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Behind the music: the 'N Sync-MSN deal
(IDG) -- Members of 'N Sync are known to lurk in chat rooms under assumed names, checking out the latest rumors that the public spreads about them -- a practice that undoubtedly drives their female devotees mad. (Hey, it's easier than hanging around the food court.) To the band, going online was synonymous with surfing the Web and visiting chat rooms. That is, until the band's business representatives approached them about forming an Internet partnership with Microsoft's MSN portal, which the members of 'N Sync hadn't even heard of.
But that's not a fatal flaw for a business venture, of course. In college, a pre-"Air" Michael Jordan swore by his Adidas sneakers and was dismayed when his agent signed an endorsement deal with some company named "Nike." Similarly, the new 'N Sync-Microsoft partnership, announced a few weeks ago, could influence the music industry the way Jordan's imprimatur did the sneaker business.
The software giant is hoping that the stupendously popular platinum godlets will lure teen subscribers -- their capacity for slavish loyalty to the band already confirmed -- to its $21.95 a month Internet access network, one of the few tech sectors it has failed to dominate. The new service, NSync@MSN, will provide the same Net onramp as MSN.com, but the draw for the teens will be its media player and instant-messaging system with skins featuring the band, and the promise that subscribers will have exclusive access to 'N Sync photos, videos, newsletters and chats.
The 'N Sync-Microsoft arrangement involves a little-known Internet advertising network called MusicVision, which had the corporate smarts to find a new avenue of income for its client, 'N Sync. In addition to an advance payment, the band will get a cut of every fee that subscribers pay Microsoft for the Nsync@MSN service during the three-year partnership. (MusicVision also will get an advance payment and a share of the new MSN venture.) Sources estimate that 'N Sync eventually could reap between $20 million and $30 million from the partnership. "It's a perfect fit between the No.1 band and the No. 1 computer company," gushes 'N Sync business manager Barry Klarberg.
In many ways, 'N Sync owes this chance at a new fortune to the bursting Rolodex of Steve Leber, MusicVision's director of corporate strategy. In rock's heyday, Leber, with his partner David Krebs, served as manager to some legendary acts including AC/DC, Aerosmith, Def Leppard and Ted Nugent. A pioneer of branding long before the term was coined, Leber recalls that Aerosmith was one of the first groups to merchandise its own T-shirts. Leber was also the producer for the theatrical production of Beatlemania, a show that grossed $70 million worldwide. Last February, Leber joined MusicVision, along with his son and nephew, with the mission of maximizing bands marketing heft. "Music is a commodity, but artists are worldwide brands," Leber says. "They can't be overcommercialized."
MusicVision co-founder Mark Weiss, a former Internet ad sales representative, looked to Leber to help him expand the company's original business model, which was to aggregate a group of music Web sites into an advertising network, much the way Conde Nast sells ads for its magazine group. After building that end of the business to include over 750 sites -- a network, according to MusicVision, that logs 10.3 million unique visitors per month -- Weiss saw a bigger bounty: official artist Web sites like NSync.com.
Leber's new rule: Find other sources of income
Artist sites generate huge traffic, but Weiss determined that they are underexploited, used only for e-commerce and other merchandising. With the blessing of the artists and their managers, Weiss set out to reconfigure these sites into tres modern brand extensions, complete with sponsored radio stations, exclusive video airings and the usual chat rooms and garb for sale. Crucial to its success, MusicVision also became adept at all the messy back-room Web work, such as designing the sites and making sure they run properly. MusicVision's network includes the official sites for acts such as Christina Aguilera, Matchbox 20, Alanis Morissette and 'N Sync.
"We knew that we could generate revenues by putting together the largest music audience on the Internet," Weiss says. "Everyone was focused on digital distribution of music, but we focused on what everyone else was ignoring."
Operating artist Web sites is also a savvy business move - a Warren Buffett-like bet on consumer staples, which seems particularly wise in a time of an advertising slowdown, such as the current dot-com malaise. "We're working with artist to create new forms of royalty streams that have never been thought of before," Leber said. "It's Leber's new rule: Find other sources of income."
Weiss and Leber put this maxim to the test with 'N Sync. 'N Sync, whose February release No Strings Attached has sold more than 9 million copies, also has one of the Web's most visited sites. According to PC Data Online's November ranking of celebrity sites, 'N Sync topped the list with 716,000 unique visitors. In August, 'N Sync business manager Klarberg approached MusicVision with the group's wish to set up more regular online chats with its fans. "Originally there was no idea for a co-branded Internet service or a service provider," the manager says.
Leber already had been thinking about some sort of partnership with an Internet service provider. He admired David Bowie's homegrown ISP, BowieNet. But Bowie's operation is tiny compared with the industry giants. Leber saw more opportunity if he partnered with one of the big players. He says he initially considered five or six ISPs but had the best feeling about MSN as a potential partner. He had an old friend at Microsoft, Bob Bejan, who had become general manager of MSN Strategic Accounts. In 1990, Bejan and Leber co-produced the $4.5 million stage production of Teenage Mutant Ninja Turtles "Coming Out of Their Shells" tour.
Going after AOL where it lives
Aside from the personal contact, MSN had long been trying to boost its own ISP business in the face of AOL's dominance. According to market research firm the Yankee Group, AOL has 23.8 million subscribers compared with just 3.3 million for MSN. In September, Microsoft relaunched its service with a new interface and is backing this effort with hundreds of millions dollars in promotional advertising.
When Leber offered MSN the tantalizing prospect of millions of teenage girls jettisoning their AOL accounts for 'N Sync exclusives, Microsoft immediately swooned over the idea. "It's a great way for MSN to reach out to a young-adult audience and work with them as they get online," says Deanna Sanford, lead product manager for MSN. "They are consumers making the decisions of tomorrow." Analysts of the ISP market agree that the deal could be huge for Microsoft. "AOL is known for targeting a teen audience, so getting kids to ask Mom and Dad for MSN because they want 'N Sync helps Microsoft's underlying strategy of taking on AOL," says Rob Lancaster of the Yankee Group. "And considering MSN's massive marketing, the cost of the 'N Sync deal is minimal compared to their overall budget."
Leber says the deal was put together in less than 90 days. From the band's perspective, the members can allay their fears of an impending teen-pop twilight by aligning with a deep-pocketed company in a long-term business arrangement. And with the combined technical smarts of MusicVision and MSN, the new service also will allow the band to break some technical barriers to stay closer to its audience. "You're limited to what you can do on a Web site," said Klarberg. "Microsoft is going to make our job easier to reach out to the fans."
It's too early to say how the fans are responding. While the band, MusicVision and Microsoft all worked on creating the CD-ROM for new subscribers, complete with pictures of the 'N Sync on the disc, the new service doesn't yet have its own home page; it's scheduled to debut by next month. And 'N Sync was able to distribute the discs at only a few concerts before retiring from the road for the winter. They'll renew the marketing push on next summer's tour with 'NSync@MSN banners and free CD-ROMs at concerts and once-a-month live chats on the service. Other methods of promotion include ads on NSync.com and the MSN.com Internet portal and perhaps bundling the software for the ISP on the next 'N Sync CD release.
None of the parties involved in the partnership foresees the new 'NSync@MSN service competing with the 'N Sync Web site. Klarberg thinks that the two target different markets. The Web site can continue to sell T-shirts and souvenirs while the MSN service will have exclusives like backstage footage from concerts. Despite the information-sharing that has become endemic to the Internet, MSN hopes that its exclusives aren't pilfered from the site and distributed to the Web at large. "At some point you have to have faith," Sanford says. "I have a feeling when you're a fan with a newsletter or picture that has exclusivity, it's good not knowing everyone has access to it."
Could 'N Sync lead the way for a pay-to-surf society?
Leber sees the divide between the free site and the paid site much like the difference between free TV and cable. But he also envisions another tier of premium channels on an ISP that could charge customers a fee beyond basic membership, much like HBO and Showtime charge more than basic cable. "There's not enough artists out there yet, but someday this type of service will be premium," Leber says. "You'll have to pay extra to get 'N Sync. A person who signs up for the regular service won't get the music side." Sanford says that MSN may be tempted. "Does it make sense to work with more bands?" she asks. "In different genres or different age groups? We're exploring that."
Of course, the branded ISP -- like the Web site -- can't play the band's music. Those rights belong to Jive, the group's label. By extending the band's exposure on the Web and away from the label, is there any chance that MusicVision eventually replaces a label's role of distributing music in a digital universe?
Both Weiss and Leber respond with an emphatic "No." Leber believes that record companies can focus on their core expertise: selling records. And in a global music environment, those sales opportunities are greater than ever before. "In the old days, a good record could sell 4 million to 5 million copies, but today, artists can sell 10 million to 15 million records," says Leber. "We want to work with record companies to sell more records because they do that better than anyone."
Leber sees MusicVision branching out into novel partnerships between bands and new technology companies, which produce portable digital assistants, wireless products and other digital products. And in a hyper-branded world, he doesn't thing bands are immune to a little business-side magic. Take tour dates, for instance: Leber says bands could get a sponsor to pay for a tour's announcement, or search engines could pay to get access to the list of venues. "What we do at MusicVision is take information and make it valuable," Leber says. "If I can get eyeballs, I can accomplish great things for our bands." Backstreet Boys, are you listening?
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