Interviews § Interview With Jack Scalfani

Jack Scalfani is the president of FightCloud.com, an online music startup with a curious business model: CDs for free (plus shipping). You probably haven’t heard the artists he represents, but perhaps you’ll want to after reading what he has to say about the music business and the Internet. Selected quotes from this interview form the basis of a related story, Give It Away Now, which was just published on Salon.com.

Q: You’ve been around for seven months now?

A: Yes, seven months.

Q: How many CDs have you given away?

A: We’ve done over 1,000 CDs. We’ve been on NPR, CBS, NBC, been in a lot of newspaper publications. A lot of university radio stations are playing our artists, and a lot of independent radio stations write us asking for our artist’s CDs. Obviously with the conglomerate that owns the other big stations, getting our artists played by them isn’t going to happen.

Q: Clear Channel?

A: Exactly, Clear Channel. I wasn’t going to mention any names.

Q: What’s wrong with the music business right now?

A: Okay, I hope you have some time.

Q: Absolutely.

A: First of all, there are two things going on. One, the major labels are trying to get on the Internet with three different companies [MusicNet, Napster, and PressPlay] which is going to be a disaster. It’s going to be a complete train wreck. They’re seeing all the problems right now. They’re going to spend billions of dollars and wind up pulling the plug on this because people are not going to rent music. Yes, that’s exactly what they want you to do. You pay the bill. If you don’t pay the bill, then they prevent you from playing the music on your computer.

Second of all, mobility. I need to move my music with me. I need to go to the gym with it. I need to take it to the car. Most people listen to their music in the car. Not many people sit at home in the living room and put it on their stereo . . . it needs to be moved around. You can’t lock it up; you can’t dictate what I’m going to do with my music. Celine Dion is going to have problems with her new CD. They’ve got this technology where it says it can’t be played. They’re doing it only in Europe. They are doing it only in Europe because America will just kick it right back and they know that. They saw it when Sony tried it with Michael Jackson. The day before Michael Jackson’s CD came out, it was supposed to be all protected and everything. It was already available on Morpheus, the whole album. If it comes out of the speakers, it can be captured, period.

The problem with them is they’re fighting their battles in all the wrong areas and the record industry needs to realize it’s a hardware issue; it’s not a software issue. As long as we all have CD players, until you change the hardware, you’re not going to be able to restrict us. So the record industry is fighting that hardware battle while trying to get online with three different Web sites selling music from I guess the five major labels, if I’m correct.

Then there is the stealing of the music. . . . When Napster was at its peak, that was the time we started coming up with our FightCloud concept. We wanted to do something right. We were watching the dot-coms die like flies and it was just amazing. Everybody was writing about these companies on the Internet and how wonderful they were. Before it even got printed, they were bankrupt.

So we sat back for about a year and a half devising what we thought would be a great business model. We love music; it’s one of the top commodities on the Internet so let’s make a business where we’re involved in the music industry. [We want to do it legally, unlike everyone else]. . . . So we started talking about what’s wrong with the record industry.

You want to stop piracy? Make your CDs affordable. I’m not going to spend three hours turning and burning a CD and make sure the levels are right . . . converting songs. I’m not going to do all that it if it’s an $8 CD. I’m just going to walk across the street to Tower Records and say “Here is my $8, thanks for the new Madonna.” That’s the first problem.

They’ve never said anything, but if you look at the ads in the paper, every time new CDs come out the price is like $10.99 now. They used to be up in the $14 range. They’ve slowly brought them down and not told anybody about it. But the bottom line is hey, bring us back to $8.99 where our vinyl records were. This is only costing the record company a dollar something to produce, if that, probably more like 33 cents.

Q: Wasn’t that actually something that the music industry promised, that CD prices would decline?

A: Absolutely, everybody remembers that. The federal government said that they weren’t going to tax us anymore after World War II, yeah right. Gas prices were supposed to come back down, yeah right. They’re just empty promises. The record industry was supposed to bring those prices down after it was a new medium and now it can be done for 33 cents apiece. These CDs are being burned for such a low cost. Now with the Internet people are so much more aware of everything that goes on, so the prices have to come down. My time is worth more to me than the money, so I will put the money out if it is a good price. I’m not paying $20.

Here is the biggest mistake of them all: two good songs on a CD. How many times do we have that? Remember that girl who sang “Where Have All the Cowboys Gone”? Vaguely. She was a kind of folksy singer. That was the only good song on that CD. People don’t want to take that chance. That’s why at FightCloud we allow everybody to listen to every cut. If you don’t like it fine, but you get to at least hear everything.

Q: In your e-mail you mentioned that if one of your artists gets a deal, you don’t have any sort of contractual hold over them.

A: We’re not considered a label, even though people keep mistaking us for one. We want to be a promotional distribution company. We wanted a Web site that was artist friendly, that really cared about the artist, and yet also was customer friendly. Customer service, give it away for free, that kind of stuff. So there was a win-win-win situation for everybody involved. Customer, artist, and FightCloud. So we said to the artists, what are some of the things that you’re concerned about? They said, we’re drowning on these music Web sites with so many bad bands.

When we first were talking to artists they didn’t want to sign an agreement in case they got a record deal. They felt they were on the verge . . . every artist does. We said okay, not a problem. Once again trying to keep it artist friendly, we let them out of their promotion once they get a deal.

If one FightCloud artist gets a record deal, well guess what? All artists will be just flying to Fightcloud.com. That’s our goal. Our goal is to pull them out of the [morass] of 100,000 bad artists, put them on a pedestal, a place they can go to showcase their talent. We would like to be the training ground for record labels, basically. We would like to be kind of like the farm clubs for baseball. We’d like the A&R people to know about Fightcloud.com and go there looking for their next talent. We have a long way to go, but as we grow we want them to know that they don’t have to listen to a bunch of people that recorded stuff down in the subway bathroom.

Q: Is the music industry model still viable? From what I understand, a lot of artists aren’t very well served by major deals if they aren’t the one act that really comes through and produces a hit. Is there an alternative out there where artists can thrive outside the major label system?

A: Yes, there are alternatives. The first thing we ask the artists is, what is your goal? Some artists don’t want the major label, they just want the exposure. Once you get the exposure then people start picking up your CD. Once word gets around and you start a reputation, you hope to build and bring on management. Then you bring on an agency and start doing shows and that kind of a thing and get a spin going. Is there an option? Yes. [One option is what we do:] We give one CD away and we charge $4.95 shipping and handling. . . . We take that $4.95 and we pay for the handling, picking it and packing it and shipping it and postage and everything. When we’re all said and done, we have $2.64 profit left.

Q: Is that going to go up when the postal rates change?

A: No, we’re not moving our price. FightCloud’s shipping and handling won’t go up when postage rates change. We believe we can build this business on what we have. We have a lot of room to breathe. We’ve streamlined our system. Each CD brings us about $2.64 in profit. We split our profit 50-50 with the artist and I don’t know any company that does. The artist gets $1.32 out of the S&H for every CD that’s given away for free. If that artist were to sign a major deal, they probably will only see 10 to 50 cents per CD in their first agreement until they hit it big time.

I don’t want to rip on the record labels because they take all the risks. They’re literally banking and promoting companies and that’s why the record label keeps so much of the profits. But there are other possibilities. So as FightCloud grows, artists may just want to come on to FightCloud’s Web site just to build their name. They may already have management and be touring already. They may take the Dave Matthews Band route, [building a career by touring].

Q: Do the artists supply you with the CDs?

A: No, we manufacture them all ourselves. We produce a promotional version of the CD. We give away the entire CD. We don’t do booklets, we don’t do lyric sheets. We tell all the artists, save your money and put those things on your Web site. To print these things is almost as expensive as to produce [the CD] so we produce just the CD. It comes in a nice hard, slimline, colored jewel case. We ship them straight to the customer. The best part is we don’t warehouse, so our company model is we don’t spend a dime until we’ve made 20 cents. We burn on demand.

Q: What’s to stop someone else from copying your business model?

A: [Laughs.] Nobody is going to do this because they think we’re insane. Literally, everybody thinks we’re insane. Nobody is going to do it until we show success. It’s like we’re telling people the earth is round. We’re doing the hardest part of it all by proving it. We know people are watching us. We hope by the time we prove it that we will be big enough not to worry. Being the first of the industry is always important in branding. Amazon will still continue to monopolize the book market as long as they continue with their business practices the way they are; they have the market share on the Net because they were first, even though Barnes & Noble was known before Amazon in the real world; Amazon was first on the net so Barnes & Noble gets a smaller percentage. We would love to be imitated because that means that we’ve proven our business model.

Q: Have any of your artists gotten that elusive deal yet?

A: No, none of our artists have gotten deals, yet. After coming on at FightCloud, three of our artists landed great gigs. We don’t know if it was directly associated with us, but three of our artists are doing television work right now. One artist has been asked to have his song on the soundtrack of an indie film. Another gentleman is working on a new UPN series that’s coming out this fall. He’s scoring the music, he’s a composer. Another artist has been asked to do music for a new sci-fi show called Squadron that’s being filmed in the U.K.

They all have their own little success stories. One of our country artists opened for Dwight Yoakum three times last year and will be opening for Billy Ray Cyrus and Shelly Wright this year. We’ve hand selected the ones we feel are right on the edge and ready to explode and deserve the attention. They all have a great track record.

I don’t know if you’re a big jazz fan but there is a gentleman who was a jazz bass player, Harry Babasin from Hollywood. He played with Benny Goodman, was in a movie with Danny Kay, was big in jazz in Hollywood and was a big name. His son, who now has a jazz band, is on our site. His son has the rights to all of his father’s music and has like masters to hundreds of different songs that have never been released. These FightCloud artists are talents that just need to be brought up.

Q: How do you deal with rights?

A: We ask that the artist own the rights to all their music. We don’t want it to get messy so we [arrange] with artists that they own all the rights to their music. If not, they have taken care of those issues in writing. That’s part of our agreement.

Q : Any predictions for the future?

A: The labels digital downloading will fail. My partner [and brother] Charles and I like to call it digital download doom. That’s where it’s heading. [It’s going to be a] train wreck. I know what they’re trying to do. They’re going to first get up on the Web. Once their stuff is up on the Web, they’re going to go full force after Morpheus and Kazaa and try to shut them down. I mean they will throw some major money at some major people to get them shut down. Once they get them shut down the labels then will hope that people will come running to their services.

Nobody is going to rent the music so their whole business plan is a bomb from the get-go. They’re trying to lock it up so tight and you can’t do that. Even Congress says you can’t prevent people from copying their legally owned CD. The next problem is all the music being split up into three different Web sites with some artists over here and some over there. Bad move. Should they have dealt with Napster? Yes, they should have. When Napster made a deal with them, it was like a $10 million deal or something the first year. The record companies should have jumped at that. The deal should have been a lot more money on Napster’s part but they all should have come together at one location. Bad move to separate.

Another prediction is Morpheus is going to move to a country [beyond the reach of U.S. lawyers]. If Morpheus was smart, they would give a percentage of their proceeds to the government of that country to cover their butts. It’s going to get worse before it gets better. It won’t get better until the next level of technology. That’s where they can control the music. It’s in the hardware, not the software.

Q: That was tried with Divx which was a resounding failure in the marketplace.

A: Yes, and the consumer isn’t going to let go of CDs. We got burned on VHS, we may go to DVDs for music, but there is no reason to. We know that albums don’t need to be burned on DVDs. We don’t need to change format. [You’d] only change the format so you can prevent me from doing things. Even the law-abiding citizens don’t like it. So my prediction is that [encrypted downloads and pay-per-play] are disasters waiting to happen. I think the record companies should concentrate more on giving the customer what they want. Become the good guys again. Win the customers over. They’re not even paying attention to what we want as music buyers. It’s going to be a mess.

In the meantime, FightCloud wants to stay free; we want to stay at $4.95 S&H. We want to keep it right there. We even pay taxes on our CD giveaways even though there is no tax on a zero dollar, the customer doesn’t pay any tax because it’s zero. But we still have to pay a tax, a user tax for California. So we’re still paying taxes.

So this is what comes out of the $4.95 shipping and handling. It pays to manufacture it and pays to package it in a jewel case. It also pays for the envelope, the stamp, the label, and the cost of printing on the face of the CD. We ship it all out to the customer. It gets to them and we pay for the credit card transaction and we pay for the Web hosting. All of that comes out of the $4.95 and there’s still plenty of money to split, so tell me the record labels aren’t doing it wrong if we can do a business off that.

By the way, my background consists of seven years of radio experience and seven years in the artist management business so I’ve been in the music industry for a good 14 years. I mean I’ve seen it all come and go. The business end of it, the radio end of it, I know how radio works and I know what these artists need to get on the radio.

Q: Is the Net going to change radio at all do you think?

A: No, not yet. Not for a long time [because of the legal issues]. Greed is choking the Internet right now. It’s definitely territorial. . . . The artists are greedy, they want their cut off the Internet, the record labels are greedy . . . . Everybody is so greedy that nobody can work on the Internet so there is going to be no radio on the Net, not even Internet radio stations. They all are going to start playing more independent. It’s going to favor the independent artist; the unsigned artist really is who people are turning to because the unsigned artist isn’t going to sue anybody.

They want the exposure, so is the Internet going to change anything for a while? No. There are so many court battles that need to be fought that haven’t even been thought of yet. The only Internet radio I like listening to is Christian pirate radio. It’s aggressive, it’s all new bands that nobody ever heard of. Its great rock, great pop.

Another prediction is the success of satellite radio. The satellite radio companies that I invested in like two years ago are going to come sneaking up and they’re just going to level local radio. Local radio will go under. . . . I’ll pay $10 for commercial-free guaranteed. You start doing that and what is your local sponsors going to be saying? Why should I advertise on your radio when they’re not even listening to you? They’re listening to satellites, commercial-free; they’re paying $10. When those numbers go up, so [does] XM Satellite Radio stock value, which Clear Channel has its fingers in. They own a big chunk of XM because they know better.

Q: Is that something that you’re invested in as well?

A: Oh yes. Yes, I invested in it as soon as I heard about it. . . . When satellite radio kicks . . . there’s going to be no more syndication. You put a talent like Howard Stern in the XM building and boom, he’s syndicated instantly. All satellite shows are considered instant syndication. It’s going to be like having cable TV in your car.

You’re going to have so many selections. A&E has its own channel; Home Shopping Network probably has its own channel. There are 50 channels of music and 50 channels of news and entertainment. They’re going to be able to fine-tune exactly what you want. If I want to listen to Hollywood gossip there’s going to be one channel just for Hollywood news. If I want to just hear about the planet, there might be a Nova channel. Local radio is nowhere near that level. I don’t know if you spend much time in Los Angeles, but we have some of the worst radio in the United States. . . . XM and Sirius are going to be really good if they play their cards right and Clear Channel is very smart for being apart of that.

Q: Do you see XM as the winner, as opposed to Sirius?

A: Yes and two reasons. Sirius had a lead when they first started with Cosby backing them and they were at the top of Rockefeller Center and they had three satellites instead of XM’s two. The tables turned when Sirius wasn’t ready to launch on schedule. The car dealers weren’t ready for them and Sirius announced they had to up their rates past $10 before they even launched. XM launched before them and XM now is running commercials full time and XM has the lead. If you look at their stock, Sirius is at $5 a share and XM is at twice that. There’s an interesting battle going on; XM would love to beat out Sirius before they can even get off the ground. You always see the David Bowie falling through the roof or B.B. King falling through the roof, those commercials. They’re going hard. I see it being a huge thing; I see it being in every car and every radio in the next three years.

Posted by Thomas Claburn on May 23, 2002