertisers they choose to place on their sections. Specific benefits and services provided to the radio station owners include: • • • • • • • • • A dot.com company that makes money A new way to make money offcurrent activities of the radio stations _ A lucrative Internet property for promoting and selling new music/ ,_--g7 C-oy_ c, Drive consumers directly to local station websites using Sound F'6ture CDs that carry ZipLink software that connects people to the lnternet using their Zip codes. Branded and consistent network seamlessly connected to the local station's web sites and fully developed, maintained, managed and hosted by Sound Future. Real estate to place advertiser Iogos, products and banners on the network. A way to develop and distribute turnkey promotions at no cost to the radio stations. Radio station identification at concert venues and on all press releases, print, and direct mail pieces distributed by Sound Future. Ability to offer the local music community valuable and costly services for free. Opportunity for Independent Labels Sound Future will partner with other independent labels to distribute their new releases via the Sound Future Network. In addition, we will distribute releases from our own label, Big Wisdom via the network. Sound Future plans to open this network up to 20-30 other indy labels. Each Independent Label will be asked to commit to a release schedule that matches the needs for slotting time each month on the network for new releases. The labels will be able to test market their music very quickly and generate revenue from sales of CDs across the Network during the exclusive period. Specific benefits and services provided to Independent Labels include: • Ability to distribute new releases directly to a highly targeted audience. 25 Confidential ii, SOUND_UTUI_ • • • • A focused period of time to push and sell each new release. Ability to generate revenue tbr new releases. Ability to gather marketing data to be used for the general release of product into retail. Promotion of the network as the place for listening to and purchasing new releases. Confidential 26 SOUFIDPUTUI_ Create the Sound Future Player Develop a proprietary browser application that plays MP3 files (among others), playlists, displays music news, song samples, information about SFM, provides links to music resources. Make the player customizable with skins. Trade the email address on the Sound Future Network, all other Sound Future Properties in Sampler Discs. manages automatic player for an and at retail Create Internet radio channels Develop custom channels of music with DJs for play on SFM properties and for other venues. Provide archived sets, staffsets and links to other SFM artists on net radio shows. Provide webcasts from Sound Future performance space and other venues - live sets, chats, and interviews with Sound Future bands. Webcast to our members or for a fee, as well as downloaded at a later date. SFM will create radio channels where people can listen to music and purchase the songs they enjoy with the simple push of a button. Internet radio channels will feature Sound Future music for listening and purchase. The Sound Future Web site will feature its own radio station linked to its product catalog, enabling listeners to purchase music they hear directly from the site. Create on-line "street" team s Seed chat rooms and newsgroups with positive Sound Future information. Commission teams of interns go into chat rooms and onto other sites and talk about SFMN, bands and the various sites and drive traffic. Keep a constant presence on-line to promote and influence the spin. Create the "Tell a Friend Program" On every SFM property, email, newsletter, music player or broadcast, offer an incentive for the customer to tell a friend about what they have seen or heard. If we entertain them, give them a reason to pass the buzz on to their friends and give their friends a good reason to visit, we will virally grow a great database. Create a network of web sites to drive traffic Establish a network of web sites and relationships that cast a very broad net and act as a perpetual funnel, as well as great enhancements for search engine indexing and site positioning. This strategy will create lasting relationships throughout the lnternet focused on targeted music customers. It also gives much more promotional flexibility to a multigenre music label like Sound Future Music. Confidential 27 SOUFIDPUTUI_I_ Run contests, giveaways and other promotions across all Sound Future properties. Create some net-centives for people who visit SFM sites to reward them for visiting, purchasing and interacting. Examples are a contest where if you can get the most people from your college to download a certain piece of music (for free), the band will play at your school. This helps with awareness of the band and creates cool publicity. We can Webcast the show and the kids will be stars. Do contests where kids make banners, art, album covers, posters, etc. and the winners will be posted behind the band or shown somehow during webcasts. Create a comprehensive Link database An inexpensive and enduring program to establish a permanent and growing infrastructure of links with other web sites. The goal is to organically drive traffic likely to be interested in what SFM has to offer. Manage links through a profile driven database - create lists of thousands of music web sites, SFM's strategic partners and online music network while developing e-mail lead sheets for future mailing, press releases and promotions. Develop lists of web sites and email contacts will be customized by the specific music category, geographical area, genre and other factors, i.e. college radio, commercial radio, DJs, retailers, distributors, venues, CD clubs, fan clubs, world music, R&B, dance music, electronica, latin music, etc. Work the College market on-line Tie in college tours with Sound Future Network Promote tours on College Internet sites Give away tickets via the Sound Future Network Register and market multiple domains Confidential 28 sOUnDPUTUI-e_ Develop a list of top keywords and phrases to use when promoting Sound Future properties and establish multiple domains to address the market. This will create a network of artist, product and content-based web sites. Register multiple domain names with targeted keywords or phrases related to specific SFM's music genre, category, artist, products or content. Always create the most effective, keyword friendly and memorable domain name for the web site. Also, individual HTML file names, page titles, images and meta tags can be optimized with targeted keywords / phrases for better search engine placements and visibility. Send targeted email messages to opt-in customers and other prospects Create and maintain targeted SFM's music subscriber email database through research, invitation, word of mouth, traditional and online advertising, opt-in email lists, and other online collection methods. The will produce a proprietary custom subscriber email database that allows instant cost effective communication with SFM's markets. Email lists of editors at radio and TV stations, music magazines and newspapers, trade and consumer magazines. A good example of a resource of such lists can be All Access Music Group email directory (at www.allaccess.com) - a list of more than 6500 commercial and college radio stations MDs, PDs and music promotion professionals. There are literally hundreds of these specific music industry online communities of professionals. Build multiple communities Individual Bands/Artists Artist Oasis Publishing Sound Future Network Hold 3D Internet chat such as Worlds Inc. and Active Worlds with SFM's artists and have exciting opportunities to interact live. Hold "virtual on-line CD release parties" as 3D lnternet chats, supported with video and audio. These customers will enjoy Sound Future specific Webcasts, downloads, on-line auctions, newsletters and forums that cater to their interests and help build a fan base of loyal customers. Offer special access to fans/media/friends and create incentives like free concert tickets and backstage passes and direct access to artists. These promos feature virtual storefronts that sell CDs, DVDs, merchandise, concert tickets, sheet music, fan clubs, etc and provide music purchase discounts or other sales incentives. Join other on-line communities Daily on-line music chats on sites like Yahoo, SonicNet, CD Now, UBL, etc. Confidential 29 SOUI"IDPUTUeI_ Release press information to the right online subscription services to reach internet friendly music consumers like MusicNewsWire (www.musicnewswire.com), one stop daily resource for music news, Send out SFM E-Newsletters Individual Bands/Artists Sound Future Network Create consistent, intimate contact with target groups without printing costs and postage while building an online community. Advertise in other Music Newsletters Newsletter sponsorship is a promotion, basically one or two paragraph paid (or traded) insert about SFM's artists and latest releases. These inserts are provided with embedded site links, specifically targeted, customized and sent to proprietary email lists such as: New Music Express' weekly newsletter, music news at MP3.com, various music "emailers", etc. Confidential 30 SOUnDPUTUe_ Off-Line Strategy ........ Provide tour support for artists Provide Radio promos for concerts Leverage the Sound Future Network in print and flyers Provide print advertising ad PR support to artists, new releases and events Sound Future will launch an advertising campaign that focuses both on the artists as well as the label identity. In addition to creating a grass roots marketing effort for each artist, the company will create publicity by targeting college newspapers, college lifestyle Websites, music enthusiast magazines and music Websites to create label brand awareness. Sound Future will also promote its artists on radio in selected markets and provide tour support, contests and other promotions. Provide Sound Future Samplers to retailers Make deals with hip retailers like Diesel and Urban Outfitters to play SFM music in their stores. Recruit the employees into our club. Focus on creating awareness for SFM music Market to the companies like AEI to get SFM music played all over non-music retail, airplanes, pre-movies, and other commercial, consumer outlets. Focus on developing strong publishing revenue streams. Create oil-line "street" team s Use real street teams to go out to music and lifestyle venues in support of tours and around showdates, to promote SFM in general and spread the word about its artists. These interns will form a national street level marketing team, which will shower local markets with information, swag, music samples, stickers, etc. on SFM bands and promoting the site. They can also employ contest and promotion tactics. The interns receive college credit, tickets to shows and increased status among their peers for their time Work the College market on-line and off-line Run a consistent newspaper ad with the URL in 150-200 college papers. Promote tours on College radio Confidential 31 SOUFIDI_UTU_(_ Give away tickets on air Utilize street teams to work local markets Confidential 32 sOUnDPUTUr_ Management Team The experienced Sound Future management team is involved in this venture to push forward, in all respects, the definition of the 21stcentury digital music company and the advancement of the recorded music industry. Sound Future team members believe it can be done better, more efficiently and with a corresponding increase in profits than today's conventional operations. The Sound Future team's combined experience in all the important areas of the music industry and its personnel combination of both enthusiastic youth and seasoned veterans provides the essential elements for the successful implementation of this concept. Organization Chart Sound Future, Inc. I I Board of Directors _ I Will Ackerman Chairman I I Networks Sound Future __ Operations Sound Future _ _! / I I I Music DaveCEoKUSek Exec VP Operations i Larry Hamby I I I MarnaGranthampresident I TBH DirectOrRelationsNetwork I VeB,,sinessnffairs[V I P.arketinISa,e so.io_vPA_. I I Greg Rodgers i II TBH V.P. TBH Promotion _ I Jill Carrigan A&R Director Confidential I [i Ii Di ri_i_ill ork Ii ' _ VPNed earn International I I Director Marketing i TBH I A&R Director Director Operations I Confidential 33 sOUnDPUTUr_E Will Ackerman Chairman Will Ackerman was a successful general contractor in California when he launched a new record label that created and defined an entirely new genre of music. While best "known as a producer and businessman, it was Ackerman's own debut recording as a guitarist that launched Windham Hill Records in 1976. As President, CEO and, later, Chairman of Windham Hill Records, Ackerman conceptualized the record label, signed all the artists, produced every record in the first five years of the label's existence, and single-handedly directed publicity and radio promotion until 1982. He personally attended to the distinctive graphic design that became a hallmark of the Windham Hill label. Beginning with a few hundred dollars, Windham Hill grew to become a privately held company with annual earnings of 40 million dollars. Windham Hill established trademark recognition within the music marketplace that was unprecedented, resulting in Windham Hill record bins in every major record store in the US. With the conclusion of a distribution deal partnering Windham Hill and A&M in 1982, Windham Hill's success became international, enjoying European tours and Gold and Platinum success in Japan. As a producer, Ackerman has created three Platinum and three Gold records in the US market. Attracted to Windham Hill's reputation for audiophile recording quality, the label was approached by Sony in 1980 resulting in Windham Hill becoming the first independent record label to record digitally. Shortly thereafter Ackerman and Windham Hill became co-producers of the nation's (and perhaps the world's) first digital radio simulcast with KQED FM San Francisco. A joint venture with Paranaount Home Video and Pioneer Laser Disc in 1983 netted some of the earliest experiments with digital soundtracks, bringing about Gold Laser Disc awards in Japan. Nominated for Grammy awards on three occasions, Ackerman was most recently nominated for his own recording of guitar music in 1999. Ackerman sold his controlling interest in Windham Hill to BMG in May of 1992, retaining the entire Windham Hill publishing catalog from 1976-1992, including artists such as George Winston, Michael Hedges, Liz Story and Shadowfax among others. Ackerman currently oversees Imaginary Road Studios in Vermont and is involved as a producer of a feature film, "No Alibis," directed by Emmy and Cannes Film Festival Award winning director, Ralph Liddle, and is producing the sound track for that film. He has lectured at Harvard, Yale and Stanford Business Schools and has taught courses on the independent record business at the Omega Institute. Confidential 34 SOUDDIZUTUI'alz Larry Hamby CEO / Sound Future Music Vice-President, Artists and Repertoire, BMG Music/Windham Hill • Responsible tbr the financial, organizational and creative aspects of the label group's recordings. Vice-President, Artists and Repertoire, A&M Records • Responsible for talent acquisition, creative direction for the label's artist roster and A&R staff organization and direction. • Coordinated various aspects of recordings by label artists including Sting, Amy Grant, Blues Traveler, Sheryl Crow, Bryan Adams and others. • Produced "Woodstock '94". This stands as the largest live-event-recording project in history. Received a Grammy award in 1995 for Best Heavy Metal Performance Recording. • Created and released the first commercially available interactive audio disc ("enhanced CD") in 1995 with the album "Dopes to Infinity" by Monster Magnet. • Signed Monster Magnet. This group has sold in excess of one million albums and is currently on tour with Hole and Marilyn Manson. • Signed Jonny Lang. This artist has sold 1.5 million albums and is currently on tour with the Rolling Stones. His album "Lie to Me" was #1 on the Billboard Blues chart for 26 weeks. His album "Wander This World" is in its 20 consecutive week at # 1 on the same chart. Vice-President, Talent Acquisition, Columbia Records, West Coast • Responsible for finding, signing and developing new talent for Columbia Records. • Creative and administrative executive in charge of certain roster talent including Eddie Money, Toto, Kenny Loggins and others. • Signed, in conjunction with label President Don Lenner, Toad the Wet Sprocket. This band has gone on to sell in excess of 3 million albums. • Coordinated the recording and release of Eddie Money's album "The Sound of Money" which has sold over one million albums. Vice-President, Artists and Repertoire, Sony Music, Nashville • Senior executive charged with the responsibility of totally revamping the creative direction on both the Epic and Columbia labels. Furthermore, my primary charge was to turn around the division's existing deficit profit position within the corporation. • Responsible for the hiring and direction of the division A&R staff. • Had absolute and total responsibility for the creative, financial and contractual affairs for the division's talent roster overhead in excess of 10 million dollars. Confidential 35 SOUFIDI_UTUB(E • Signed Vern Gosdin to Columbia Records. His first release "Chiseled in Stone" was nominated for Country Music Association Album of the Year in 1988 and received a nomination for Song of the Year and Best Male Vocalist. This album has gone on to sell more than 1 million albums for Columbia Records. • Coordinated Rodney Crowell album "Diamonds and Dirt" which was also nominated for Album of the Year. This album has sold over 500,000 albums. No Country artist in history had as many #1 singles from one album to this point. • Coordinated Roseanne Cash album "King's Record Shop" which yielded four number one singles. This was the most #1 singles in history to that point for a female artist. This album has sold in excess of 500,000 albums. • Was responsible for the recording and release of the song "Somebody Lied" by Ricky Van Shelton. This was the artist's first #1 single and was nominated for Song of the Year in 1988. This artist has gone on to sell over 5 million albums. • Signed Henry Lee Summer. His first single "I Wish I Had a Girl" became a #1 Album Rock track and top twenty Pop single. He has sold in excess of one million albums for Sony. • Signed Mary Chapin Carpenter. Coordinated the recording of the albums "Hometown Girl", "State of the Heart", "Shooting Straight in the Dark" and "Come On, Come On". This artist has sold in excess of 10 million albums, received six Grammy awards including Best Country Vocal Performance, Female (four times), three Grammy nominations including Record of the Year (the first in history for a Country album) and numerous Country Music Association awards. • Creative head of Sony Music Nashville responsible for eighteen number one singles, four number one albums, thirty Country Music Association award nominations and five Grammy nominations. • 1988 was the most profitable year that CBS/Sony Nashville had enjoyed in over ten years. Vice-President, Artists and Repertoire, West Coast, Epic and Portrait Records. • Senior executive in charge of entire West Coast label talent roster. • Responsible for hiring, training and directing West Coast label A&R staff. 100% of the staff assembled for this department has gone on to successful, senior level positions in the music industry. • Coordinated the recording of Michael Jackson's "Thriller" album. This is the largest selling record in history. Associate Director of Artists and Repertoire, CBS/Epic Records • Primary executive responsible for the creative and administrative coordination for records by such artists as Heart, Cheap Trick, REO Speedwagon, Charlie Daniel's Band, Molly Hatchet, Sade, Jeff Beck and Michael Jackson. • Coordinated the recording and release of the single "I Can't Fight This Feeling" by REO Speedwagon that became a #1 Pop single and generated sales of over 3 million albums. Confidential 36 SOUFIDI_UTU_E Worked with many, if not most, of the brightest and best recording industry executives - past, present and future. Among them are: Jerry Weintraub, Walter Yetnikoff, Dick Asher, AI Teller, Tommy Mottola, Don Lenner, Billy Sherrill, Herb Alpert, Jerry Moss, David Anderle and Polly Anthony. Confidential 37 sOUnDIzUTUBE David Kusek - CEO / Sound Future Network A pioneer in music technology and co-developer of MIDI, Dave Kusek brings business, marketing, strategic planning, operations and financial expertise to Sound Future. DirectorBerklee Press -1998 to present Director of Berklee Press, the publishing division of the Berklee College of Music. Responsible for all aspects of company operations including marketing and product development. Producing a wide variety of products including books, CDs, Videos, DVDs and distance learning applications all designed to extend the curriculum of the Berklee College of Music. Developing extensive ecommerce enabled Web site to promote and sell Berklee Press products. CEO - Digital Cowboys - 1996 to present Founder of Digital Cowboys, a Strategic Marketing firm assisting clients including AOL, BMG, Apple Computer, AIX, A&M Records, Berklee College of Music, Boston Acoustics, Hal Leonard, IBM, Island Records, Liquid Audio, Microsoft, Polygram, Roland and Yamaha. Digital Cowboys provide strategic marketing, DVD production, Web site design, e-commerce consulting and direct marketing services. Member of the development team for Music Power Network, the world's first lnternet resource lbr professional musicians. Developed direct sales system for Boston Acoustics, manufacturer of speaker systems including e-commerce enabled Web site, catalog marketing, print advertising, and public relations. CEO - Passport Designs, Inc. - 1981 to 1995 Founder of Passport Designs a leading publisher of application software for the music industry, Mr. Kusek established the music software business and developed and marketed many successful multimillion dollar product lines including Encore TM, Master Tracks Pro TM and MusicTime TM. Responsible for marketing, business affairs, management, operations, finance and product development. Designed and marketed #1 selling music software line for 8 years. Developed unique sales channels including multi-tiered distribution via software and music retailers in 7,000 storefronts in 28 countries. VP Marketing - Cognitive Systems, Inc. - 1979 to 1980 Software development firm. Created direct-to-disc digital audio recording and editing system. Chief Engineer - Star Instruments, Inc. - 1976 to 1979 Developed Synare TM, the first commercially successful drum machines and synthesizers for drummers. Key member of startup team. Directed product design, development, manufacturing and quality. Product Manager - Electronic Music Labs - 1974 to 1975 Confidential 38 "l SOUFIDIZUTUI"eE Product management for one of the first electronic music synthesizer manufacturers. B.A. Major in Mass Communications, University of Connecticut - 1980 Computer Science and Music. Marna Grantham President - Sound Future Networks Senior Vice President, Marketing, Affiliate Marketing, and Network Distribution, United Paramount Network • Member of the ten member executive team that launched the network. • Member of executive team involved in all aspects of network operations. • Member of executive team involved with pilot selection, scheduling of fall programs, and evaluation of program and audience testing. • Member of executive team responsible for the January 1995 launch marketing strategy. This strategy resulted in the network's number one position in the Nielson overnight ratings system for Star Trek: Voyager, UPN's premiere program. • Responsible for strategic and fiscal planning for network distribution, affiliate and national marketing. • Responsible for the development of station distribution - increasing distribution to 94% of the U.S. in January 1997. • Responsible for re-launching Home Shopping and Religious stations and turning them into profitable UPN affiliates. • Responsible for new station acquisitions. • Responsible for production, budgeting and facilitation of yearly Advertiser Upfront Presentation, Spring Affiliate Meeting and Affiliate Marketing Conference. • Responsible for the development of all national media and promotional campaigns. • Member of the Viacom executive marketing council. Director, Affiliate Marketing, FOX Broadcasting • Member of the executive team involved in all aspects of the affiliation switch campaign for the New World CBS and ABC television stations. • Member of the marketing executive team in the FOX launch of the NFL. • Responsible for developing media and promotional campaigns for all FOX affiliates. Marketing Manager, KBHK Television • Developed new and innovative marketing programs resulting in increased station revenue. • Developed new business through vendor cooperative programs, resulting in KBHK's number one position in the market for new business. Research Director, KDVR FOX Television Confidential 39 "l sOUnDI_UTU_I_ • Manipulated and analyzed data to evaluate new program acquisitions. • Analyzed competitive environment, trends, and programs. • Developed sales pacing system. Confidential 40 SOUDD;UTUI'_ Chris Stone Executive Vice President- Operations Chris Stone is a successful music industry executive with a list of credits which spans over 30 years of hit records, films and outstanding music service businesses and professional associations. Co-Founder and Executive Director of the Music Producers Guild of the Americas (MPGA) (1997 to 1999), a non-profit guild for leading audio engineers and music producers. Co-Founder and former president and chairman of the Society of Professional Audio Recording Services (SPARS) in the U.S. (1979 - 1989). Founder and CEO of World Studio Group, (1992) where Mr. Stone continues to service the elite of the recording industry, facilitating projects/'or the clients of 30 premier recording studios around the world. Most recent contract (1998) was to successfully provide complete live recording facilities for the Rolling Stones "Bridges to Babylon" tour at all locations in South America and Europe. Mr. Stone is also the founder of Filmsonix 1nc.(1987), a recording industry consulting firm, servicing record labels, pro audio manufacturers and recording studios. In 1967, Mr. Stone founded the Record Plant recording studios which provided audio recording services lbr the Rolling Stones, the Eagles, Bruce Springsteen, Bonnie Raitt, Crosby, Stills, Nash and Young, the individual Beatles, Jimi Hendrix, Fleetwood Mac, Heart, Guns & Roses, Whitney Houston, Billy Idol, Motley Cru, Prince, Chicago, and Barbra Streisand, among others. Sold to Chrysalis Records in 1989. Record Plant today remains a leading global recording facility. After the sale of Record Plant, Mr. Stone served as a reorganization consultant for Motown Records, L.P. His mission was to serve as acting Chief Operating Officer while changing policy, personnel and assisting in the hiring of a permanent COO, which was accomplished ahead of schedule and under budget. At the conclusion of the Motown assignment, he has been retained extensively as a marketing and financial consultant to provide new diversification and marketing plans for both international and domestic premier audio recording facilities and professional audio equipment manufacturers. Mr. Stone has been involved in many films and live events including the Concert for Bangladesh, Flashdance, Star Trek, the Oscars, the Grammys, and both Woodstock festivals. He was the Associate Producer of Woodstock '94 for A&M Records. As Record Plant Scoring, Inc. he operated the film scoring stage and the ADR stage at Paramount Pictures (Stage M) from 1983 to 1989. Mr. Stone is a recording industry journalist, currently providing regular monthly columns on the business aspects of audio recording for Pro Sound News in the U.S. and formerly for Sound Pro Magazine in Europe and MIX magazine in the U.S. He has lectured extensively, including the keynote for (APRS) in England. He is currently preparing a book "Audio Recording for Profit", (The Sound of Money) for a major trade publisher, to explain the marketing, promotion, management and financial requirements of global music and visual audio recording facilities today and in the future. Mr. Stone also serves as a Music Industry expert witness, equipment appraiser and business appraiser for the International Proti_ssional Audio Industry. Confidential 41 SOUFIDPUTUI_IZ Prior to his music business career, Mr. Stone worked in marketing at Revlon Corporation. Mr. Stone is a former member of the Board of Directors of Euphonix Inc., and has an MBA in Marketing from UCLA. Confidential 42 SOUFID_UTUI_ Gregory Rogers Vice President International FOUNDER AND CEO, THE FILM MUSIC GROUP London Leading film music company in Europe, which acquires and manages master and music publishing rights across a broad spectrum of film projects including The Last Emperor, Sheltering Sky, Le 8eme Jour and Breaking The Waves. Current projects include new films: Dancer In The Dark (Bjork and Catherine Deneuve), 15 Moments (Dan A_oyd), A Monkey's Tale (animated film featuring voice characterizations by John Hurt, Michael Gambon Rik Mayall and Michael York) and Saving Grace (Brenda Blethyn and Craig Ferguson). FMG also acts as music consultants to Sony Music Publishing with regard to their acquisition and exploitation of the Lowery Music Publishing Group. SENIOR VICE PRESIDENT, MCA MUSIC ENTERTAINMENT, ASIA PACIFIC Hong Kong Led MCA Music Entertainment's expansion into the Asia Pacific region, creating nine operational companies in less than fourteen months including the Asia Pacific headquarters in Hong Kong. Responsible lbr identifying investment opportunities in Asia Pacific for other MCA divisions including film, music publishing and theme parks. VICE PRESIDENT, THE WALT DISNEY COMPANY, ASIA PACIFIC Hong Kong Created and implemented the strategic plan for five consumer product divisions in Asia including music, music publishing, audio entertainment, multi-media products and new business development. Grew the music business by 880 percent, the multi-media business by 430 percent and developed a multi-million dollar strategic alliance with IBM throughout the region. CHAIRMAN, WILDLIFE ENTERTAINMENT London Established, owned and operated leading management company in Great Britain with 14 producer clients (including producers for the Waterboys, Madonna, Michael Jackson, Bryan Ferry and others), 8 recording artists, 5 writers and consulting contracts with Coke, McCann Erickson, Cypress Records and Good Relations. REGIONAL MARKETING DIRECTOR, RCA/BMG MUSIC INTERNATIONAL London Regional Marketing Director for a 220 Million Dollar business. Restructured BMG marketing organization in Europe, co-introduced CD software format with Polygram and created and guided marketing strategy for recording artists like Eurythmics, Scorpions, Stevie Wonder and Ciannad. OTHER Prior to 1981, Mr. Rogers held key positions in the CBS Records organization; Promotion Manager for the Western Region of the U.S., Product Manager for the Epic label in Los Angeles, Marketing Director for the Portrait label in Los Angeles and Regional Marketing Director for Europe based in Paris. Mr. Rogers served three years on the Asia Pacific regional board of directors for the IFPI and five years on the Board of Directors of the Country Music Association. Confidential 43 SOUFIDIZUTUI_I_ Ned Hearn Vice President of Business Affairs Edward (Ned) R. Hearn. Business law practice concentrating on the entertainment and computer software businesses. Clients include record labels, music publishers, recording artists, writers, production companies, managers, computer software designers, and multimedia product developers. A partial listing of past and present clients include Windham Hill Records/BMG, Concord JaTz, Music For Little People, Sugo Music and Design, Gourd Music, Maggie's Music, Ubiquity Recordings, Monarch Records/HLH Entertainment, Ray Lynch, Will Ackerman, Tim Weisberg, Joe Satriani, Green Day, Jawbreaker, RBL Posse, Premiere, ID, The Braids, SF Weekly, GPI Publications, Klutz Press, San Jose State University/Student Union Event Center, Media X, Matrix Software, and Medior. Member, Board of Directors, California Lawyers for the Arts and the Northern California Songwriters Association (Board President). Co-author of Musician's Guide To Copyright and The Musician's Business and Legal Guide. Editor-in-Chief for Rutgers Law Journal. Associate at Cleary, Gottleib, Steen & Hamilton, New York City; Fenwick & West, Palo Alto, California; Partner at Harrison, Hearn & Berthold, San Jose, California; and Law Offices of Edward R. Hearn, San Jose, California. Offices in San Jose and San Francisco, Calitbrnia..BA and JD Degrees from Rutgers University. Harry Gold Chief Technical Officer Vice President, Interactive Media, Mullen Responsible for interactive strategy, planning and web site development and marketing. Current clients include Cozone.com, Cambridge Soundworks (hifi.com) and Oxygen Media (oxygen.corn). Vice President, New Media Services, Wickersham Hunt Schwantner Architect of all on-line initiatives. Clients include Microsoft, CBS Radio, Mediaone, the Financial Times, Bose Corporation, Electra Records, Boston Acoustics, the City of Boston, the City of Hartford, Store 24, and Advanced Data Capture. Developed web properties including bose.corn, bostonacoustics.com, bostondirect.com, boston.sidewalk.com, clubmed.com, and mediaone.com. President, Interactive Promotions lnterActive's services included music promotion and direct marketing through all forms of traditional advertising. Developed unique tactics to promote his clients using television, multimedia development and on-line promotional strategies that created proprietary communities and sustainable traffic-building infrastructures. Served over 300 local and national bands as well as dozens of independent labels by providing low cost development and promotional services in conjunction with WBCN a property of CBSRadio. Musical promotional services included telephony hotlines, web site development, intelligent search engine indexing, linking and easy to Confidential 44 c_OUNDPUTUI'_(_ access media cooperatives that placed band promotions in local papers, national magazines and on MTV. BS in computer science from Southern Vermont College in Bennington. Jill Carrigan A&R Director Co-Founder and Co-CEO - Ultimedia 1996 to present Co-Founder and Co-CEO of Ultimedia, A&R Consultants and publisher of the Resource of Producers and Managers (RPM) Directory and www.rpmdirect.com, a successful trade publication for the music industry. Along with running the company's day to day operations, Ms. Carrigan is responsible for developing a worldwide network of subscribers and advertisers from the A&R, music publishing, Film and TV Music, and pro audio manufacturing communities. Ms. Carrigan's experience in the music industry includes nearly every facet of artist development. Beginning in 1993, she was hired to do promotion and A&R at A&M Records. This led to a job in 1995 in tour marketing and band management for Steve Stewart Management (Stone Temple Pilots). In 1996, Ms. Carrigan was hired to coordinate street level, grass roots marketing efforts for Asylm Marketing (Red Hot Chili Peppers, Me'Shell Ndegeocello, Bjork). In 1996, while employed with Asylm, she co-founded Ultimedia and The RPM Directory. In 1997, Jill was hired as West Coast Advertising Representative for Billboard Magazine, the music industry's leading trade magazine. Her territories included all West Coast record labels, artists, and artist managers and all U.S. pro audio manufacturers. In November 1998, when she left Billboard to pursue The RPM Directory full time, Ms. Carrigan was National Advertising Manager. In April 1999, www.rpmdirect.com was launched. Ms. Carrigan holds a B.A. in Music Composition, History and Theory with a Minor in Business from Hampshire College in Amherst, MA - 1993 Jerimaya Grabher A&RDirector Co-Founder and Co-CEO - Ultimedia 1996 to present Co-Founder and Co-CEO of Ultimedia, A&R Consultants and publisher of the Resource of Producers and Managers (RPM) Directory and www.rpmdirect.com, a successful online and hardbound trade publication for the music industry. Along with running the company's day to day operations, Mr. Grabher is responsible for developing a worldwide network of recording professionals, management companies, and recording studios. Confidential 45 SOUI-IDI_UTU_ Mr. Grabher's early music industry experience includes music retail, local concert promotion, and artist management. Hired in 1995 as talent scout for A&M Records reporting directly to CEO AI Cafaro and Sr. VP A&R David Anderle, Mr. Grabher was responsible for bringing in artists who were later signed to A&M. In 1996, while employed at A&M Records, Mr. Grabher co-founded Ultimedia and The RPM Directory. In 1998, Mr. Grabher was hired as Manager of A&R at the Windham Hill Records Group, where he was executive producer of an all-star Hammond B3 compilation featuring performances by Jimmy Smith, Jack McDuff, Art Neville, and more. While at Windham Hill, Mr. Grabher was also responsible for coordinating artists and projects such as Lisa Lynne, the Mark lsham Retrospective, and the Mozart Variations and Thanksgiving compilations. In 1999, www.rpmdirect.com was launched and Mr. Grabher left Windham Hill to work full time for his company. Confidential 46 SOUDDFUTUB(_ Board of Advisors Lucie Salhany CEO LifeFX, President Paramount Television, CEO Fox Broadcasting, CEO United Paramount Network, Compaq Computer Board of Directors, John Frankenheimer Partner, Loeb & Loeb, LLP a leading media and entertainment law firm. Clients include multinational and independent recording companies, distributors and music publishers, as well as internationally recognized recording artists and composers. Confidential 47 SOUFIDIZUTU_I_ Financial Summary 2000 Revision 8 Network CD Units New CD Releases CD Catalogtitles TotalCD Units Sold New DVD Releases DVD Catalogtitles Total DVD UnitsSold Revenue NetworkCD Sales Network Merchandise NetworkAdvertising LabelCD Salesat Retail LabelDVD Salesat Retail Returns LabelCD SalesOnline LabelDVD Sales Online LabelMerchandise Sales OnSne Returns Paid Downloads Subschptions/Access ees F Fan Clubs PubUshing (net) Total Revenue Cost of Sales NetworkCOGS LabelRetail COGS LabelOnlineCOGS LabelOther Total Cost of Sales Gross Margin Expenses SoundFutureMusic $ 3.065,819 $ 45% 6,776,192 $ 99% 2,784,200 $ 41% 12,626,211 $ 12,480,657 $ 24% 13,272,071 $ 26% 4,200,539 $ 8% 29.953,268 $ 20,492,611 $ 22% 19,387,138 $ 21% 5.875,301 $ 6% 45,755,050 $ 33,942.287 $ 17% 23,941,647 $ 12% 7,890,285 $ 4% 65,774,216 $ 45,606.190 16% 28,885,222 10% 10,544.607 4% 85,036,020 $ $ $ $ $ $ 3.093,628 481.206 215,090 134.746 3,924,672 $ $ $ $ $ 6.212,656 10.029.022 5,808.299 1,192,038 23,242.015 $ $ $ $ $ 15.883,053 15,684,837 11.355,443 2,303.900 46,227,234 $ $ $ $ $ 27,927,622 28.801,454 27.508,279 4.922,230 89,159,584 $ $ $ $ 40,087,427 33,750,317 45.193,080 7,475,844 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 5,208,851 25,317 115,000 992,405 152,159 (Z28,913) 221,546 44,753 235,000 (25,065) $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 15.626.553 126,584 460.000 19,969,125 3.883.140 (4,770.453) 6,769,469 2,157.300 5,170,000 (704.638) $ $ $ $ $ $ $ $ $ $ $ $ $ $ 23.439,830 1,392.419 2,300.000 31,435,600 8.241,345 (7,935,369) 12,331,170 5,886.675 8,720.000 (1,346.692) 352.440 1,485,000 3,154,578 3,501,342 92.958,217 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 35,159.745 9.746,931 9,200,000 53,716.560 14,772,456 (13,697,603) 36.419,480 16,413,840 17,384.000 (3,510.866) 777,150 2,970,000 6,939,693 9,013,604 $ $ $ $ $ $ $ $ $ $ $ $ $ $ 49,223,642 16.569.783 18,400,000 61,388.000 18,864,900 (16,050.580) 62,431,000 31,441,500 23,840,000 (5,865,625) 1,431,540 5,940,000 10,409,140 14,856,280 398,237 5 117,500 2 13,000 376,000 2,585,000 4 2 855,000 1,194.712 8 5 1,792,068 12 13 4,360,000 6 6 2,688,102 16 25 8,692,000 8 12 1,788.000 3.763,343 18 41 11,920,000 9 20 2,740,000 2001 2002 2003 2004 74,463 12,140 6.827,655 1,773,633 534,772 50.995.264 $ 195,304,769 $ 292,861,580 $ 126,506.667 2,902,984 $ 43% 27,753,269 $ 54% 46,730,983 $ 106,145,205 $ 166,354.913 50% 54% 57% SoundFutureNetworks $ SoundFuture, Inc. $ Total Expenses $ EBIT $ (9,723,227) -142% $ (2.199,999) $ .4% 975,933 $ 1% 40,370.987 $ 21% 81,316,693 28% Confidential 48 ip ' Market Background Information OSOUFIDIZUTUB(_ • From MB! and Jupiter Communications - The Internet and the Music Industry - Internet music sales are expected to reach $5.2 billion in the year 2005. This will be driven by the convenience of ordering CDs and downloading music over the Internet. - Online music sales hit $170 million in 1998, while "Net research company Jupiter Communications said that overall U.S. retail spending online will almost double in 1999 to $5 billion, from $2.6 billion one year ago. - The study stated that Intemet sales will represent one-tenth of the total $46 billion music market in the year 2005. • From Business Week and BrUl's Content - The Effect of the lnternet on the Media Landscape - More than 170 million people worldwide are wired to the Internet - More than 3.5 billion e-mails are send every day. By comparison the U.S. Postal Service sends 630 million pieces of mail each day. - Radio is a proven driver oflnternet traffic. • From emarketer and Brill's Content - The Internet is Still Growing Rapidly One new user every 1.67 seconds. 36 new users every minute. 2,166 new users every hour. 52,000 new users every day. 365,000 new users every week. 1.58 million new users every month. 82.9% of first year college students use the lnternet to do research and/or homework. 83% of all teenagers have used the Internet. • From Wired Magazine - August 1999 - On the popularity of music downloads About 846 million new CDs were sold last year. But at least 17 million MP3 files are downloaded from the Net each day. That adds up to almost 3 billion downloads in the first six months of 1999. • From The Industry Standard Magazine - July 12, 1999 - On recent deals Panicked by the stunning popularity of MP3 and downloadable music, the recording industry and other purveyors of entertainment content are running around willy-nilly trying to figure out what to do about the lnternet. The prevailing wisdom seems to be to buy, rather than build. The sellers market in digital music kicked off when Viacom-owned MTV Networks acquired Imagine Radio, a Web-base broadcaster. Next, Real-Networks bought Xing, an MP3 encoder company. And AOL forked over a combined $400 million for Spinner.corn, an Imagine Radio rival and Nullsofi, maker of the Winamp MP3 player. Meanwhile, Hollywood agent Michael Ovitz and Yucaipa, a LA based investment firm, snapped up both MP3Spy.com, an MP3 search service, and Scour.net, an audio-video search engine. Last week, chipmaker $3 agreed to buy Diamond Multimedia, maker of the Rio MP3 handheld player. More deals are coming. Sources close to ReaINetworks, MTV and AOL say the companies arejust starting their digital-music shopping sprees. And the impulse to consolidate is tempting the traditional recording industry as well. Record labels like Sony and EMI are getting in on the act, taking equity stakes in NetConfidential 49 sOUnDPUTUI_ music companies in exchange for promises of future content-distribution relationships. Sony, for instance, has invested in both the music site Launch and CD kiosk company Digital on Demand. And EMI bought an interest in Liquid Audio after agreeing to non-exclusively encode its catalog in Liquid's format. • From Billboard - June 5, 1999 - On Webcasting and lnternet radio Plain and Simple, people want to sample stuff before they buy it. We're offering consumers the opportunity to go deeper into categories of music that aren't exposed on radio. Over time this will be an important driver for retail sales of pre-recorded music. As to the theory that consumers will record music (for free) off the Internet en masse, the source points to Celine Dion's My Heart Will Go On. It's the most-played radio record in history and it still went No.1 in sales. It proves that hearing what you're looking for doesn't make for less incentive to buy it. • From Tag It- May 1999 - MP3 Survey The music industry has been flipped on its head and those who want to go to the top will need to take into account the increased control demanded from consumers, artists and smaller firms. In the past and present, the music industry has tried and is trying to control and decide market forces. However, the consumers and the creators of entertainment will decide on the final direction of the industry. Take them into account and the new online music community will be a financially promising sector. • From Reuters, 8/99- Recent Music/Audio IPOs Investors now seem to be very interested in the digital delivery of music and other media, said Eric Efron, co-manager of the $1 billion USAA Aggressive Growth Fund in San Antonio, Texas. When investors see this type of stock working, they automatically want to buy the next one. The recent success of IPOs by music and audio-related lnternet companies such as Musicmaker.com Inc. (HITS), Liquid Audio Inc. (LQID) and Audible Inc. helped increase interest in MP3.com (MPPP), he said. Reston, Virginia-based Musicmaker.com is an Internet company that lets customers compile their own CDs, Redwood City, Calitbmia-based Liquid Audio sells software that allows consumers to download music from the Internet, and Wayne, New Jersey-based Audible delivers audio versions of books and newspapers over the lnternet. Company LQID MPPP CDNW HITS Shares Outstanding 18,017,000 66,638,000 30,105,000 7,195,000 Market Cap Close on 8/18 $425,579,550 $23 5/8 $2,128,250,000 $31 15/16 $460,980,000 $15 3/8 $72,840,000 $10 1/8 • From Billboard - July 24, 1999- Internet music demographics The lnternet has particular demographics that effect the current sales of music on-line and the current transaction patterns of customers. For example, teen titles in general might not do as well on the lnternet because online shoppers tend to be older than record-store visitors are. Additionally, the need for a credit card puts online buying out of reach for many teens. However young Internet audiences are ideal candidates for fan clubs, chat and intimate artist access opportunities. • The average Internet use is male 59%, are college graduates 50%, have an average income of $61,500, and are between 21 and 30 years old and white. • A new survey of music and the Internet from Xceed Intelligence (NYC) estimates that consumers will spend $2.53 billion on music on-line by the year 2003 or about 16% of total music sales. Confidential 50 SOUND;UTUI_E • The Industry Standard Magazine reports that music is the most popular on-line purchase for teenagers. Teens are the first generation to begin their lives as consumers with on-line shopping. • According to Forrester Research, paid digital downloads could amount to a $1.1 billion dollar business by 2003. • Tag It - reported in its May '99 MP3 Surveythat over 47% are willing to pay for downloading singles and a surprising 58%willing to pay for full length recordings. • The most popular CD store sites do not have the lowest prices. Aggressive marketing, good site design, strong customer service and customization earn customer loyalty. Labels tuning in to Net By ltUary Rosen Special to CNET News.tom April 27, 1999, 4:00 a.m. PT URL: http://news.cnet.eom/category/0-10578-201-341046.htm ! Is the traditional, mainstream record business being made obsolete by the Internet? Is the lnternet rendering the traditional record business obsolete? Yes. The revolutionary force of the lnternet like a monumental wave, scattering the beach with thousands of new opportunities tbr delivering content to consumers. Music is a large part of this wave of change, if not the leading ripple in the waters. Technology companies, music companies, artists, record labels, and individual Web site pioneers are combing the beach, grabbing up new ideas like shells and trying out as many different options as they can. This is no different from what is happening in every other industry, of course. Drugstores and grocery stores are sprouting up on the Web, moving the shopping aisles and checkout counters into the virtual world. Amazon is reinventing book sales even as people experiment with electronic devices that may redefine the book. Car shoppers are using the Internet for everything from pricing information to car and insurance purchases. Whatever the industry, it's the end of the world as we know it--and the start of something promising and new. That the Net is radically changing the distribution models and economics of the record industry (and many other industries) is abundantly clear. But it's also true that human nature will drive the evolution of the Net--not the other way around. The human landscape includes artists, business people, brilliant musicians, talented promoters, creative marketers, and shrewd financiers working together to bring consumers new music. And then there is the exceptional hybrid, the one-man-band who has the ability and inclination to combine these pursuits. The Net creates a marvelous playing space for such entrepreneurial artists to develop their own microlabels and business models on the Web. Already there are artists posting the musical equivalent of shareware on Web sites and experimenting with subscription-based music distribution. The lnternet also presents a whole new field of opportunity for new and traditional record companies. Just a few years ago, when a record company invested heavily in producing and promoting an artist's album, they had one way to recoup money on that investment: by selling the actual recording on vinyl, cassette, or CD. The lnternet cracks the channel wide open for record Confidential 51 sOUnD_UTUe_ companies, and with many more distribution opportunities, record companies have other ways to expose and distribute their artists' product and much more precise methods for targeting the ideal customer for their music. More revenue opportunities means more abundantly available, affordable music. This is good not just for established artists who will continue to see more money spent to promote their work but for new artists hoping someone will invest in their work. A recent analyst's report divided the coming years for the music industry into three eras. Forrester Research described 1999 to 2000 as the "pirate era," 2001 to 2002 as the "promotion era," and 2003 and beyond as the "commerce era." The pirate era hardly needs elaboration. In the promotion era, old dogs learn new tricks: Record companies, experts in pre-lnternet era promotion, must rapidly evolve their techniques to make commercial recordings visible and accessible to consumers online. What's more, they must make room for Gen-X and Gen-Y puppies to rush in and shape their merchandising in exciting new ways for the wired world. The commerce era kicks in when the public has been presented with an easy, appealing, wholly satisfactory avenue for acquiring music exactly the way they want it, and online sales move to dominate the music market. Right now, there's a deafening noise level around the implications of MP3 and other emerging and proposed standards. But while the flashy sound bites focus on swashbucklers amassing illegal music collections, the sophisticated thinking trend has shifted away from piracy, toward legitimacy. Virtually all of the major technology players are building security features into their compression systems, and legitimate online music archives support copyright protection. They are not seeking to "lock it up" in a cumbersome way but are finding ways to allow the music to flourish and the creators to get paid. There is a general consensus growing around the long-term advantage of creating a fair and secure system for distributing and enjoying music on the lnternet. The array of music posted on the lnternet today is like a giant yard sale--loads of stuff that's cheap or free. To the extent that music merchandising happens at all, the selection is like a giant food court at the mall, where nachos and pizza and corn dogs and teriyaki burgers--anything you want-are out there on the steam table, and you have to sort through it to find something you want. On some days that might suit your time, taste, and budget. But on another day, you might want to go to a restaurant that has some ambiance and puts some care into the "packaging" of your experience: The menu is carefully composed, the food is high quality and attractively presented. People seem to be willing to pay for that careful, discriminating packaging. Here again human nature prevails over chaos, quality over quantity. When an artist and a record company work together to package an album or song and deliver a unique artistic vision, or when a retailer creates an in-store or home page display of little-known blues singers recommended by a major hip-hop star, this is not a matter of big business skimming profits or homogenizing public taste. This is marketing and promotion that adds value and vigor to the creative community. It showcases artists and lights a path for the consumer. It creates a connection among people who can easily identify and navigate among musical choices and genres, creating shared listening experiences. Confidential 52 O sounoPUTUI_ And shared experience is the essence of the musical tradition. It's about what happens when music passes through the rosined bow or drum skin, the mixing board, the audio file, and enters that most technically refined and discriminating of devices, the human ear. As the recording industry adds value, and speeds that sound along to deliver a great listening experience, it will handily earn its place in business's brave new world. Hilary Rosen is president and chief executive officer of the Recording Industry Association of America, a Washington trade group representing the U.S. sound recording industry. Rosen was named president and CEO of the RIAA in January 1998. In addition, Rosen is a founding board member and current board cochair of Rock the Vote, an organization that encourages young people to become more involved in the political process. Prior to joining the RIAA in 1987, Rosen operated her own consulting firm and served as a vice president for the lobbying firm of Liz Robbins Associates. Confidential 53 SOUDDPUTU_ Net levels playing field By Robert Kohn Special to CNET News.com April 27, 1999, 4:00 a.m. PT URL: http://news.cnet.com/category/0-10578-201-341047.htm I Is the traditional, mainstream record business being made obsolete by the Internet? Twenty-five years have passed since Bob Dylan proclaimed to the world, "The Times They Are AChangin'," and now, it seems, those prophetic words are rumbling down the halls of the traditional record industry, calling into question the very ways in which that industry has operated for so long. Ovid, another great poet, could not have concocted a more extraordinary metamorphosis such as that which is about to occur in the distribution of recorded music. The result of these changes may be easier tbr some to predict than it is for some to accept, but, as in every transformation, there will be winners and losers, and the losers might as well prepare themselves for the inevitable. The most obvious change to arise from the digital download revolution will be the wholesale dismantling of traditional "bricks-and-mortar" music retail operations. If Dylan were to write the song, he may well title it the "Disintermediation Blues." Retail sales of music, however, will not go away; it will, instead, reemerge in a different form: the lnternet kiosk, which can be placed just about anywhere that music buyers are likely to be when they want to purchase a recording. This change alone will be one of the most visible benefits to consumers and, in my view, will be the single most important factor leading to an overall increase in music industry revenues. A related change, which will have profound implications for the music industry, is the demise of the manufacturing and distribution infrastructure that currently supports traditional music retail stores. This support, the physical manufacturing and movement of CDs to and through retail channels, is currently controlled by the Big Five record distributors--WEA, Sony, Universal/Polygram, BMG, and EMI. Eighty percent of the resources of these five organizations is devoted to the manufacture of physical objects, such as CDs, and moving them from one place to another. The demise of this infrastructure will be quick and sure, "Like a Rolling Stone." It's not a matter of "if," it's only a matter of "when." Because the so-called Big Five will see 80 percent of their operations undergo a forced evaporation, what's in store for the remaining 20 percent? Here may be found the proverbial silver lining for many record industry executives, because that remaining 20 percent represents the critical functions of (a) developing the careers of talented recording artists--called A&R, for "artist & repertoire"--and (b) promoting those careers through radio and television promotion, tour support, and the like. These functions are not only here to stay, but, in my view, will become more important as the digital revolution evolves. With greater access to the Internet, aspiring recording artists will need the kind of experienced guidance, financing, and promotional resources necessary for them to create the kind of quality product worth listening to and to rise above the noise level that the lnternet helps amplify. A&R executives have reason to sing, "I Guess I'm Doin' Fine." Confidential 54 SOUFID;UTUI-_E Some more good news: While traditional bricks-and-mortar retailers and distributors will be singing the blues, commercial counterfeiters of unauthorized CDs will be singing their last refrain. Without the filing of a lawsuit or government raid, these guys will soon be "Blowin' in the Wind," as there is no way they can compete with the digital downloads. If they try to sell on the Internet, they are soon discovered and will be summarily shut down by lawsuits filed by the music industry trade associations. So what's all this about piracy? About the only "pirates" left are the consumers who illegally post music on the lnternet for others. In other words, these pirates also happen to be the music industry's customers. The approach to these customers by the Big Five record companies, using the Recording Industry Association of America (RIAA) as their mouthpiece, has been to seek to deploy technologies that purport to prevent the copying of music, the so-called SDMI (Secure Digital Music Initiative). Recent announcements by a cafeteria of companies, including even the bad boys of Redmond, promise nothing but great new ways to inconvenience the consumer without any promise of real copy protection. The dirty little secret of these companies--you can read it in their disclaimers--is that encryption will not work to protect music on the Internet. So what's all the fuss about? is it really worth inconveniencing the consumer with something that will not work to begin with? GoodNoise, the source for downloadable music, believes that, if you make it easier to buy than to steal, people will buy it. With thousands of high-quality recordings being made available on our site each month, we are making it convenient for fans to buy their music--just the way they want it. Dylan was right: "The Times They Are A-Changin'," but they are changing for the good--for the good of the artist, for the good of the record label, for the good of the consumer, and, ultimately, tbr the good of the music industry as a whole. Bob Kohn is chairman of the board of GoodNoise. Kohn is a seasoned high-tech executive, member of the California Bar, and coauthor of the 1,500-page book Kohn On Music Licensing, a practical guide to business and legal issues in the music industry, which he wrote with his father, AI Kohn, retired vice president of licensing for Warner Bros. Music. He served as chief legal counsel for Pretty Good Privacy, Borland International, and Ashton-Tate. Prior to joining Ashton-Tate, he was an attorney at the Beverly Hills law offices of Rudin & Richman, whose clients included Frank Sinatra, Liza Minelli, Cher, and Warner Bros. Music. He lives with his family in Pebble Beach, California. Confidential 55