Whether you love it or hate it, there is no denying that American Idol has become one of the biggest draws in the U.S. entertainment business. So when Justin Beckett, founder and CEO of Fluid Audio Networks, convinced Idol executives to let his small Los Angeles-based tech company extend the televised talent contest to the Internet, he knew he had a business that would attract both Idol fans and willing investors. But when it came to looking for the seed money to get his website off the ground, Beckett also knew that most U.S. venture capitalists would treat his proposal with about as much enthusiasm as cranky Idol judge Simon Cowell. “I am an American, running an American company with one of the best entertainment brands in America; I didn't think I would have to leave L.A. to get investors,” says Beckett, who eventually found them, of all places, in Canada.
Beckett turned to Canada, not because U.S. investors thought the idea wouldn't work, but rather because he wasn't asking for enough money. To establish his American Idol Underground website (idolunderground.com), Beckett needed less than US$10 million. That's well below the usual US$20-million to $30-million threshold needed to get the attention of major venture capitalist firms south of the border. “Unless you're asking for tens of millions in financing or positioning yourself for at least a US$250-million initial public offering, it's pretty hard to get American investors interested,” Beckett says.
But there were plenty of interested Canadians, including investment firms such as Toronto-based Wellington West Capital Markets, Pinetree Capital Ltd. and even the Canadian Imperial Bank of Commerce. “Larger U.S. investment firms just can't afford to take the time to invest in a small company like this,” says Larry Goldberg, Pinetree's executive vice-president and chief financial officer. “That creates a good opportunity for funds like us.”
Beckett is no stranger to the Canadian markets. The chairman of Fluid Audio is Lorne Abony, co-founder and CEO of Toronto-based FUN Technologies (TSX: FUN). Beckett met Abony in 2004 when FUN purchased Beckett's previous venture, SkillJam Technologies–an online gaming firm that had developed partnerships with tech giants such as Microsoft and America Online.
The SkillJam deal was the second online venture that Beckett, a former investment manager and one-time prospect for the Dallas Cowboys football team, had founded and sold to a larger established player. But not all of his ventures have ended so successfully. Back in 2000, Beckett stepped down as an executive vice-president and principal of North Carolina-based Sloan Financial Group Inc. amid allegations of mismanagement and overspending. At the time, Sloan was the largest minority-owned financial services firm in the United States. Like many companies caught up in the Internet gold rush, however, Sloan lost millions (invested by Beckett) when the dot-com crash all but destroyed any value in a major portal that aimed to become the AOL of Africa.
Beckett acknowledges having been caught up in the Internet frenzy, but says he is determined not to let that happen again. “That whole experience has just emphasized how much you need to focus on the day-to-day and build a solid business one step at a time with a defined revenue model,” he explains. “After all, success has many fathers, failure has none.” That's one of the reasons why, in his latest venture, Beckett opted to look for modest financing in Canada rather than rewrite his business plan and ask for the tens of millions more that could have put him on U.S. investment funds' radar screen.
American Idol Underground is an opportunity to capitalize on the ever-growing popularity of the TV talent show as well as the turmoil that has engulfed the recording industry. The site, which launched in October, offers 13 online radio channels ranging from pop and rock to rap and even spoken word. Each channel features unknown and unsigned artists who each pay US$25 to upload a track to the site in hopes of gaining exposure for their music–and maybe even a coveted recording contract à la first American Idol winner Kelly Clarkson.
The fee guarantees that each song will be played at least 200 times for users who log onto the site for free. The listeners rate each song and are encouraged to e-mail the would-be pop stars directly. “There are some songs on the site that are just dreadful,” says Beckett. “But there are others that are fantastic, and listeners can click a button and tell the artist how much they enjoyed their music–or that they should get out of the music business.”
In addition to getting exposure, the amateur artists compete for prizes based on their listener ratings. Those prizes have included everything from a Starbucks gift certificate to an all-expenses-paid demo-recording package–or even inclusion of one of their songs on a promotional CD. There are already more than 100,000 songs on the site, partly the result of a partnership with CD Baby, an online distributor of independent music based in Portland, Ore. But a growing number of the songs are from completely unknown artists who produce the tracks from their garage, basement or home studio.
In fact, many of the entries are from contestants on the American Idol show who failed to impress the celebrity judges and make the cut to the final 12. At recent Idol auditions in cities like Cleveland, Beckett's representatives handed out flyers promoting the Underground site. “Every year, thousands of people audition to be on American Idol but only a few are chosen,” says Beckett. “This is a way for some of them to continue to have their music heard and maybe make their dream come true.”
In the next few months, American Idol Underground will log its one millionth unique visitor–maybe even sooner given the massive television ratings for the Idol show, says Beckett. In January, more than 55 million viewers tuned into the première of the fifth season of the musical competition. (The much-hyped series finale of Friends in 2004 drew only 52.2 million viewers.)
The website is the culmination of more than three years' work for Beckett, who first approached executives at FremantleMedia, owners of the American Idol brand, with the idea of moving the popular musical competition online back in 2003. It took more than two years to work out the details of a licensing agreement. Beckett controls the technology that powers the site, but not the Idol brand. He is now in negotiations with Asian partners to launch a similar website for Chinese-speaking unsigned musicians. Eventually, he would like to use Fluid Audio's technology to create other music sites that are not affiliated with American Idol. For instance, he could partner with a well-known hip-hop or jazz brand to attract the next unsigned rapper like Eminem or vocalist like Diana Krall.
By focusing on unsigned artists looking for their first big break, Beckett avoids most of the problems with copyright and Internet music downloading that continue to plague the established music industry–and that have mired other music sites in often business-destroying lawsuits.That strategy also allows him to tap into the global US$5-billion recording-artist services market. As the site expands, Beckett hopes to add features that will help independent musicians sell everything from music downloads to T-shirts and other promotional material.
Ultimately, the success of the website will have less to do with riding on the coattails of American Idol (or exploiting the pop-star dreams of failed contestants) than with capitalizing on how the Internet is changing the ways musicians distribute music and communicate with an audience, says Beckett. “The Internet is making it much easier for musicians to get their music heard and connect with their fans,” he says. “This democratization of the music business is quickly making record labels irrelevant.”
The big question for American Idol Underground is whether the public's seemingly insatiable appetite for online music will extend to garage bands, amateur rappers and too-bad-for-even-Paula Abdul singers. Beckett and his Canadian investors are banking on it. And should the business grow as large as he anticipates, Beckett might someday take the company public–likely on a Canadian stock exchange.