Sonic Boom: Napster, P2P and the Battle for the Future of Music. John Alderman

On November 21, 1997, the company raised $37.5 million by selling 3 million shares.

      While video was the obvious progression from audio, and dominating the field a worthy goal, the company failed to see how popular downloadable music was becoming. It wasn’t until after the success of Winamp and Napster that RealNetworks would release RealJukebox, an MP3 player of its own. Though RealAudio convinced a generation of Net users that sound worked on the Web, it did not focus any efforts to build a business selling or distributing popular songs. That was where Liquid Audio stepped in.

      While Santa Cruz was the lush and isolated birthplace for IUMA’s portal for bands, there was another spot not far north whose rich mix of academic values, technical innovation, and do-it-yourself culture encouraged pushing all the limits of music, especially when it came to technology. If the semiconductor chip business was important enough to name the whole region “Silicon Valley,” the heady musical side of Palo Alto and neighboring Redwood City and Menlo Park was busy following its own path, and one would inevitably intersect the other.

      The sprawling suburbs, towns, and wooded hills southwest of the San Francisco Bay seemed to represent American innovation in the latter parts of the twentieth century. The area also defined experimentation, both technical and social, and was the birthplace of the Grateful Dead and the Jefferson Airplane, though they later moved to the urban setting of San Francisco’s Haight Street. Despite plenty of upscale neighborhoods, from the sixties through the early nineties there was still room for bohemians and enclaves such as that of author Ken Kesey, whose regional “acid tests” (as well as LSD experiments conducted by Stanford) were crucial factors in launching the psychedelic movement of the sixties.

      “It’s a fertile area, that’s for sure,” said Liquid Audio CEO Gerry Kearby, pointing out that the trio of Stanford University, audio hardware manufacturer Ampex, and the Grateful Dead all combined to create an environment of audio exploration; his company brought together veterans from all three. The combination of music and the computer was simply inevitable, and there was not a more likely spot for propagation than the South Bay and its community of Deadhead engineers.

      “All that stuff sort of started with the Dead. They spent a lot of money trying to figure out how to make stuff sound better, and how to push the envelope,” said Kearby. “Bands like the Dead and companies like Ultrasound—the Dead’s PA company—were very involved in the transition of adding computers to the process of making music.”

      Because Ampex “was the greatest audio company in the world in the late ’70s and ’80s,” engineering products that are still in use today, Kearby says that the company was responsible for a convergence of audio engineers in the region. Ray Dolby, for instance, was working at Ampex when he developed his idea for noise reduction. “It’s no accident that I’m here, and many top engineers at Dolby and Liquid Audio came from Stanford,” said Kearby. Besides of its network of like-minded professionals with a penchant for experimentation, the environment was good for inspiration.

      Kearby’s contribution to the online world evolved from a rich collage of experience in the many sides of making music. He was born in Oklahoma, and his life was typical of many American rolling stones; his hometown was where he decided it would be. Though he attended college during the Vietnam War, Kearby was drafted into the Marines, losing the typical student exemption because he was too busy playing in rock bands and “forgot to go to classes.” He managed to avoid a Southeast Asian tour of duty and became drummer in a Corps band. There he saw a different type of action; he was required, he says, to play drums in the middle of a Washington “riot” while an angry mob pelted him with rocks.

      After his time in the service, Kearby resumed his studies at San Francisco State University without much direction—he refers to his time there as “majoring in the G.I. Bill.” (Actually, he earned a B.A. in broadcast management and audio engineering.) Back in San Francisco he helped some friends manage a recording studio and found that he enjoyed the work. Kearby became a sound engineer for bands like Jefferson Starship and the Grateful Dead until “after a couple of years it occurred to us that we were doing all the work, and the musicians were getting all the money.” During this period he was also actively teaching music to marching bands, a vocation he practiced for ten years.

      In the mid-’80s, as easy-to-use personal computers like the Apple Macintosh were gaining popularity, Kearby and some friends from the Center for Computer Research in Music and Acoustics at Stanford realized that there would be a market for computer-controlled recording studios. They formed a company called Integrated Media Systems, which was quickly tapped by George Lucas to build his first professional digital recording studio. Kearby describes the development as almost happening by itself: “one day we woke up and found ourselves a high technology company.” By 1989, the company sold his digital audio workstation to the Swiss firm Studer Editech, and Kearby stayed on as VP of sales and marketing. After several years, he grew restless. In 1995, Kearby quit his job, and took the summer off to “walk the dog and watch the O. J. trials.”

      By then the hype over the Internet had grown into a roar and was quickly becoming an American obsession. Whether walking the dog or watching TV, few Bay Area residents escaped the powerful buzz. Kearby was no exception, and with plenty of sound technology experience under his belt, he realized that he knew how to make “the kind of authoring tools that everyone on the Internet needed.” He had heard the streaming offered by Glaser’s RealAudio and thought it was “OK,” but realized that musicians and labels would soon want to sell songs and records on the Net and that this business—worth potentially billions of dollars—would require special tools. He believed that he could build those tools.

      Kearby quit walking his dog so much and recruited a friend, the software engineer Phil Wiser, also from Integrated Media Systems, and venture capitalist Robert Flynn. They began developing the Liquid software and went in search of the right venture company for financing. They believed Hummer Winblad to be that company—because of its reputation as a smart investor that took a hands-off approach after assembling the management team—but roping the company in would prove difficult. Kearby and Wiser originally thought that their system would need a hardware component, in addition to their software tools; something with added processing power to decrypt sound while retaining high quality. Hummer Winblad was a software-only firm and declined to even hear their pitch.

      When a self-imposed deadline for launching his company or finding another job was just a month away, Kearby read an ad in the paper announcing that venture capitalist Ann Winblad would soon make an appearance at San Jose’s nonprofit Center for Software Development (now known as the Software Development Forum). This was a fundraiser—casually called “The Gong Show”—at which developers paid a nominal fee to talk to a VC for ten minutes, with all proceeds benefiting the center. Kearby called the center the day before the event and was told that the event had been sold out for months. He asked if anyone might have canceled. Nope. Realizing that this was probably a needy group of developers, Kearby had the bright idea to inquire if anyone’s check had bounced. Sure enough, one had, and he was able to assume that place.

      His presentation went well, and on second meeting Winblad told him that although she liked his ideas, he was clearly “an audio guy” who “didn’t think like us Silicon Valley people.” He needed some help polishing his pitch. She suggested that he hook up with Steve Holtzman. A latter-day Renaissance man and a connected Silicon Valley player, Holtzman juggled careers as an avant-garde composer and digital theorist. An unimposing figure with sharp, darting eyes, Holtzman had held successive positions as VP of marketing at Wise and Radius, and he’d earned a lot through their successful IPOs.

      As one who’d often contemplated music’s place on the Net, Holtzman was immediately enticed. He called Kearby that day and met him the next. After lending a quick hand to polish Kearby’s plan, Holtzman ended up writing a check for $100,000 on the spot. Kearby phoned Winblad to relay the good news. “I said ‘Hey, Ann, your due diligence guy just wrote me a check. Let’s do this deal,’” Kearby remembered. Though she was obviously keen on the deal, Winblad put Kearby through an “Excalibur test” by seeing if he could strike an exclusive deal with Dolby labs. Through years of work, Kearby was very familiar with the key figures at Dolby and had good relationships there. But the company was known to refuse any exclusive