It was on New Year's Eve that the idea struck Alexandre Taillefer. The Montreal tech executive was hosting a party at his home to usher in 2006, and he wanted to add karaoke to the mix. But when Taillefer went to rent the equipment, he was taken aback by the cost and hassle of even a bare-minimum setup. He ended up spending $1,500 and devoting hours to arranging DVDs and typing up song lists so guests would know where to find Sweet Caroline and Islands in the Stream .
Taillefer couldn't fathom why, at a time when the Internet streams content to people's homes at low cost, karaoke tracks weren't just as easily available as a YouTube video. Sure, there were various cheap rip-offs available online, but nothing that resembled the boisterous experience of packing a bar with a bunch of friends to belt out some favourite tunes.
Most people would have shaken their heads and left it at that. But not a serial entrepreneur like Taillefer. In the mere 3-1/2 years since that New Year's epiphany, Taillefer and business partner Eric Boyko have built a company, Stingray Digital, that is poised to become the top global player in a digital golden era for the hokey pastime from Japan.
Thanks to its core asset - the Karaoke Channel - Stingray already has the distinction of enjoying the largest global audience of any Canadian broadcaster. But it's just getting started: The company's new partner is none other than the monster from Mountain View.
Google Karaoke, anyone?
If turning karaoke into big business sounds offbeat, Stingray's entire history has been just as unorthodox. When Taillefer (who is CEO) and Boyko (president) started the firm, they didn't know what it would sell - they simply knew they should be in business together.
It was 2005; both men were successful tech entrepreneurs who had built companies and sold them off, pocketing handsome returns in the process.
Boyko, now 39, founded eFundraising.com in the early '90s while still attending McGill University. The company helped schools and other organizations operate fundraising drives. At the height of the tech boom, Boyko sold the business for $30-million to Zapne Corp. He later bought it back for 10 cents on the dollar after the tech crash, rebuilt it and sold it again at a profit to Reader's Digest for $3.5-million.
"That's when you know you are a good entrepreneur - when you can sell it, buy it back, and sell it again," says François-Charles Sirois, vice-president of corporate development at Quebec private equity firm Telesystem Ltd., which was one of Stingray's earliest backers.
During the same period, Taillefer, now 37, founded Nurun, an Internet design and software company that he sold to Quebecor Inc. He then created Hexacto, which made games for cellphones. It was snapped up by Jamdat, which in turn was consumed by Electronic Arts.
Flush with cash and enjoying a reputation for turning seed money into profits, in 2005 the two men began casting about for a new venture. But what? They had no idea. They had only a name - Stingray Digital - and their talents: Taillefer, the analytical and detail-oriented mind; and Boyko, the numbers guy who can also nail a sales pitch.
"There are instances where you wouldn't want to have two, let's say, 'alpha men' in the same shop because they would be banging heads all the time," says Pascal Tremblay, general partner at Novacap, another private equity firm. "But these guys are so different and complementary that they make a very good team in the end. It's a powerful mix."
Novacap stepped up to invest in whatever Boyko and Taillefer wanted to pursue (the firm now owns 21 per cent of privately held Stingray), as did Telesystem, which now holds 36 per cent. (The board consists of Boyko, Taillefer, Tremblay and Sirois.) For Sirois, the son of CIBC chairman Charles Sirois - a onetime tech wunderkind himself - backing a company without a product was an attempt to correct a past mistake. In 1998, Boyko approached Telesystem for capital to expand eFundraising.com. "I thought it was the worst idea in the world," Sirois recalls. "I told Eric that I would not put any money in that kind of project. And six months later, he sold the company for $30-million."
With funding for Stingray in hand, Boyko and Taillefer spent nearly a year weighing ideas. They ranged from the unlikely (online bird watching) to more conventional content plays like trivia.
When the partners considered karaoke, the nut issue became apparent almost immediately: rights.
Music rights vary by application. It is one thing to broadcast a song, another to license it for an ad, and another again for an artist to record a song. And it's yet another to record a karaoke version - to replicate the backing tracks with hired musicians, with the lyrics embedded for simultaneous playback. Karaoke rights are cheaper than recording rights, because there's not as much intellectual property at stake (and, at least until now, not much audience at stake either).
Despite the cheaper rights, what seemed to be keeping karaoke small-time, Boyko and Taillefer discovered, is that no one had done enough legal legwork to obtain them: The karaoke discs used in bars often use tracks that are technically illegal. Other firms had tried to get into karaoke, including Electronic Arts with video games and Yahoo online, but had all gotten bogged down by the rights issue.
But in his research, Taillefer came across a little-known operation in North Carolina that was actually approaching critical mass. The Karaoke Channel owned the rights to more than 15,000 songs, and used a stable of studio musicians to record karaoke versions of them. The songs played on cable TV in the U.S., with subscribers paying a small monthly fee to have the channel on their service.
Although it emerged that it wasn't going to make it over the financial finish line on its own steam, the Karaoke Channel did show that karaoke is a natural fit for the unfolding interactive world of on-demand television made possible by digital cable and Internet-protocol services. Subscribers can pick whatever song they like, whenever they like.
The Karaoke Channel was in such distress that it had stopped paying licensing bills and was being bombarded with lawsuits that it couldn't afford to defend itself against. Boyko and Taillefer saw their opportunity: Acquiring the Karaoke Channel and its catalogue would unlock the puzzle. All they needed to do was convince their backers that karaoke, despite its tacky reputation, was the direction Stingray needed to go.
"I'm not a karaoke guy. I thought that was so cheesy," Sirois admits. "I said, 'Alex, find anything-but not karaoke.'" He was persuaded to join the two men on a trip to North Carolina to view the assets. He could see the catalogue of songs had value, but remained skeptical. Yet he got on board. "I thought it was a bad idea. Really I was backing Alexandre and Eric. Sometimes you just have to go with it."
Stingray bought the Karaoke Channel in the spring of 2007 and set about cleaning up the company's problems. It also started recording new tracks in North Carolina to expand the library. Then as now, completed songs are sent to Stingray's headquarters in Old Montreal, where in-house karaoke testers give them a tryout before they are offered on the Karaoke Channel, and via the company's online catalogue and iTunes.
While it was acquiring the Karaoke Channel, Stingray was also making itself into a more well-rounded digital music company, acquiring Galaxie - a series of music channels available on digital cable, which it bought from CBC - and Max Trax, a similar service that it purchased from Corus Entertainment Inc. for $16-million. Like specialty TV, it's a sweet business, with a steady stream of income: Cable companies pay Stingray to include the music stations among their offerings.
If he and Taillefer were going to make any real money from karaoke, Boyko knew Stingray had to start exporting the concept. An unsinkable salesman, he began meeting with cable operators all over the world. (He has become such a valued client of Air Canada that if he hasn't materialized for a flight, they call him.) By this summer, the Karaoke Channel was being seen in at least half a dozen countries, including Canada (through video-on-demand on cable), the United States and the United Kingdom. It boasts 35 million subscribers; by that measure, Stingray is Canada's leading broadcaster. Within a few years, Boyko expects the Karaoke Channel will be broadcasting in at least a dozen countries and approaching 100 million subscribers, including some in places as far-flung as Kenya, Croatia and Chile.
Stingray is also the biggest distributor of karaoke songs on iTunes, with a quarter of a million sales each month. Once the upfront costs of producing a song are paid - about $1,200 to $1,500 for rights agreements and musicians' time - the assets start paying back in spades. The business is now 80 per cent margin, Boyko says, and the catalogue is worth about $30-million. "At the end of the day, you're very profitable, but it's like owning a building," Boyko says. "You may bring in $2-million in rent, but the building costs you $20-million." The company, with a staff of 110, expects its revenue to climb to $35-million this year, from just $3-million two years ago.
In keeping with the venture's unconventional genesis, the deal that brought Stingray into the realm of tech giants happened by happenstance. Last year, Boyko's friend Belinda Stronach - the Magna executive and former MP - invited him and other executives from various companies on a heli-ski trip in the B.C. Rockies. As it happened, the party included several Google officials.
The Google types liked the idea of karaoke, and were even enticed by Stingray's biggest asset: its library of legit recordings. As owner of YouTube, Google knows that it's hard to build a business selling advertising around content that is not licensed. But there's no such problem with Stingray's offerings. Moreover, the nature of karaoke fits nicely with the ascendancy of user-generated content and online communities, not to mention the rise of Guitar Hero and American Idol : Fans could film themselves performing and post the video online, driving audiences and ad dollars higher.
Serendipitously, the organizers held a karaoke party during the trip. The sight of executives belting out their best Bob Seger impersonations was enough to convince the Google types that a karaoke application on Google was just what the world needed.
Stingray will share ad revenues with Google in exchange for making its tracks available. "The numbers we're looking at are like hundreds of millions of views per month," Boyko says of the deal.
Though Stingray now has offices in Budapest and Luxembourg, and the company records songs in the language and style of every country in which the Karaoke Channel operates - such as calypso for Trinidad - most of its content can go anywhere in the world.
It never fails, Boyko says: If the Karaoke Channel is available, Gloria Gaynor's I Will Survive is the most requested song. "We don't know why. It doesn't matter where you go - Germany, France, the U.S. - that's the No. 1 song," he says. "There must be a lot of people out there breaking up." In honour of her song's status, Stingray flew Gaynor up to Montreal in June for a private concert, and has since started discussing an endorsement deal with her.
Stingray now has relationships with 64 of the top 75 music publishers in the world, and is recording 50 to 60 new songs every month to freshen its catalogue of 18,000 songs - the largest collection of licensed karaoke songs in the world. "Our objective is to put together a library of probably 40,000 songs in multiple languages," Taillefer says.
There are some holdouts, though. The Beatles and the Rolling Stones recently cracked, but U2, Justin Timberlake and - pure karaoke gold - ABBA are the three most notable acts that remain reluctant to part with karaoke rights. Boyko's goal is to secure deals with the holdouts by showing the company's recordings are good enough to match the originals, and that the artists shouldn't fear their work is being mangled.
The company is also doing away with the lamentable videos that typically have accompanied karaoke tracks, replacing them with a series of video clips whose sequencing responds to the cadences of each song.
How far can Stingray grow? The company estimates the global karaoke market to be worth $7-billion. That includes Japan, of course, but the birthplace of karaoke is a tough market to crack, since companies such as Sega Music Networks already dominate the market. Stingray sees the rest of the world as its oyster.
Even if another big player tries to move into its space, Boyko figures Stingray has a head start on its catalogue that will take years, if not decades, for another company to match through negotiated rights agreements. Indeed, some of the biggest potential players are now coming directly to the company as customers. Electronic Arts has started sourcing Stingray's library. And word has spread around the industry to other players, including Microsoft, which has contemplated having a karaoke product on Xbox. "Even Microsoft said, 'I don't believe you have the rights,' " Boyko says. "Then we showed them the list of publishers."
Stingray's reach extends to commercials and television shows as well. If you've seen an episode of shows like American Idol , you've probably heard some of Stingray's work. If those shows were to go directly to the artist for the original music tracks, it would cost $50,000 to $80,000 per song. The cover versions Stingray makes itself are offered up for only a few thousand dollars.
In a few weeks, Boyko will duck down to the U.S. to meet with American cable carriers, signing up clients such as Time Warner. These deals add subscribers in chunks of 5 million or more, bulking up the company in a hurry.
Stingray is getting restless, though. Boyko and Taillefer want to revisit an old idea of theirs. A trivia channel, or an on-demand trivia service, would be a hit, they suspect. After all, it was Montrealers who invented Trivial Pursuit.
First question: What famous Montreal company was founded with no idea of what it would sell?