Lander: Tell us about the genesis of HDtracks.
Chesky: Napster was like an atomic bomb falling on the record business. Suddenly, millions of kids learned how to share music on the Internet without paying for it, and the scary part was that it was all happening so fast they didn't even understand they were stealing. And the situation just kept getting worse.
Lander: I expect the iTunes Store, which opened in April 2003, exacerbated the situation considerably.
Chesky: Before iTunes started, David and I got invited to a presentation about it, with all the independent labels, in Cupertino, California. We heard Steve Jobs talk about iTunes, and David raised his hand and asked if Apple planned to offer better-quality files. Steve Jobs shook his head and said, "Not at this time." We wanted to continue with the audiophile model, so we figured, let's take lemons and turn them into lemonade. Let's take a bad situation and try to make it work for us. We thought we were late to the game, but the fact is, we were very early with hi-rez downloads. I think I can say we created that market. It didn't exist until we went in and explained the model to labels and got them to come aboard.
Lander: HDtracks began delivering downloads in 2008. Where did your business model come from?
Chesky: iTunes created it. They're the 800-lb gorilla, so in terms of how the deals are structured, you've got to pretty much follow the model they carved out. We started with a group of independent labels, like Reference Recordings and Alligator [Records]. We got them to come aboard, and we started putting out CD quality. Not too long after that, we started coming out with 96/24 [24-bit/96kHz], and that made a significant difference; it really distinguished us. Selling CD quality as opposed to MP3 wasn't enough. In the beginning, the major labels weren't interested in working with us. And then a record came out on an independent label, Rounder Records. It was Raising Sand, with Alison Krauss and Robert Plant, and it was the biggest record of the year.
Lander: It won a Grammy for Album of the Year in 2009.
Chesky: We had that title in the HDtracks catalog because it was from Rounder. And then we were able to get in touch with T Bone Burnett, who is a very prominent producer, and we talked him into making a 96/24 version. Not only did we have great success with it, but it was a way for us to go to the major labels and say, "Look, we have the record of the year, and you really ought to look into what we're doing." Because of that, we were able to make a deal with Universal Music. Universal was distributing the Concord Music Group, and Concord wanted to do a deal with us. That's when Universal said, "Let's try them," and gave us titles from their Verve catalog: Diana Krall, Louis Armstrong and Ella Fitzgerald, Stan Getz and Astrid Gilberto. We started with a very limited number of titles, but we showed immediate results. We proved, right out of the gate, that there's a market out there for better quality. It's a very good way for the labels to monetize their old catalogs.
Lander: How do you approach the label executives?
Chesky: Every presentation has included three of us: David and myself, and Lisa Marks, our in-house lawyer. I think my brother and I complement each other in the sense that David can talk about artistic things, about the quality, and how we make a difference. Nobody's better in spreading the word on hi-rez audio. When it comes to the business side, I talk about how we can make it work. Lisa's our liaison with the labels. She's been with us for 17 years, and she's very articulate, very level-headed, understands business, and sees the big picture.
Lander: How do you go about weaning an entire generation off lo-rez MP3 downloads?
Chesky: By letting people hear the difference; by letting them know there's an alternative.
Lander: Is it that easy?
Chesky: No, nothing's easy. I'm doing a whole ad campaign now on the Internet just to let people know that high-resolution music exists. I believe that, when people are educated and understand what we're offering, a percentage of the market will be willing to pay for quality. There's definitely a market here, and it's a growing market.
Lander: Do you worry that, if the market segment grows large enough, the major labels will sell hi-rez files directly from websites of their own and cut you out?
Chesky: It's my understanding that the majors already offer downloads via their own artist and label sites, and that's fine. We're always happy to help with that. I believe that most people would rather go to a store that has a wide variety of music rather than buy from a single artist or label site, but the bottom line is that it all helps raise awareness of better-quality music files and their availability. We support that.
Lander: What single factor do you think would do the most to make the hi-rez music segment grow faster?
Chesky: It started with the catalogs. We did that—we got Verve. Now, to get younger people interested, we need frontline products, the music that's more relevant to young people, whether it's Katy Perry or Bruno Mars or Daft Punk. The music business is changing every day. The labels are very excited about the new business models, and they love the revenue that they're seeing from HDtracks, revenue that wasn't there for them before. They're committed to giving us more new titles, like the new Michael Jackson and Black Keys recordings, and the newly remastered first three studio albums from Led Zeppelin. And we're continuing to get more street-date product, which means the labels are offering us the high-resolution editions of many of their new releases on the same day they're being released in other formats. This is very important, because people want to be able to purchase the high-resolution version the same day that the MP3 or the CD becomes available.
Lander: How big do you think the hi-rez market can ultimately get?
Chesky: I like to believe that hi-rez audio can become an industry worth several hundred million dollars. It's becoming a whole ecosystem. Sony's stepping into the game, and all these companies are making DACs and players that are compatible with what we're doing. Remember, before you can create the Ferrari, you need the gasoline to run it. When we started HDtracks, there were only a few hi-rez DACs, and now even smartphones are starting to include playback for high-resolution music. Now that we created the platform with hi-rez downloads, now that there's a store that you can go to and we have all the majors aboard, look at all the hardware products. It's exciting to us, and the more content we have to offer, the more hardware companies are going to say, "Wow, we should step into this market, because the software is there." I believe that a rising tide lifts all ships. The more people committed to this area, the more success it could have. To me, there's tremendous potential.
Lander: It won a Grammy for Album of the Year in 2009.
Chesky: We had that title in the HDtracks catalog because it was from Rounder. And then we were able to get in touch with T Bone Burnett, who is a very prominent producer, and we talked him into making a 96/24 version. Not only did we have great success with it, but it was a way for us to go to the major labels and say, "Look, we have the record of the year, and you really ought to look into what we're doing." Because of that, we were able to make a deal with Universal Music. Universal was distributing the Concord Music Group, and Concord wanted to do a deal with us. That's when Universal said, "Let's try them," and gave us titles from their Verve catalog: Diana Krall, Louis Armstrong and Ella Fitzgerald, Stan Getz and Astrid Gilberto. We started with a very limited number of titles, but we showed immediate results. We proved, right out of the gate, that there's a market out there for better quality. It's a very good way for the labels to monetize their old catalogs.
Lander: How do you approach the label executives?
Chesky: Every presentation has included three of us: David and myself, and Lisa Marks, our in-house lawyer. I think my brother and I complement each other in the sense that David can talk about artistic things, about the quality, and how we make a difference. Nobody's better in spreading the word on hi-rez audio. When it comes to the business side, I talk about how we can make it work. Lisa's our liaison with the labels. She's been with us for 17 years, and she's very articulate, very level-headed, understands business, and sees the big picture.
Lander: How do you go about weaning an entire generation off lo-rez MP3 downloads?
Chesky: By letting people hear the difference; by letting them know there's an alternative.
Lander: Is it that easy?
Chesky: No, nothing's easy. I'm doing a whole ad campaign now on the Internet just to let people know that high-resolution music exists. I believe that, when people are educated and understand what we're offering, a percentage of the market will be willing to pay for quality. There's definitely a market here, and it's a growing market.
