Guest post by Eliot Van Buskirk of Evolver.fm.
Beyond Oblivion was supposed to save the music industry.
Instead, it lived up to its name, collapsing in dramatic fashion at the end of 2011 when investors lost their patience with a company that kept promising and never delivering. Years of careers and $33.2 million vanished, with two days notice, over the December holiday break.
Here's how it was supposed to work: Consumers would buy a device that came with the right to listen to unlimited music for the life of the device or seven years. Unlike Nokia's device-tied "Comes With Music" service, if they bought another Beyond Oblivion-enabled device from another manufacturer, all of their music, preferences, playlists, song ratings, and so on would transfer seamlessly there. Even better, according to what the company's chief marketing officer Bruce Henderson told Evolver.fm last August, customers would also be able to transfer all of that music to iOS and Android apps to keep their collections alive that way.
Everybody would have won — in theory anyway. Fans would have had unlimited music that felt free and yet was guilt-free. Music labels and publishers would have been paid. Cellphone manufacturers and carriers, which would have footed the bill minus whatever costs they could pass on to customers, would have acquired a powerful new marketing tool with which to differentiate themselves to music fans.
In practice, the S.S. Beyond Oblivion now sits at the bottom of the ocean, though the man who was at the helm, CEO and "Imagineer" Adam Kidron, apparently harbors plans to resurrect it still. According to one former employee, the CEO of the bankrupt company is still being paid $325,000 per year as he seeks more funding to get it afloat.
After speaking with multiple sources from the now-defunct company, Evolver.fm, which agreed to keep those sources anonymous, has come to an understanding of what went wrong with this once-promising startup.
Actually, it was more than one thing. A long list of missteps led to the company's staff being laid off unceremoniously during the holiday break with two days notice and zero severance pay. Half of them were on vacation when they heard the news.
As one source put it, "The CEO was insane, and that's why the business failed."
A recurring theme was of CEO Adam Kidron making promises he couldn't keep, such as promising a potential partner that his engineers could deliver client software by December 2011, when his engineers had said it wouldn't be ready until April.
It was clear as early as October that the company was in major trouble, with multiple high-ranking employees threatening that they would resign if the CEO were not replaced. The investors — Allen and Company, News Corp., Intertrust, and Wellcome Trust — "felt oversold too many times" and "lost confidence," and could not reach an agreement on how to continue funding the company. Two of them, Wellcome Trust and Intertrust, would only invest more in the company under a new CEO (News Corp.'s own Jack Kennedy was apparently an option), while News Corp. and Allen and Company continued to support Kidron.
Beyond Oblivion's commercial partners were apparently ready to move towards the end, despite the delayed software and lack of sufficient licensing agreements, but the investors had already had enough. The company announced to its staff on December 28 that they would be laid off on December 30, 2011. The company officially filed for bankruptcy about a month later.
In the end, Beyond Oblivion had ingested 7.6 million tracks into the service, built multiple desktop apps, had its iOS app approved by Apple, built an Android app, and inked deals with two of the four major labels (Sony and Warner) with the other two "very close" to being signed. However, it lacked any deals with publishers and hardware/carrier partners — both of which would have been necessary to launch.
Wrong Business Model
In order for Beyond Oblivion to work, it would have had to extract about $50 per device from wireless carriers, smartphone manufacturers, or some combination of the two. However, those companies operate on slim margins ($30 or less per handset in profit after subsidies), so to ink a deal with Beyond Oblivion would have meant eroding those thin margins, or even going into the red on each device sold.
According to our sources, plenty of companies were interested in Beyond — including HTC and possibly Samsung — but not many were large enough to do a deal for hundreds of millions of dollars, which would have enabled Kidron to cover his advances not only to labels, but to the publishers and performing rights organizations he ignored until it was too late. Employees of the hardware companies and carriers that were large enough to make the deal were apparently reluctant to "put their heads on the block," essentially betting their careers on Kidron when he lacked a successful track record in the technology space.
"Launching was built around a home run model," said one source. "The $150 million in prepays to the labels required that we go out and secure at least $200 million in commercial commitments… and there were very few OEMs and mobile operators with the scale to offer us a $200 million deal… and we didn't have the scale to launch, say, 10 different $20 million deals concurrently… Even with the scale, there was too much venture risk for most commercial partners to make a significant commitment to an unproven technology platform, an unproven business model, a company that had not yet launched, and in the end, we were not able to find a single partner that would commit $200 million or more to our unproven company… HTC was very interested but $200 million was more than they could swallow."
"The label prepays should have been zero dollars, and if we couldn't avoid some lump sums, those lump sums should have been staggered over the first 12-24 months post-launch," the source continued. "By agreeing to have $150 million upfront, which I think was a fundamental error on the part of the CEO and CFO, they put us in this 'must hit a home run' situation — swing for the fences, and if you miss, you walk off and you're out, and that's exactly what happened to us… With no prepays, or significantly lower prepays, we might have had the opportunity to sign a much smaller deal or two with second-tier operators and some combination of handset makers that would have allowed us to at least launch, prove the technology, prove the business model, and grow at a meaningful pace while still sending money to the labels."
If News Corp.'s Kennedy had taken over, he would have likely renegotiated the label deals along those lines, but he never got the chance.
"It's just crazy in this market, in these days, that the labels would ask for prepays," continued the source. "But it's even crazier that we would agree to them, and that any investor would allow us to agree to them. I don't blame the labels for asking for it; I blame us for agreeing to it. Part of the reason I believe why our CEO did agree to it was he wanted certain concessions on the labels' part — he wanted the per-device fees to be low, he wanted them to be flat, and he wanted worldwide rights — another fundamental mistake."
Beyond Oblivion's website is gone.
Record labels and artists who own their own songs have a monopoly over their copyrights, which is as it should be. If I write a song that never existed before, then I create a recording of that song, I should own it, at least until I sell it to a label and publisher. However, the fact that copyrights are essentially monopolies means that companies must take extra care when negotiating with labels and publishers. There's nowhere else to get those songs.
Kidron promised potential hardware partners that a Beyond Oblivion user in Bangladore could access the same music as another user in New York City. Beyond Oblivion then had to try to pressure the labels (not to mention the publishers it neglected to sign) for global rights to launch worldwide right off the bat — full price for "A" countries like the U.S. and Western Europe; 50 percent price for "B" countries; and 25 percent for "C" countries such as India — instead of launching country by country to establish revenue and credibility, the way Spotify and other services have.
"In arguing for worldwide rights, he put us in a position where we had larger prepays," said one source. "We didn't need worldwide rights — it's not like we were going to launch in 15 territories inside of a 12 month period. We could have launched in the U.S. or some territory first, proved that it worked, then gone back and negotiated for the next two or three or four. By trying to do everything at once, we ended up in a position where we couldn't do any of it."
Pressuring negotiating opponents who held all the cards was not an ideal strategy. And due to Kidron's promises to hardware/carrier partners, they then insisted on a global offering as a major deal point, making a difficult situation practically impossible.
Cult of Personality
By all accounts, Kidron is a person of extreme intelligence and charisma. One person used the word "genius," claiming that Kidron was capable of charming senior employees, partners, and investors, "like the best used car salesman in the world." According to one source, Kidron "thought he could be Steve Jobs — not listening to other people [and] driving stuff the way he wanted to do it."
However, he was out of touch with some of the hard realities of his business, including the need to secure publishing and performing rights organization deals. And when faced with those hurdles, he refused to revise strategies, preferring instead to stay the course — an approach that (mostly) worked for Steve Jobs, but not for Beyond Oblivion.
Kidron spent upwards of $25,000 on his travel each month to meet in person with all of the hardware partners, music partners, and wireless carrier partners that would have needed to be involved in such a comprehensive, partnership-driven service. The company's outlay on "repeated" meetings and "unnecessary" events was pegged at around $100,000 per month — and that was flying coach.
In addition, it paid 5-10 "heavily-underutilized industry experts" $10,000 per month each, allegedly including analyst Mark Mulligan, who shot a video with Kidron and appears to be listed as one of 406 creditors in the company's bankruptcy proceedings:
Beyond Oblivion had about 90 employees in four offices (New York, Salt Lake City, Mountain View [California], and London) most of whom thought the company was sitting pretty with $77 million in investment. In reality, though, about $44 million of that was contingent on deals with all four major labels and possibly other thresholds that were never reached. Kidron had allegedly insulated himself from all but the most senior employees of the company before that as well, so "everyone was extremely surprised" when the company shut down.
Adding insult to injury, Kidron apparently never told employees how much their stock had been diluted ("to a crazy extent"). Even if it had succeeded, the stock that had lured key employees to the company would have been worth far less than they would have anticipated.
Silly Name, Zany Stunts, Bleeding Cash
Just about every senior employee and advisor retained by the company hated its product's putative name, BOINC — the result of $500,000-worth of "brand design" by an outside marketing firm. Kidron apparently loved the name, but when he shopped it around to potential hardware and carrier partners, they all objected, and would have called their products something else had the plans gone forward.
"We spent all this money building out a brand identity, preparing marketing, advertising, and all this other stuff, for something we could never actually sell," said a source — plus about $200,000 on parties with the marketing firm in question, which produced the following video for the never-launched product:
Beyond Oblivion also spent money on prototypes for unpopular cellphone platforms and Linux-based set-top boxes, including a scrapped prototype based on the Songbird platform. The company burned through $20 million of its $33.2 million in the final ten months, less than $1 million of which was paid to employees. "The rest was marketing expenses, operations, and some other interesting things that the CEO wanted to do," including $100,000 on hardware device prototypes that would have had to compete with Apple's iOS devices "because our CEO had grand plans to kick Apple's ass and take over the hardware space as well."
Investors and employees were also worried about Kidron's approach to the Consumer Electronics Show. At CES 2011, he allegedly hired a Steve Jobs impersonator to interrupt business meetings between himself and would-be partners "as a joke." The Steve Jobs look-alike also apparently "roamed the show floor to fool attendees, while an employee filmed the whole thing" — a film that may have been meant for promotional purposes somehow, but which was only seen by employees.
For CES 2012, Kidron planned to hire models to walk the CES show floor with the words "wanna boinc?" on their panties and T-shirts, in the case of the females, or on their chests in the case of Speedo-wearing males. All of the models would have offered demonstrations to CES attendees, giving them a button with the words "I boinced at CES" printed on them. The buttons would also have functioned as the invitation to a private party at a Las Vegas strip club. These plans were scrapped in November as the company unraveled.
"And you wonder why somebody like HTC wouldn't necessarily want to do business with us," said a source.
In addition, Kidron paid a "famous graphic novel artist" to make a comic book and video about the upcoming "music revolution." A "young urban character" would stand on a pile of MP3 players talking about "insurrection, music liberation day… and the freedom that is Beyond."
Ultimately, our sources still believe that the Beyond Oblivion concept could work. It's just that Kidron's tactics were a lesson in how to take a tough situation and make it impossible.
As one former Beyond Oblivion employee put it, "It will be a huge loss to the industry if [device-bundled music] never happens."
"Conceptually, the idea is very sound, and it's a good one," said another. "There are certain players in the constituency that need to adjust their risk averse-ness in order work with it a little bit better on making the threshold not so high to be successful. The way that the advances were proposed… was probably a mistake. It was too much thinking that it's an all-or-nothing proposition, which is how it was presented to everybody. I don't think it had to be that way… There aren't many companies that are willing to do deals for hundreds of millions of dollars with a company that's unproven. I mean, that's just ludicrous."