Internet and Society 1999
The Technologies and Politics of Control
Scribes Notes -- Lecture 9
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
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
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
Money comes from advertising
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)
How much of it is a barter for banner ads? MP3 started out with large % barter, now 70%
of banners generate revenue
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
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
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)
Large swings are common in stock value (millions, billions,
no big deal).
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
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.
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.
Marketing ploy—“Ignore button,” fixes spamming
Considerable more hits than MP3, we have hard core net users.
We’ve been hiring away—CEO in January
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)
We ran surveys recently, and a small percentage of our visitors
are day traders.
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
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.
Do you give user names out to companies? That’s very controversial, we try not to.
is not anonymous, you can easily tell who visits porn sites.
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.
We hired Dr. Bob and the difference is that you can converse
with people who write the editorials.
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.
grad. Started Direct Hit (search
engine that ranks sites by popularity)
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
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,
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
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
Our business model: CPM
charge and advertising
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)
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.
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.
We won the $50K Competition, but donated the prize back to
the other companies b/c we already had an offer in hand
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.
Advisors, the source of money, and moving quickly are all important.
It’s risky to explore all options, it’s all about speed in
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
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.
Z: What’s the most
you can raise privately? $100
What’s the benefit of going public? Well, it takes lots of people and a strong
infrastructure. Most companies
are about 80-100 people.
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.
You don’t want VCs to get cold feet b/c others get nervous
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.
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.
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.
Financing—several rounds, then went public. IPO was $26, stock opened at $110.
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.
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.
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.
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
Opening it up to everyone
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.
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
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.
You can get out of non-compete agreements with a good lawyer.
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.
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.
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
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.
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.
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.
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.
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.