I spent the weekend at Michael Robertson's Ranch. He is one of San Diego's most successful Internet entrepreneurs. He sold MP3.com for over $350M, he also started Lindows (Linux based windows), MP3Tunes.com (cloud based music) and Gizmo5 (voip). There are rumors floating around that Michael sold the domain name MP3.com for $350M, got lucky and never built a great company. That is, well, just a rumor.
What people don’t know unless they get a chance to talk to Michael is he built a great company, one that was exploding in organic traffic and revenue before it was purchased. We all know that to generate explosive organic traffic and revenue you need a lot more than just a great domain name.
The story he tells is very entertaining. Back in the early days of the Internet he was watching for search terms that were growing in popularity. He found the search word MP3 was gaining in popularity and bought it for around $1,000, which in 1996 was an expensive price.
He didn’t even know what MP3s were or how to make a site around them but through trial and error he grew MP3.com into the #1 place for musicians to show off their music and for consumers to find great music, sort of the first Myspace.
The real secret of his success came from creating a network effect. He allowed Bands to upload their music and have a custom website to host their music all for free (revolutionary back in the late 90’s). They could even create a CD and sell it for whatever price they deemed necessary above the $5.00 cost of creating the CD. The network effect occurred when the bands would promote their music on MP3.com. Michael gave them all their own URL’s like MP3.com/bandname. The bands would have this URL on their business cards, email it to their fans, etc. and then the more fans that used the site the more bands that came on, and therefore a network effect was created.
By giving his customers (the bands) total freedom and making the service free he empowered them to become an army of marketers bringing consumers to site by the millions.
He was able to raise money from Sequoia and eventually sell the company not based on a domain name but based on this network effect.
What is your businesses network effect?