PEOPLESOUND.COM: Behind The Scenes

Ernesto Schmitt, President of Peoplesound.com

The idea of selling music over the Internet has become hugely popular — but many musicians remain worried about issues such as copyright and publicity for their work. Paul White puts these concerns to the founders of Peoplesound.com, one of the best‑publicised on‑line record companies working with unsigned artists.

If you've read any of the music papers over the past few months, you can't have missed adverts for Peoplesound.com. They're an on‑line record company with a difference — the difference being that they deal almost exclusively with unsigned bands, facilitating on‑line CD sales and free MP3 downloads without tying down artists to exclusive contracts. The artist doesn't even have to pay to have CDs manufactured up front because, as I discovered on my tour of the facility, CDs are burned to order, eliminating the need to keep stocks. So far, Peoplesound.com is only one year old and from the musician's perspective, their deal sounds almost too good to be true. I asked Ernesto Schmitt, one of the company's founders, how they came up with the idea for Peoplesound.com and what it really offers the unsigned artist.

So what's the story behind Peoplesound.com?

"I used to be a strategy consultant for the Boston Consultancy Group, and at the time I was involved in the post‑merger integration of Universal and Polygram. I remember looking at the various pieces of analysis and thinking that the conclusions being drawn were not the ones I would arrive at. For me a very different story emerged — that of oversupply in the music industry, consumer confusion over what music to buy and about the way in which the industry finds artists who are commercially viable. There's also the question of how to launch and market those artists. I realised that all these issues could be dealt with through new media.

"Peoplesound.com is built on three principles: the principle that through clever technology, you can help consumers discover music, that an entire new generation of artists need to be distributed, but can't be distributed through the traditional channels, and that the music industry can benefit enormously from learning what works where and from interpreting the data that companies such as Peoplesound.com generate. In turn this will enable them to be much more targeted in terms of which artist is released where. Everybody wins. Artists win because the system is more democratic than it was in the past: previously you had to struggle just to be heard, and then you had to fall in with the A&R person's perception of what the future musical trends were going to be."

Music Selection

How does your selection process work? Presumably you can't accept every artist that comes along?

"We only reject around 20 percent of what is offered to us, and with those we do reject, it's not a question of whether these guys are going to sell five million copies or not. We only reject something if we think they've got a bit more homework to do on their music. If you put 10 different people in a room to listen to 10 different tracks, the chances are you'll have full agreement over which is awful and which is not bad, but there will be violent disagreements over the difference between 'not bad' and 'will sell 10 million copies'. The beauty is that we'd rather have that debate decided by our consumers than by our A&R people."

Do you see the Internet as being fast enough for people to browse audio, especially as the demands for bandwidth continue to increase?

"On the service side, we're having to deal with an almost exponential growth in content, and what we've done is to ensure we've scaled all of our systems such that it doesn't matter whether 100 people or 10,000 are searching on the site. On the client side, you can stream music fairly satisfactorily at 32K/second over a 56K modem. It takes a while to download an MP3, but broadband technology is becoming increasingly available, and the way I use the site now is that I don't even download any more — I just stream MP3s at 128K/second stereo, which is near‑CD quality. I think that's the experience people are going to have with on‑line music in the near future."

I imagine all the new telephone schemes to provide fixed‑fee, unlimited Internet access will help.

"Absolutely — market conditions are now becoming more favourable for web sites such as Peoplesound.com. Mind you, after people received their first quarterly phone bill, they realised that the free Internet services weren't actually free — unlike in the US."

Don't you see a danger in that if people are given unlimited access for a relatively small cost, they'll spend so much time on line that the whole system will get clogged up?

"Our infrastructure can cope, but the phone network is up to the telephone companies to maintain. Over the past couple of years, the infrastructure has been improved significantly and I think this will continue."

The Peoplesound Contract

What is the financial contract between you and the artists? It seems fairly loose in that you don't try to tie up the artist's copyright or their publishing rights.

"One of the challenges that we had to overcome is that the deal is almost too good to be true for the artist. Traditionally, artists don't receive very fair service from the music industry, they don't get their demos returned, often they're not even heard, and if you do get a record contract, you're signing away your next five daughters. We could understand when people said 'Hang on, how does this work?

"The beautiful thing is that we don't need to make money from the artists. We make money from the way consumers interact with music on the site and from advertising. We're not going to charge you, we're not going to restrict you and we're not going to take your copyright away. Just give us your music, and when you're ready to leave, you can just go. If you get a major record deal as a result of being on Peoplesound.com, we're not going to ask for a percentage.

"For a limited time we were giving a £100 advance to artists. That's been phased out now, but we may reintroduce it. To date we've had over 6,500 artists join us, which makes us Europe's biggest site of this kind. Around 70 percent of those artists are from the UK and all the artists' music is available through all our European sites as well as the UK site."

How many new CDs land on your desk every day?

"It fluctuates, but it's usually between 50 and 100, and we have had up to 130. Each track on every album is listened to and the track details are entered onto a form that is then used to drive our search engine. We're also working with a number of record labels, both formally and informally, for us to act as A&R advisors, and we have some artists who are doing phenomenally well — Drawbacks and Stumble come to mind. We've had around a dozen bands signed since joining Peoplesound.com.

"At first the record industry was extremely sceptical, asking 'Who are these new people?' But now it's turned around and they're mostly very positive. In fact some of the companies have been working very closely with us, trying to keep all the benefits for themselves rather than sharing with other companies — so that's an encouraging sign that we're being successful."

What's in it for you if a major company does pick up one of the bands you've been promoting?

"There are three things: the first is that the record industry realises that the best place to find top new bands is Peoplesound.com. Secondly, the artists realise that Peoplesound.com is the short cut to a good record deal, and thirdly, the consumers realise that we've got some great music."

So you don't have to take a great chunk of somebody's career to make a living?

"No. Concepts are a dime a dozen on the Internet, but the devil is in the detail. We have something like 60 competitors in the UK alone, none of which come anywhere near us because of the way they work. There are companies that charge artists to get onto the site, but that results in fewer artists, and consequently fewer consumers visiting the site. There are other people who want a share of your publishing rights, there are sites with no quality control — it's details like that which determine success or failure. We took a number of gambles, but so far so good."

Further Promotion

I understand the basic arrangement is that you put up artists' material and split the profits from CD sales with them (after deducting VAT and the cost of manufacturing the CD), but I believe that you also have a system for promoting artists who you think are special in some way?

"The way it works is that the entry point is totally democratic. Each genre has a popularity chart that is dynamically generated based on the download frequency. It's up to the artist to demonstrate that they have or can generate a fanbase. Maybe one of the artists we didn't like much will get thousands of downloads a day from their existing fanbase, and those who make it to the top attract the attention of our A&R team. We probably focus on around 200 top artists at any one time, and we pick a number every month to get a full PR backing via Coalition PR, who make sure that they get reviews and features in the main music mags. Additionally, we have an entire synchronisation department run by the former head of music licensing from MCPS who goes out trying to place that music in films, adverts and commercials. We also work with artists in a traditional A&R way, advising them."

If an artist is already PRS‑registered, is that a benefit or a problem?

"PRS is no problem — they simply impose a blanket licence for streaming audio airplay. MCPS is slightly more complicated because they haven't quite got their head around the fact that we're on the side of the artist and that artists welcome promotional downloads. Some of our artists wouldn't be heard at all other than via Peoplesound.com except for the audience in the pub on a Friday night when the band play. The fascinating thing is that MCPS act on behalf of the holder of the copyright, and if the copyright holder wants to make a piece of music available as a promotional download, MCPS shouldn't have to get involved in that, and doesn't legally have mandate to do so. What the music industry is doing right now is trying to figure out how to protect the rights of artists while at the same time using new technology to promote them."

You also sell compilation albums. Does that generate royalties for the artists?

"We put out a whole series of compilation albums. At the moment there are about four but we're launching around 30 of them shortly, mainly genre by genre. The A&R people pick a selection of great tracks and the royalties are shared out pro rata between the artists."

Is there any danger that by putting your best track on a compilation CD, the major record companies will be reluctant to pick it up on the grounds that it's already available to the public?

"We haven't had that problem so far, and let's face it, our compilations don't sell five million copies, but even when you do have a compilation that sells that many copies, that's often the way to get a track discovered. Of course it would be wrong to claim that we are an altruistic company — we're in business to make money. For example, if we do a synchronisation deal and place you in a Head & Shoulders advert, we take 25 percent; the difference is that you're not bound to us. We've had one track used on a major TV commercial already and we're keen to encourage the market to use our content repository for that purpose."

Contacting Artists

Peoplesound.com management. From left: Bruno Heese, VP International Development, Martin Turner, Chief Operating Officer, Paul Levett, VP Technical Operations and Ernesto Schmitt, Chief Executive Officer.

How can record companies or other interested parties contact an artist? Can they do it directly from the page in Peoplesound.com or do they have to come via you?

"They do have to come via us at the moment, simply because we want to make sure that the interaction between labels and artists is of a high quality. You don't want thousands of jokers contacting you. Having said that, there's never been a request that we haven't put through. Similarly, if somebody sends in an email for a particular artist, we'd always forward that.

"The other thing we've done to allow musicians to talk to each other is to set up a forum, and we've already added a comments facility to the web site. If I look at the postings, it's DJs commenting on tracks, artists commenting on artists and consumers commenting on artists — and that's great."

Your usual process is to burn CDs as they are ordered rather than keeping a large inventory of albums, but what happens if an artist already has CDs to sell?

"Selling existing CDs is a deal that we offer mainly to labels rather than individual artists because carrying that much stock becomes an operational nightmare. We've done it with a number of labels, but we only stock around 20 CDs at a time. The reality for most artists is that they're self‑producing their albums, and for them, having a batch of CDs produced is a big capital outlay. With Peoplesound.com, it's incremental revenue because there's no initial outlay at all. The way it works is that the artist sets the price of the CD themselves, which can be anything from £3.99 to £11.99. We then deduct 17.5 percent VAT plus £2.00 for the manufacturing cost. The rest, which is the notional profit, is divided 50/50 between us and the artist. That means that artist receives something like 40 percent of the retail price for an album priced at £11.99 or around 20 percent of an album priced at £3.99. To be honest, these custom‑burnt CDs are more of a loss leader for us. We're doing it largely for the benefit of the artists, as there's not much money in it for us and there's a lot of manufacturing complexity, but it's something artists demand and need."

Where's The Profit?

Martin Turner, Chief Operating Officer.

This sounds literally too good to be true as far as the artist is concerned. How exactly do you make your profits?

"It's all in long‑term potential. The way we like to think of this is as the next generation of music company that has direct access to artists, and consumers who ultimately pick the winners themselves. Current revenue comes from selling CDs, advertising and selling information to the music industry. Building the company is a three‑stage process: one, acquire content; two, generate traffic; three, extract information from the interaction between the consumer and the music. At the moment, the MP3 tracks on the site are those the artists select as being available for free download. We don't have any 'charged‑for' MP3s at this time, though we may review the situation when more Internet bandwidth becomes available to our customers.There are also two record company majors who are seriously considering the possibility of distributing our music to retailers in the high street."

Looking further ahead, what are your future plans for expansion?

"There are two axes for expansion, the first of which is geographic: we already have offices in London, Munich and Paris. We'll be adding Italy, Spain and the Netherlands in the near future. We won't try to make inroads into the States until after we go public, because you need such a huge cash investment to enter the market in the US. There's no point burning small amounts of cash and getting nowhere.

"The other axis is the value chain, which means developing the core business of artist content, traffic and our relationship with the music industry."