27 Aug Making music matches: Madison start up brings new dimension to music search
Madison, Wis. – Ohigo, Inc., a Web-based music retailer, has the look of a start-up business that could be headed for a lucrative exit – provided that music lovers are ready for a new way to search.
The Madison-area business has what it believes to be a differentiating technology – indexing songs by sound – in an industry that is expected to double within the company’s five-year exit window. It has the backing of local investment group with prospects for additional financing, and it may have the answer to a question that music labels have in the wake of declining sales.
Now Ohigo has the inventory to put its search engine to the test. The company has reached an agreement to become a digital retailer with The Orchard, a global catalog that includes thousands of record labels, and its business model calls for additional licensing agreements and partnerships with record labels and content aggregators.
Joe Kletzel, president of Ohigo, said the significance of the Orchard agreement is that it gives Ohigo a musical inventory that addresses every genre of music, and allows Ohigo to demonstrate the robustness of its search capability.
Ohigo’s search engine allows people to discover new music that sounds similar to music they already like, using factors such as rhythm and tempo. Customers type in the names of artists, songs or genres they like, and are presented with recommendations.
Competitors use a variety of methods to recommend songs:
One method, collaborative filtering, is represented by Last FM, which recently was acquired by CBS for $280 million. Users of Last FM enter song titles from their music library into the system, then receive recommendations based on what other users with similar tastes are listening to.
A second method, purchase-based filtering, is employed by Amazon.com through the “Customers who bought this item also bought…” section on its product pages.
Finally, Pandora employs people who analyze and compare music by hand so that the system can recommend songs to users who like similar ones.
Giving new artists a chance
Ohigo believes its appeal will not be limited to consumers who would prefer to find new music through sound. The company encourages artists across the country to upload their content for distribution to its website, and it has received appreciative feedback from such artists because its search capability allows them to connect with more fans than other methods, Kletzel said.
Typically, other methods are more of a market “push,” where content is pushed upon the user on a website with featured artists on the front page (or on the radio). That means a program manager decides when the content is going to be played or featured. In contrast, Ohigo offers a “pull” model by making search its main entry point.
“We know the overall market is shifting because there are so many new ways to digest media,” Kletzel said. “Those new ways to digest media are typically enabled by newer technologies that are out there, whether that’s satellite radio to provide a more personalized listening experience, or Internet radio, or people listening to their MP3 players in their cars and other times when people typically consume music.
“It’s a more user-friendly package, so when we looked at where we were going to go, and we looked a where the market was going, we decided we wanted to give the market what it wanted.”
Kegonsa Partners, a Madison-based seed and venture investment firm, co-founded and invested in Ohigo. The company has recruited a board of directors that includes entrepreneurs Bob Mierendorf, Dan Neely, and Ken Adamany, and Andy Hayman, general manager of the Saatchi Chicago office.
Kletzel, who previously managed a technology business in Southern California, is confident that Ohigo’s search engine provides the kind of sustainable competitive advantage that venture capitalists covet, but he is not yet certain it will need or accept venture funding. Part of that assuredness is the low fixed costs for a company that has five employees, and expects to add only five to seven positions over next several years.
“The nice thing about our business is that the fixed costs are very low because we do these things automatically,” Kletzel explained. “We feel very comfortable that we can reach the fundraising goals we have over the next five years with limited, if any, venture capital raises.”
“That does not preclude us from doing so if the right deal comes our way,” he said. “The funds we need to raise as not as significant as you might think in order to achieve our business goals. It goes back to the efficiency of the business.”
Ohigo has identified 2012 as the year that it may be ready to be acquired, with five years between launch and exit as the national average. Management is projecting break-even revenue by April 2008.
According to Kletzel, $20 per user is a typical valuation in the industry. He noted that LastFM recently was purchased for $280 million with 15 million users, a level that Ohigo expects to reach by March of 2009, and Nokia acquired Loudeye for $70 million.
Kletzel said the the average e-music user buys about 1.67 songs per month, and the company would generate an estimated $7.5 million per month even if users buy only one song every other month.
The digital music space is a $2 billion market, having doubled since 2005, and it’s projected to grow to $5 billion by 2010. The Berkman Center for Internet and Society, part of the Harvard University Law School, predicts that in the same year 25 percent of online music store transactions will be driven from consumer-to-consumer, taste-sharing sites.
Derek Slater, an affiliate with the Berkman Center and an activism coordinator with the Electronic Frontier Foundation, said the estimate took into account past trends, current statistics, and feedback from industry leaders. “In general, there is a considerable reversal going on in music discovery,” he said. “As people depend less on mainstream radio and TV, they have a myriad of choices to draw from.”
The key metric will be consumer traffic. Ohigo recently moved into a private, exclusive beta as part of its launch plan. It conducted an exercise that allowed consumers to upload music and utilize the search engine, and it recorded about 18,000 unique viewers over a three-month period.
Kletzel believes record labels could boost sagging sales with additional music discovery avenues: Traditional music discovery outlets such as Tower Records have gone out of business, meaning there is less “floor space” there, and while there are multiple online venues for consumers to purchase music, most of the music they are exposed to is through push marketing.
“We believe Ohigo is a method that can bring consumers to a greater diversity of artists that are more highly targeted to their tastes,” Kletzel said. “It’s kind of the long-tail phenomenon that made Amazon so successful.”
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