Interview with Sky Kruse, CEO of LightningCD

We have developed a service that lets customers purchase a compact disc online and our software downloads all the necessary components to create the CD directly via their own computers. Our system utilizes the CD burners that are built into most computers.

This lets them have the CD they are looking for in 30 minutes or less without the inconvenience of having to run down to the mall or wait for Amazon to ship it. Included in our solution are the CD cover, artwork, liner notes, etc.

In 2001 we were looking for a new idea. It was fairly obvious that music downloads were going to be a big thing. Although at the time the only downloadable music was available through Napster. The only legitimate way to purchase music online was via an ecommerce company. It occurred to me that I shouldn’t have to wait a week and a half to get a CD.

I realized that I had the ability to burn a CD using my own computer. Using my CD burner I could get the music right away. At the time, the only way to do that was Napster.

It didn’t seem like a sustainable business model. Folks seems to be willing to purchase music online as long as they are getting the same quality as they would receive in a store.

Customers can purchase individual track or entire albums from us. That is a feature that we added due to customer feedback. They wanted to download different tracks and create their own greatest hits collection.

Apple has made the biggest splash with iTunes. Basically, the focus has been on individual track downloads. The differentiation between those providers and ourselves is that those services only provide individual song tracks.

Exactly, users can play a CD in any device that they own. Their listening to a given song is not limited to their computer or iPod. We offer a different distribution channel for music.

I give Apple a lot of credence for legitimizing digital downloads. They have convinced the music industry that this market is here to stay. We have a sufficiently different offering than Apple and there is a lot of room in this market space.

Worldwide it represents a $30 billion business. The majority are in seven countries: United States, United Kingdom, France, Germany, Japan, Australia, and Canada.

We started off with individual CD downloads, primarily because we saw this as a distressed area. The music industry has been in trouble for awhile and is looking for a better way to do things.

We see ourselves opening up the system to downloading software. Since we are going for entertainment brands we will also be including video games as well.

As DVD burners become more prevalent, we definitely see ourselves going after this market as well. The infrastructure needs to expand to allow for this capability. DVDs take considerably longer to download than CDs and until broadband is widely accepted and the speeds are there to handle it we will continue with our core focus.

In certain respects we have a number of different customer bases. We have the artist and music labels that are looking to sell music and we have customers who are looking to purchase music. The music labels and artists are relatively responsive to the idea.

It gives artists who are just starting up the ability to get their music out there and make some money.

We currently have just over 1,300 CDs for sale. We started growing our list in July 2003 and have been growing since then. We started off with approximately 20 albums and have grown from there. Currently, we are in discussions with smaller and larger labels about increasing our library.

There isn’t a requirement to prepress thousands of CDs. There are no storage, maintenance, or opportunity costs associated with partnering with LightningCD. Because the customers burn their own CDs their are no distribution costs.

Our catalog is still relatively limited. The average CD store will have twice the 1,300 CDs that we have. At this stage we don’t have Britney Spears, Eminem, etc. on the site. Basically, we have a fair bit of depth in a couple of niches and we have targeted those niches heavily.

We have been advertising online via sites tat reach our target markets. Our goal is to make consumers aware of our catalog. Keyword search on artists and albums has also been successful for us.

In order to keep the relationship fairly simple we have set up our partners with revenue share deals. Typically an artist that is signed with a major label will receive 5-7% of the sales price of an album. Only the large sellers make a lot of money via the traditional system.

We pay the artist 50-60% of the sales price. If a band refers a sale to us then they receive 60% of the sale price. Each of the artists featured on the site provide free marketing and PR for us through their concerts and events. They are rewarded for doing so with a higher percent commission.

Music labels are required to burn thousands of CDs and pay for shipping costs to different warehouses or stores. Then they will sit on the shelf for quite a while, which brings in inventory costs. We have no inventory costs, simply because each CD is stored on our server and can be recreated as an exact copy with our secure system.

There has been a longer sales cycle. Music Labels have a lot more individuals that are involved and want to review the contract. We have a fairly simple one-page contract that puts everything into plain English.

They will decline over time for a number of reasons, but they will never go away completely. One reason they will decline is that quality is an issue with the file sharing networks. Established companies can provide CD quality digital music, but the file sharing networks have issues with quality.

One thing that unites this group is a passion for music. All of us have at one point or another been musicians. We are looking for folks who have their heads on straight and have a good perspective on business.

You have to keep a positive outlook on things, even when the environment is going more slowly that you would like. Things tend to move as quickly as you would like. Also, it is extremely important to network both personally and professionally. We have closed more deals through contacts than we have through the standard sales process.