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Internet and Society 1999
The Technologies and Politics of Control
Scribes Notes -- Lecture 9


1)     Guests

a)     Jordon—HLS grad, “escaped from being a lawyer,” joined an Internet company—MP3, started as consultant, retired last month and he’s 28—MP3 was split into two groups:  one focusing on internal development and one on marketing; it moved very quickly           

i)          How important were lawyers in the process?  I don’t know that much about that—we had one person (Cooley) handle most of it, brought in an in-house counsel one month before the IPO

ii)      What’s the business model of MP3?

 several ways of looking at it:  revenue model talks about revenue streams, becomes problematic if you have to hit your numbers; business model focusing on looking 3-5-8 years ahead at the open market and the music market expanding, the whole span of how music can turn into $--there’s a tension between talent and the business side, our model was to look at how power players operated and how internet efficiency could be applied to cut out middlemen and give more rewards to artists

iii)    Money comes from advertising

iv)    Do you try to monitor who is visiting your site?  Yes, to bring CPM up (amount of money you get per thousand impressions—advertising term)

v)      How much of it is a barter for banner ads?  MP3 started out with large % barter, now 70% of banners generate revenue

vi)    Stock fluctuates quite a bit, but Jordon still has his stock and can’t sell it until February—pretty standard to be locked in for a certain amount of time

vii)  Is it simply a waiting period? Or are there conditions?  For me, it’s simply a waiting period.  No matter what I do, I can still sell the stock.  That’s something to take into an account b/c of the market fluctuations

viii)Stock prices are often determined on the offering bid.  MP3 had a 3/2 split before IPO b/c price went up too quickly during the “road show”—meant there was a lot of stock and volatility (I didn’t know any of this until I started this)

ix)    Large swings are common in stock value (millions, billions, no big deal).  

x)      Two things:  1) I had no technical background, 2) I did not have any experience in the music industry, 3) no financial background either.  Anyone can do this—it’s all about risk.  Things would be different if I was still at a law firm

b)     Bill—22 years old, founder of ragingbull.com in late 1997 after interning at Goldman Sachs managing really rich people’s accounts.  I love the stock market and the Internet—starting company in dorm room with college buddies at UVA during his sophomore year and “didn’t want to go back to WallStreet.” We started it with $30,000 in Dad’s basement—looking back, we were crazy.  By the end of the summer, things were going well but you need brand, huge size, and relationships to make money.  Dropped out of school with buddies. 

i)        Ragingbull.com features

(1)  This stuff isn’t rocket science—there are some personalization features that allow you to get some info pretty easy.  You can track someone on the site if you find someone you liked. 

(2)  Marketing ploy—“Ignore button,” fixes spamming

ii)      Considerable more hits than MP3, we have hard core net users.  We’ve been hiring away—CEO in January

iii)    What’s the future of the company?  We’ve gotten big quick and revenues are coming up fast—in front of us are 3 porn sites, Ebay, and Yahoo chat. We have about 400,000 visitors a day.  We are “sticky”—someone comes to our site, they stay there, that’s what everyone wants (the more unique people who spend the most amount of time, the better)

iv)    We ran surveys recently, and a small percentage of our visitors are day traders. 

v)      Revenue stream—we have the perfect demographic.  We want to turn those eyeballs into money.  We offer an “instant community.”  If you go to Alta Vista investments, it really is raging bull underneath.

vi)    Z: You don’t provide the content, you only provide the dancehall.  Did you ever worry about legal liability for harmful or damaging speech (people talking down stock and suing)?  Do companies ask you to clean up the board?  Ha ha, actually, we keep track of subpoenas.  I have nine since I started.  It’s challenging—we have lots of lawyers that tell us we’re not responsible, so we don’t take any steps to monitor.

vii)  Do you give user names out to companies?  That’s very controversial, we try not to.

viii)The Internet is not anonymous, you can easily tell who visits porn sites.

ix)    We’ve taken down posts upon request—it is in our user agreement.  The first level of defense is that users ignore it.  Second, we have 6 people patrolling and they try to pull out the content but still delete things on occasion.  We also sell companies info about what investors say.

x)      We hired Dr. Bob and the difference is that you can converse with people who write the editorials.

xi)    Is the barn door closed on this model?  The consumer market is rapidly closing, but if you put together the right managing team, anything is possible.  Multiple revenue streams is the key word now. 

c)       GaryCullis--HLS ’98 grad.  Started Direct Hit (search engine that ranks sites by popularity)

i)        Example—legal liability stocks (no one has reviewed this before); free MP3—popularity is indicated by little orange men next to the site; we look at how many people visit and how long they stay when we figure the ranking

ii)      What is data gathered by?  Our model is to sell the results to other portals and we have a network with about 20 others, we are the default results for Hotbot, MSN, Lycos

iii)    Our standard product counts all users equally, but we're working on something based on age, gender, and geographic location.  We would be leveraging what other people have done. 

iv)    We have nearly 100 million sites in our directory, Yahoo has about a million b/c we don’t have an editing model which is labor intensive

v)      Our business model:  CPM charge and advertising

vi)    What got you into this idea?  I was a patent agent.  When I started law school I realized a paradigm shift in searching for info.  85% of search requests are looking for the same thing. (MP3 is popular)

vii)   Slide show—we’ve raised about $30 million and have 60 employees. History—Entered MIT $50K competition, Recruited 35 yr old CEO who was in retirement.  The first round process is the hardest part, we didn’t have a business plan at the beginning.  We finalized it in April of 1998.  It was risk free to portals. 

(1)  Arranged a west coast trip to meet with people.  No one was working on a similar technology.  We talked to customers and met with Draper Fisher (venture capitalist company)—they offered $1million for 33%, settled on $4million.  We didn’t even have a lawyer at the meeting or had one at the time.  Lawyers don’t do into VC meetings.  These negotiations are very rough and there’s no need for a resolution on the details.  We found out later that the average size of a deal like this was $3-6 million.  But, we were fast and hit the grand running.

(2)  We won the $50K Competition, but donated the prize back to the other companies b/c we already had an offer in hand

(3)  Now there’s been additional financing and growth—it’s better to raise money when you don’t need it, no one wants to give money to a desperate company.  We raised $26.3 million in July and are focusing on new products: Shopping engine that rates products, directory engine, corporate searches, yellow pages.  We are looking to public financing in the first quarter of 2000.

(4)  Advisors, the source of money, and moving quickly are all important.  It’s risky to explore all options, it’s all about speed in this industry.

(5)  Our patents are just now coming to issue.  It’s the wrong thing to try to rely on at the beginning stage.  It’s a land grab.

viii)How much of your time was spent on this?  I spent much of my time on raising money.  We were fortunate that our financing went quickly.  The third round was slower.

ix)    Z:  What’s the most you can raise privately?  $100 million.

x)      What’s the benefit of going public?  Well, it takes lots of people and a strong infrastructure.  Most companies are about 80-100 people. 

xi)    What’s the New England job market like?  (David Birch in the reading said it was horrible)  We are recruiting like crazy.  We made some key hires lately.

xii)  You don’t want VCs to get cold feet b/c others get nervous

2)     Lawyer for 20 years and then had an interest in technology which involved into the early stages of an Internet practice in 1995.  Evolved into working with various ecommerce clients (dot com or infrastructure).  I started doing work for Akamai.  It takes weeks to go public and get enough people.  You back a truck into MIT, ha ha. 

a)     Companies that didn’t exist 3 years ago now are huge. It’s utterly fascinating that something that was in a person’s head can be made into a business.  We’re still in on the front end of it. 

b)     Akamai story—used algorithms to solve hot spot problems (i.e., CNN when Starr report was released—they had to take the banners down and banners mean revenue).  Speed is what does it on the internet, a slow site will lose.  Akamai was put together as a solution.  The solution was the subject of an MIT PhD thesis that started in 1995 and was put together with someone from the Sloan B-school and entered the $50K competition. 

c)      Financing—several rounds, then went public.  IPO was $26, stock opened at $110.

d)     IPO price—investment bankers buy the stock from the company (IPO price) and then re-sell it to the public.  They are the ones taking the risk, but can unload the shares for whatever price they want (hence the disparity).  NASDAQ is a pure auction market. 

e)     From a corporate point of view, is it a loss that the shares could have been sold for higher?  Well, you are at the mercy of the investment bankers. 

f)        The current valuation--$15.9 billion dollars.  Earnings are $0.  Book value is negative $.41.  Overvaluation of stock b/c there is more demand for the stock than there is supply.  The public market is not an exact process.

g)     Z:  So far, we have an economy that ultimately has someone wanting to advertise forming the basis of their revenue—I can’t imagine that the amount of money companies wanting to spend on advertising is increasing.  Is television going to die?  What’s feeding the source of this?  Well, not everything is ad driven.  On-line banking is a service.  Ours is a service model and our customers are websites.  They pay us for our service.  We rely on patent, trade secret, copyright, a little bit of everything

3)     Opening it up to everyone

a)     Was your years in law school a waste of time?  Not at all—there is value in terms of strategy.  My parents are still upset that I didn’t join the bar.  MP3 guy:  no, there is a distinct value of the whole 1L thinking like a lawyer thing b/c it helps your speed of thought.  Former Lawyer:  there are so many legal things out there.  There are legal issues out the wazzoo with these start ups.  It’s helpful to be able to think out of the box.  You can also practice as a cyber lawyer and never run out of work.  DON’T GO INTO THIS IF YOU WANT TO WORK A SMALL AMOUNT OF HOURS. 

4)     MP3: There is a group in San Francisco that are experts in Internet contests and created a form to make it work.  (there are international problems b/c some countries need to be excluded)

5)     Is Palo Alto still the hot area to be for lawyers and entrepreneurs?  MP3—there’s so much going on there that unless you actually already have contacts there it is difficult to get into the community.  Lawyer—can’t buy a house there, it’s still a great hot bed, but this area is incredibly booming too.  There are Microsoft millionaires up and down CA, also TX, Atlanta, NY, Toronto, Dublin.  Directhit—we haven’t lost employees, just find it harder to recruit.  It’s not as fluid.  Our law firm is now Testa Herwitz. 

6)     You can get out of non-compete agreements with a good lawyer.

7)     What’s your biggest mistake when you started your company?  22yrold—not scaling quick enough.  You can’t imagine how quickly it goes.  Hiring—the first 10 people you hire are the most important.  Directhit—Again, needed to grow faster.  Lawyer—Not being decisive, Undercapitalization.  22yrold—learn from others successes and not their mistakes.  MP3—Bracket the other side.  We weren’t prepared for our rapid expansion.  We might have wanted to stand back and figure something out.

8)     Income steam from web advertising—how tolerant would you be to a fall off in advertising revenues? MP3—the line between advertising and ecommerce is very blurred.  There are pockets of different kinds of ad revenues so that you can still diversify.  If for some reason corporate America stopped advertising on the Internet, companies would suffer on the short term.  22yrold—we’re losing about ½ million a month, so we would just lose more money.  These huge valuations are about more than billboards.  It’s a merger of all the mediums.  DirectHit—advertising is doing very well, CPMs are going up. 

9)     Is this sustainable?  Is this an overheated valuation economy due for correction?  What’s your biggest nightmare for your company?  MP3—if Universal music put all their music on the net for free, we would be in tons of trouble.  But, they’re slow and conservative—we’re fast.  Lawyer—It’s a natural oligopoly so you want to be one of the one’s that survive.  There are a lot of companies out there trying to do what we’re doing.  DirectHit—I think the Internet is still on Beta and the market should double or triple.  People are placing bets on who is going to be the guerilla at the end of the day and will get all the money.  22yrold—understand the drivers of the valuation, there’s lots of hype and everyone rushes to buy it.  In time, supply and demand will take care of itself.  The winners will win huge.  The investors (Stock holders?) will be left holding the bag.  The merger of public and private markets is happening—it’s more like options.  Biggest fear—server goes down in middle of night.

10) How did you get up to speed on business plans and decide which VCs to hook up with? DirectHit—get your hands on a good business plan and find out which VCs people are talking about.  MP3—working as a corporate attorney helped.  There is a form to a business plan.  Our VC called us.

11) Do you want to cash out like MP3 guy?  Lawyer—the thrill is just beginning.  The money is sorta out there and you can’t get to it.  You don’t think about it, you focus on work.  You started out to build a dream.  DirectHit—It’s all about building a company, there’s a real thrill to it.  22yrold—there’s a profound cultural shift.  There is something to owning a piece of the company.  Jordon—I’m still locked up.  I want to move on to other things.  I want to do it again.  It’s like Magic.

12) What stage do you think about bringing in lawyers?  What types of lawyers do you want?  Lawyer—the company had 6 or 8 law firms doing various things and wanted someone in house.  I brought a broad range of experience.  DirectHit—I did the patent, when you reach a point where you are doing so much legal work it makes sense to bring things in house.  It’s tough to outsource contracts.

13) In this field, is there a gender gap?  22yrold—most of us are male drop outs.  There is a lot of technology, in which more males are interested.  (Side note, there are alternatives to lawyers on the web—click and settle)  DirectHit—there’s always a need for good lawyers.  MP3—lawyers know lots of people b/c they work with people in the community so are useful to take them in to the Board of the Advisors b/c corporate attorneys are very well connected.  Law firms make business communities work.  Lawyer—there is an enormous need for lawyers.  Now you see more in house.  About gender, I’m the only in house at my company.  The space is equal opportunity for non-white, non-male people.

14) Z:  This was a session different than usual.  This was less about the conflict of values and more about filling in the story about what’s built the Internet and what will be next.  Issues are popping up as they’re talking:  privacy (eye-balls), property, speech (don’t have to monitor ragingbull).  This is the Internet of tomorrow in some sense.  You have the opportunity to be a part of it.  We might be on the verge of another round.  We’re only at the beginning.  Next week will be more traditional.  We’ll see a wholly private effort to combat spam.  Readings will be available tomorrow afternoon and are available on-line. 


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