Yangaroo hops to digital music
With a 25-year history in the music business, Cliff Hunt was quick to spot an opportunity when the concept of downloading digital music files over the Internet began to take off.
Eight years ago, he and a partner acquired the rights to a Vancouver firm’s keystroke recognition technology – the software uses biometric identifiers to determine who is typing in a password on a computer – and set about figuring out a way to apply the feature to music sales.
Then file-sharing site Napster came along and turned the recording industry on its head.
"Music files were everywhere and rights didn’t matter anymore," says Hunt, 59, the chief operating officer of Toronto-based Yangaroo Inc. "We had to rethink our whole strategy."
He ultimately decided to focus on the longstanding relationship between record labels and radio stations – an area with which he was intimately familiar. A trumpet player who played his last gig in 1973 at St. Lawrence Market, Hunt has also worked as a band manager, with a record production company and as a music publisher.
Hunt saw a way to streamline the way labels promoted and distributed their product to radio stations, which has traditionally required printing thousands of CDs, packaging them with promotional material and ferrying them across the country.
In addition to being expensive and wasteful – most promos end up in the garbage can – the approach made it easy for highly anticipated releases to be leaked on to file-sharing websites well before they were played on the radio, let alone available for purchase in stores.
Says Hunt: "The kid that delivered the tape from the recording studio to the record company would be burning it in his car on the way. The next thing you know it’s up on Napster or Grokster or whatever the file-sharing system of the day was."
Enter Yangaroo. Co-founded in 1999 by Hunt, the company gives the labels a way to distribute their music securely over the Internet using the firm’s encryption technology and digital watermarks, which allow the file to be tracked if it ends up being leaked.
The firm, which completed an initial public offering in 2003, already has Canadian distribution agreements with EMI, BMG Canada, Universal Music Canada and Warner Music Canada and has signed exclusive deals with Canadian radio heavyweights, Astral Media Inc., Corus Entertainment Inc. and Rogers Communications Inc.
"Virtual every single that goes to radio in Canada today goes through DMDS," says Hunt, referring to Yangaroo’s Digital Media Distribution System.
But the key U.S. market has so far been more difficult to crack. While Yangaroo did 1.3 million deliveries in the U.S pay day loans. last year and has deals representing 1,900 individual radio stations, the company continues to rack up losses as it tries to establish itself in the industry. In 2006, Yangaroo posted a loss of $2.1 million, or 7 cents a share, on revenues of just over $430,000 – most of which came from the Canadian market, according to Hunt.
"What you’re doing is changing a culture of people that have been used to handling discs for the past 50 years," Hunt explains.
He says the strategy is to initially offer its services for free and then gradually introduce pay-per-use charges.
Investors, however, appear to be running out of patience. Shares of Yangaroo, meanwhile, have fallen from a high of $1.40 in mid-2003 to around 25 cents.
Inside the company’s development centre, located in Toronto’s Liberty Village neighbourhood, about 20 employees work at desks scattered beneath the exposed beams and ductwork of a converted industrial space. Music posters cover the walls, toys cluster around computer monitors and the sounds of indie rock filter through the air. The look is jeans, hooded sweatshirts and pierced ears.
Almost as if on cue, a shaggy-haired employee with a beard picks up the telephone to field a call from a curious radio station that wants to be added to the distribution list. Hunt smiles.
In some ways, the file-sharing phenomenon that’s decimated the recording industry has created a unique opportunity for Yangaroo. Big labels are desperate to cut costs and protect what little control they have left over the music they distribute. Small independent labels, meanwhile, are a promising growth area as more artists seek to take control of how their work is distributed in a rapidly changing industry.
Hunt is also keen on pushing the company as a more environmental solution since its technology not only eliminates the need for CDs and their jewel cases, but also the myriad of promotional material that gets shipped along with them.
But an even more lucrative opportunity may come from exclusive ownership of the DMDS technology. Yangaroo is currently waiting for a U.S. patent approval (it owns the patent in Canada, although it is being challenged by another company) that Hunt says would be a "ground-breaking" development for the company.
"It’s a barrier to entry by any competitors," he says, adding the technology also has potentially lucrative applications in other fields such as medicine and law, where the security of data transfers is paramount.
"It would make us an acquisition target by larger companies that want to own that space."