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PEOPLESOUND.COM: Behind The Scenes

Interview | Company By Paul White
Published July 2000

Ernesto Schmitt, President of Peoplesound.comErnesto Schmitt, President of

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, 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 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, 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 and what it really offers the unsigned artist.

So what's the story behind

"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.

" 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 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

PEOPLESOUND.COM: Behind The Scenes

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 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

PEOPLESOUND.COM: Behind The Scenes

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, 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

"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 Secondly, the artists realise that 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

PEOPLESOUND.COM: Behind The Scenes

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

Submitting Your Music To

Martin Turner, chief operating officer, explains the life cycle of a Jiffy bag after it arrives at

"Every day we get somewhere between 50 and 100 CDs in Jiffy bags along with varying amounts of information. The first thing we have to do is check we have all the info we need. Probably between five and 10 percent of the packs are incomplete — the bank details are missing, there's no picture, the text isn't adequate or whatever. We chase up the missing information where necessary then, when we have that, the details are logged into a database. What we need from the artist is a signed contract granting us non‑exclusive distribution rights. We need a CD with the music and between two and three tracks need to be marked as being available for free promotional download via the Internet. We also need a picture and some text about the artist or band — the more information we have the better.

"Once we have the necessary information, we send the package to the A&R team downstairs — to music industry professionals who listen to every CD and every track so see whether the material meets our sonic quality requirements. At that point we reject 20 to 25 percent of the material submitted. We're not trying to tell people that the music we have on our site is all brilliant, but there is a certain base quality level we're trying to achieve that differentiates us from other MP3 sites. There's also a self‑selecting mechanism to some extent because we insist that everything comes in on CD, Jaz, Zip or MP3 — the actual process of getting music into one of those formats cuts out those who are less serious.

"Where the material is accepted, the A&R team rate the tracks to identify the key influences, tempo, quality and so on. These ratings are used in the database that drives our search engine. Once a tracking sheet has been completed for the CD, it goes upstairs to our production unit where the web pages are created. They scan in the pictures, key in the text, enter the payment details and enter the A&R ratings. Shortly after that the music is available on line.

"When somebody wants to buy an album from a particular artist, an order comes in electronically, and the CDs are burnt to order with custom on‑body printing and custom printed cardboard packaging. A very good‑quality product is shipped out very quickly after receiving the order. We selected the cardboard packaging because it looks good and it's very durable. We have a policy that any CD can be returned within 30 days for a replacement or a refund, but as far as I can remember, we've only had two or three CDs returned."


As well as Ernesto Schmitt, I also spoke with co‑founder Martin Turner who filled me in some of the details of the operation. One of of my first questions was to establish how many artists albums are sold each day

Martin: "I guess that when we passed through the department this morning we must have seen at least 50 or 60 albums ready to ship, but I can't tell you the total figure as that's competitively sensitive. I believe that we now sell twice as many albums per visitor as, even though they still get more visitors than we do at this time. The number of sales is growing all the time and we want to make it a substantial part of our revenue stream. As to free MP3 downloads, that's currently running at around 20,000 per day."

You also produce compilation albums for sale. Do those only draw from the pool of tracks that artists have ticked as being available for free download or can you take any submitted track?

"We do a combination of the two, though most of the bands tick what they imagine to be their best songs, so they're the ones that we listen to most intently. If we do hear tracks that aren't in the free category that we think are good, they can be added to the compilations."

The problem with the established music business is that what sells best is what's marketed best. If you move into selling via conventional record shops, will your A&R guys make the decisions as what to promote?

"To some extent yes, but we also have to listen to the retail outlets as well because they know what's selling best in the shops — we know what's popular on the Internet. Part of what we're doing here is enabling people to discover new types of music, and yes, you're absolutely right, much of what is currently sold through the retail channels is forced down people's throats."

One of the difficulties people seem to have with choosing music is that once they leave the college/school grapevine, there's no longer any real cross‑fertilisation of musical ideas and tastes. What's the age group breakdown of visitors to your site, and do you think you can help people discover new types of music and new artists?

"Obviously we analyse the demographics of our users and they are very broadly spaced, but that's because we have over 80 genres and sub‑genres of music they can choose from, ranging from classical through to garage. But what we do envisage is attracting a lot of older people as well as the younger generation, because of this aspect of discovery. I'm listening to a much wider range of music since becoming involved with It's a bit like wine — you find you don't have to stick with Leibfraumilch for the rest of your life!"

Have you thought about setting up a separate division for library type music that can be used for commercials or TV work — I say this because it generally needs to be structured differently to music designed purely for listening?

"It usually requires some additional production work to be done on the track to meet the needs of the client, but I'm not sure we need to set up a separate division at this time. If that part of the business really takes off, then we may review that, but at the moment our job is to establish as a credible source of material."