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Answer the question in two parts with the titie:Part A: Walder’s VisionWhat is Walder’s vision for UGHH? Has he fulfilled this?Part B: Walder’s NeedWalder exhibits a classic entrepreneur’s trait of wanting to be his own boss. As UGHH grows larger, how might this need get in the way of growth? What specific examples of this do you find in the case?MAX 2 Pages, Times New Roman, Font Size 12
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UNDERGROUNDHIPHOP.COM
As Undergroundhiphop.com (UGHH) approached its 10th anniversary,
company founder Adam Walder felt he had reached a crossroads. Although
UGHH was the leading source of independent hip-hop on the Internet,
company revenues remained small compared to major online music retailers.
The opening of a storefront in 2005 helped create new opportunities within the
music industry, but also proved to be a drain on company resources.
Adam was proud of the fact that his company had remained debt free
throughout its history. Now, he wondered if such a conservative financial
strategy was limiting its potential. UGHH desperately needed to hire
programmers, designers, and managers to keep up with new technological
developments and social trends, such as music downloads, blogs, and online
social networking. Yet the cost of running a bricks and mortar retail store left
little to invest in other areas of the business.
Despite these challenges, 2007 promised to be an interesting year. Adam had a
number of exciting new ideas for growing the business, ranging from
franchising opportunities to the creation of a reality TV show. The question
was, which should he pursue and how should he finance them.
BACKGROUND
In high school, Adam Walder worked part time as a music store clerk, where,
one day, he met a radio disk jockey from Rutgers University Radio. The station
transmitted to a 25-mile radius around New Brunswick, New Jersey, and, like
most college stations, offered an eclectic mix of content. Adam used the
opportunity to solicit a position at the station. Soon afterward, he found himself
hosting the “Monday B-Side,” a popular Monday night hip-hop program
broadcast between 10 PM and midnight.
After graduating high school in 1995, Adam attended Northeastern University
in Boston, Massachusetts, where he majored in business administration and
information technology. At first, he was eager to work at the Northeastern
This case was written by David Wesley under the suprvision of Professors Mike Zack and
Ben Compaine soley for the purpose of class discussion. The authors do not intend to
demonstrate either effective or ineffective management. The authors may have been disguised
names and other identifying information for the purpose of maintaining confidentiality.
Copyright 2006 Northeastern University, College of Business Administration
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radio station. However, when the station insisted that he take the 3 AM to 6
AM slot, he quickly realized that it was not to his liking. “I had an ego by
then,” he explained with a slight note of resentment. “I went from one of the
top shows in New Jersey to a slot where nobody was going to hear me.”
After about 10 weeks, Adam quit his position at the radio station. Nevertheless,
music companies continued sending promo albums, which he gladly added to
an already extensive record and CD collection from his days with Rutgers
University Radio.
Around the same time, a high school friend who had moved to California
called Adam on the phone and told him about a new Internet homepage he had
created. It was a simple page that simply said, “Yo, Adam, what’s up.” But at a
time when the World Wide Web was in its infancy, it was a revelation.
Although at that time, nearly everything on the Internet was text based, Adam
thought to himself, “if I can see this in Boston, I can give this web address to
anyone in the world and they can see it. I’ve got to learn how to do this.”
Adam immediately delved into HTML (see Glossary for technical definitions).
Soon after, he created a homepage highlighting his career as a disk jockey. At
first, he directed the page to family and friends. Later, he began to compile an
index of promotional music that record companies had sent him over the years.
Some listings included audio files that allowed users to stream music directly
to their computers in WAV or RealAudio format.
At the time, Adam Walder’s personal homepage was the only site in the world
that had streaming audio of independent hip-hop. As Internet users began to
discover the site, its popularity increased. He soon realized that he could reach
far more listeners through the Internet than he ever could as a college radio
disk jockey.
I just wanted people to hear my music. Even though I wasn’t
being heard personally, people all over the world were hearing
the music I loved. I had a tracker that told me where visitors
were located, and some were from countries I had never even
heard of. Before that, I had no idea that hip-hop was a
worldwide phenomenon.
The website also provided Adam with greater freedom to manage his time and
focus on his studies.
I could do things on my own terms. I didn’t have to do it from 3
AM to 6 AM. I could do it between classes. It was amazing. I
couldn’t do that with regular radio.
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Toward the end of 1996, Adam began receiving emails from listeners who
wanted to hear old-school rap, rather than just the new promos he received
from record companies. As a result, he began to catalog his entire record
collection of several thousand albums. He also added streaming music of
exclusive tracks that he had recorded live as a disk jockey at Rutgers
University.
Artists would appear on my show and “freestyle,” which means
they come up to the microphone and just rhyme. So this was
exclusive content and people loved it. And I loved it because I
was reliving my memories.
I began working on the website every free second of every day.
It had to be at least 10 hours a day. While my roommates were
playing video games, I was on the website doing updates. I
wasn’t getting paid a dime and didn’t want to get paid a dime.
The idea of making this into a business had not even entered my
mind.
Although other sites devoted to hip-hop began to appear on the web, nearly all
focused exclusively on well-known artists and top-40 hits. Underground hiphop was different. By being against the mainstream, the site appealed to
college students who wanted to rebel against the ordinary. “These were the
kids who wore Che Guevara shirts,” Adam explained.
Forget the masses and the mainstream stations. We want to be
underground and independent. That’s why college radio fits so
well, because it’s grass roots. People who like that kind of
music also like this kind of music. They felt like it was their
duty to make sure our website was known.
In January 1997, Adam added a message board using free third-party software.
Traffic immediately doubled to more than 2,000 visitors a day as members
frequented the site to post comments about their favorite music.
The best thing was that I didn’t have to do anything. Members
created the content. All I had to do was give them a place to
talk. And not only did our traffic double, but artists began
posting messages to fans. It became an online hangout for fans
and artists.
When I was a kid, if I was a fan, the only way I would meet
musicians was to write a letter, maybe to management, and
hope they read it. Now you can go on the Internet to a MySpace
page and literally converse with your favorite musician. When I
started the message board, this was unheard of.
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A Mini-Portal for Underground Hip-Hop
As late as February 1998, Adam’s website had been hosted by a free web
service called Geocities. In late 1997, Geocities began experimenting with new
ways to generate revenue, such as posting conspicuous banner advertisements.
Although casual hobbyists tolerated the changes, for Adam they were a major
annoyance. In addition, users had a hard time remembering the site’s archaic
Geocities web address.1
Around the same time, web portals had become fashionable among Internet
companies like Yahoo, AltaVista, and Lycos. The idea was to become a
destination where Internet users could carry out a number of activities, such as
shopping, reading news articles, and sending e-mail. By attracting users to
spend more time on a given portal, Internet companies hoped to increase online
sales of products and services and deliver more revenue-generating banner
advertisements.
Adam wanted his site to become a mini-portal for independent hip-hop music.
Users could search for music they liked, listen to audio samples and streaming
radio, chat with artists and other fans, and post questions and comments on the
discussion board. He also wanted to become the first hip-hop site to offer
online music purchases.
With the help of a friend who worked for an IT company and who understood
networking, Adam built an inexpensive server and hooked it up to the highspeed Internet line in his dormitory room. Although the server consumed as
much as 80 percent of the allotted bandwidth for the dormitory, nobody
complained.
After transferring the site from Geocities, the next step was to register a
domain name. Adam soon discovered that other web sites had already
registered the most obvious names, such as hiphop.com and rap.com. Adam
finally settled on Undergroundhiphop.com. “At the time, I didn’t think it was
that great of a name,” he admitted.
Now if you ask people, “What is the best thing about Adam’s
website?” they will invariably say, “He has the best domain
name in the world.” Anyone who goes on a search engine and
looks for underground hip-hop or for an underground artist will
find our website in the search results, because the keywords are
part of the company name.
1
The URL for Underground Hip Hop was initially www.geocities.com/disk
jockeyquest97/adamshomepage/undergroundhiphop.
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Creating an Online Community
Within a few months of registering the domain name, traffic increased to more
than 5,000 visitors a day. At the same time, Adam began to receive e-mails
from fans volunteering to help maintain the site. Some offered to moderate the
message boards, while others offered to write reviews. When one developed
the company logo as part of a $100 contest, he initially refused the prize. He
finally agreed to take $50 if UGHH gave the other $50 to the runner-up. “We
regularly have about 10 volunteer reviewers from all over the world,” Adam
explained.
All they want is for their name and e-mail address to appear
next to the review so that when they go for job interviews they
can say, “I was a reviewer for Underground Hip-Hop, one of
the fastest growing hip-hop music sites on the Internet.” They
also get to show their friends that they are part of this cool
website, which is important for many high school and college
kids.
To help support the site, Adam began to post third party banner ads, which by
the end of the year generated about $1,000 per month.
This was pure profit. I didn’t have any expenses, since I was
using the university Internet line and had no payroll. It sure
beat work-study at $40 a week.
Online Music Sales
The two major music copyright organizations complained to Adam about the
free availability of music on UGHH. They argued that audio streams posted on
the site were violating copyright. Meanwhile, more users began to ask how
they could purchase the music they heard on the site. Adam realized that if he
sold music through his website, he could argue that the site was not
broadcasting or distributing music, but promoting legitimate sales.
We didn’t allow users to download music, since it was
streaming only. But I explained to the copyright lawyers that
customers wanted to listen to the music before they bought it.
What is wrong with that? Besides, the record labels weren’t
complaining. They wanted their music heard. It was ASCAP
and BMI who were complaining.2
2
The American Society of Composers, Authors, and Publishers (ASCAP) and Broadcast Music
Incorporated (BMI) were competing organizations that sought to protect music copyrights on behalf
of members by requiring broadcasters and third party performers to obtain licenses.
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I said, “How can you tell me not to put music on the web site,
when the record labels want me to? Give me a list of all the
people you represent and a list of all the songs from them that
you see on my web site, and I will remove them, because those
are not the people I am trying to represent.”
I am trying to represent underground artists, not people like
Eminem, Dr. Dre, and Missy Elliott. If I’m running into trouble
because there are songs from 10 artists among the 30,000 songs
on the site, and they want me to pay ridiculous royalties, I don’t
want to represent them.
In August 1999, at the beginning of his senior year in college, Adam opened an
online store (see Exhibit 1). Using $1,500 in personal savings, he purchased a
small inventory of the site’s more popular albums. Between August and
December, Underground Hip-Hop posted revenues of $24,000 (see Exhibits 2
& 3).
This was pretty crazy for a student in dorms. During lunch, my
roommates and friends were packing orders. I would go to the
post office on roller blades with 50-gallon garbage bags filled to
the brim with orders. It was the most absurd thing ever. But I
was living my dream. It was really happening.
The Rise and Fall of Grand Royal
In November 1999, Adam received a call from an Internet startup called
den.net. Den provided high quality streaming video content over the Internet
with the intent of competing against broadcast television. In 1999, the
company was on a spending spree as it tried to acquire content providers. They
saw UGHH as another opportunity to expand their Internet offerings and reach
new audiences.
Adam was thrilled by the idea of participating in such a well-respected and
quickly growing venture. Yet, when he met with the company’s executives in
Los Angeles, he quickly realized that Den would not be around much longer.
The company had been spending $20 million a month and would soon run out
of cash. A number of executives had already defected to Grand Royal, a record
label owned by the Beastie Boys.
The Beastie Boys was the best-known all-white hip-hop group. They founded
Grand Royal in 1992 after leaving Def Jam Records.3 The company promoted
itself through a self-titled magazine focused on hip-hop. Grand Royal
3
Founded in 1984, Def Jam grew to be the leading hip-hop music label. Universal Music acquired
Def Jam in 1998.
Page 7
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magazine was arguably the best hip-hop magazine in the industry and fans
eagerly awaited each new issue. Soon however, the demand for subscriptions
overwhelmed the editorial department. New issues were often late and over
budget.
In 1997, Grand Royal created a website to catalog its albums. Although it
contained artist biographies and listings of new releases and concerts, it lacked
the compelling content needed to drive traffic to the site. Then in 1999, the
company decided to resolve its publishing problems by distributing Grand
Royal magazine through the Internet, while also offering to sell music and
branded merchandise. Grand Royal began to show interest in UGHH after
articles about Adam and his company appeared in Rolling Stone magazine and
Sony Style.
Grand Royal contacted Adam with an offer to purchase 50 percent of
Undergroundhiphop.com in exchange for a $100,000 per year salary for 3
years, a $150,000 signing bonus, funding to improve the website, and an office
at Grand Royal in Los Angeles.
Anything I needed, they were going to give me. For a college
kid, $450,000 is a lot of money. I was also getting a big ego. I
had one of the members of the Beastie Boys, one of the most
famous groups in the world, calling my dorm room. It was the
biggest high in my life. I loved to see my friends’ reactions
when I would say, “You guys, I am talking to the Beastie Boys
on the phone. Can you keep it down?”
Elation gradually turned to disappointment as Grand Royal began modifying
the contract to offer less while demanding more. In June 2000, Adam hired a
lawyer to negotiate on his behalf.
I couldn’t look for a job because I was expecting to have a 3year contract with Grand Royal. EMusic, which after iTunes is
the biggest mp3 store around, was interested in my company.
But I couldn’t talk to them because the Beastie Boys were going
to own at least 50 percent of the company. Third, I couldn’t
look for an apartment because I was supposed to move to
California. I was basically a puppet at this point. I couldn’t do
anything.
In August, Grand Royal called off the deal, citing irreconcilable differences.
When he learned the news, Adam turned pale and became nauseous. In one
moment, his dream had been crushed. Though the dream of a glamorous life in
L.A. had slipped through his fingers, Adam soon realized that it had been for
the best. Even before Grand Royal pulled out of the negotiations, Internet
companies had begun to face a liquidity crisis. Venture capital suddenly
Page 8
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became scarce, while investors tried to unload holdings in Internet-based
companies.
Between March and November, the technology laden NASDAQ exchange lost
nearly half its value. One by one, Internet companies became insolvent. Firms
that once epitomized the hopes of a new economy became its first causalities.
Companies such Pets.com, eToys, Value America, and Webvan were relegated
to history. When Grand Royal joined them, no one was surprised. The
company’s trustees eventually sold its remaining assets for $65,000.
Independence
In 2001, Adam married Lynn Ivers, another Northeastern University student
who ran an Internet store specializing in custom engraved gifts. Together they
tried to obtain warehouse space for their rapidly growing enterprises, but
property owners were reluctant to rent space to a younger couple who lacked
substantial assets or established credit histories.
At first, they tried to run both businesses out of their home until they ran into
space limitations. “Records and CDs were everywhere,” Adam recalled. “I
swear the wood floor was about to collapse because it was so heavy with
product.”
We were there for about five months. I remember being out on
our three-season porch in 90-degree weather, packing orders in
my shorts. In the winter, we had a portable heater, but it was
still so cold we had to pack orders with winter gloves. I always
wondered what customers would think if they knew how much
we went through to pack their CDs.
Eventually, the Walders found space through a family friend who understood
their situation. At first, the 1,100-ft² space seemed more than ample. Then, at
the behest of customers, UGHH began to offer international shipping. Orders
immediately jumped by more than 30 percent. And since US prices were much
lower, some European customers began ordering large quantities of CDs for
resale on eBay Europe. Within six months, the company had once again run
out of warehouse space.
The Retail Store
In June 2005, UGHH opened a 2,600-ft²-store front in Boston. In doing so,
Adam hoped to overcome several problems. The company’s employees did not
like working out of a warehouse in an industrial area of Boston. Out-of-town
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artists needed a place to sign autographs and give live performances. And the
company needed a more visible presence in the community.
By opening a store, UGHH was also entitled to join Nielsen SoundScan, an
information system that tracked North American music sales through 14,000
affiliated retail stores. Billboard magazine and other news sources in the music
industry used SoundScan as the basis for music charts, such as the “Top 40”
singles. Once UGHH became a member, major record labels began to offer
promotional incentives, such as free CDs and in-store visits by major hip-hop
artists (see Exhibit 4).
The record labels used to care less whether or not we had the
latest stuff. Now they make sure we have it. For example, Lupe
Fiasco is the newest prodigy of Kanye West. When he released
his CD, the record label made sure we had autographed
booklets, a bonus CD, stickers, a download card and a bunch of
other free stuff to give away.
People could go to Virgin
Megasto …
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