Their Tube

In the YouTube universe there are big players like Maker Studios, Fullscreen and AwesomenessTV whose short-form content attracts millions of views each month. Then there are companies like AudioMicro Inc. that fly under the radar – but have their livelihood directly connected to the video-sharing website. The Sherman Oaks company is what you might call a below-the-line player, but it has a surprising presence, licensing 450,000 files of original music and sound effects used in some 27 million YouTube videos. And it has an even faster-growing ad business that makes money for music industry clients by inserting ads in videos that often use popular music without permission or a license. Think “Happy” by Pharrell Williams or “Free Fallin’” by Tom Petty. “Everybody says you can’t make money in music,” said the firm’s 35-year-old founder and Chief Executive Ryan Born. “Well, YouTube found a way to make money and we are paying out to our clients money they wouldn’t have otherwise.” That symbiotic relationship has been a figurative gold mine for AudioMicro, which has seen its revenue skyrocket 936 percent between 2011 and 2013, making it No. 1 on the Business Journal’s list of fastest growing private companies. The firm brought in just $500,000 in 2011 but last year saw that spike to $5.4 million. This year, Born forecasts that revenue will top $10 million. Behind that growth is a relatively complicated business model for a company founded in 2007. The original AudioMicro business is working with composers, sound designers and performers to create original music that the company licenses for use in videos, websites, short films and video games. In conjunction with that revenue stream, it developed its AdRev business, which uses proprietary software to detect the illegal use of music owned by others in videos and insert advertising. Finally the company runs ImageCollect.com, a photo library of 6.7 million images for licensing to magazines, newspapers and celebrity-centric websites. The company employs fewer than 20 workers in two offices, with Born, President Brian Felsen, Operations Manager Brett Heatley, and others in Sherman Oaks, and a team of software engineers in Kherson, Ukraine. There are also up to six contract workers available. YouTube connection YouTube, a subsidiary of Google Inc. in Mountain View, is by far the largest online video website, reaching 84 percent of all web users who view such videos, according to ComScore, a digital measurement and analytics firm in Reston, Va. AudioMicro’s presence on the site may be under the radar but it is pervasive. The 27 million videos using AudioMicro licensed music and songs total about 3 billion streams per month. By comparison, Maker Studios, owned by Burbank’s Walt Disney Co., has 6 billion streams per month. “It’s impressive when you stack it up,” Born said. Peter Csathy is chief executive of Manatt Digital Media, an L.A. advisory and legal services firm that counts AudioMicro as a client. He said the company occupies a favorable position in the YouTube space, allowing artists to create videos that can be viewed globally without copyright issues. “That great opportunity to have a library that is cleared globally is you become the go-to source of that music,” Csathy said. “That is the holy grail.” David Cremin, managing director of DFJ Frontier, a Los Angeles venture capital firm, said Born and his get-it-done attitude had a lot to do with why the firm made a $1 million investment in AudioMicro. “The train was leaving the station and we helped the train so it could go faster,” Cremin said. AudioMicro has been through two rounds of outside financing. In 2008, it received $500,000 from DFJ. The second round in 2011 provided $500,000 from DFJ and $250,000 from Fotolia, an image library based in New York. Born also put $60,000 of his own money into the business, and racked up $50,000 on his credit card to get the business going. Born first started with the photo library and production music by making cold calls to potential customers. In those early days he was sending out 300 emails a day. AudioMicro works with composers and musicians to produce original music. The artists are paid by license fees with AudioMicro taking a 50 percent cut in sales for exclusive use of the content, and a 65 percent cut for non-exclusive use. Music tracks cost $49 each when bought individually or $10 a track with a subscription. Sound effects pricing is lower. “YouTube loves the catalogue. It’s deep; it’s affordable,” Born said. “We have a lot of the data on what music is popular among their peers.” Bent Pixels, a Las Vegas digital media company with a multi-channel YouTube network, has been using the AudioMicro library exclusively for its content creators for about two years. Chief Operating Officer Marty Cordova said its creators usually look for no-cost services related to making their videos, but Bent Pixels feels it’s worthwhile to have higher quality audio and has agreed to license music and effects from the AudioMicro catalogue. “It is important to tell these partners we have thousands of songs, effects, and TV and film scores to make their content better,” Cordova said. “On YouTube, the higher quality content gets more views. It is important to provide good music for them.” Detective work Born added the advertising service a few years after AudioMicro’s launch. The system works with the cooperation of client music publishers, record labels and content owners that provide copies of their copyrighted music. AdRev encodes the sound and turns it into digital files. Software developed by AdRev scans the millions of videos on YouTube and compares the sound track to those files to detect when a clip at least 30 seconds long of copyrighted music is used. Finding clips shorter than 30 seconds requires manual manipulation by an AdRev staffer. If copyrighted material is detected, the person who uploaded the video is notified with an email from YouTube that ads will begin to appear before, over or alongside their video. AdRev takes a 20 percent share of the ad revenue and the rest is given to the copyright holder. AdRev is currently generating most of the growth for the company and is on pace to pay out $10 million in royalties this year. Marcia Kautz is director of operations for Warner/Chappell Production Music, the Nashville division of Warner/Chappell Music that creates film and television scores. She said she has worked with similar, so-called video monetization firms but strongly prefers AudioMicro. “Hands down AdRev has the better customer service,” he said. “We are seeing a better rate of return than the other entities that we have worked with.” Born launched AdRev by landing Universal Publishing Production Music in Santa Monica as the anchor client. In addition to Universal and Warner/Chappell, AdRev also represents big name performers including Bob Dylan, Tom Petty and the Rolling Stones, all of whom own their music publishing rights. “When you are selling something it is helpful to have clients who people have heard of,” Born said. Cremin, of DJF Frontier, said Born’s ability to open AdRev was impressive, given how different it was from the original business model. “Some people call it a pivot,” Cremin said. “He is doing what an entrepreneur is supposed to do.” Learning from failure Born traveled different career paths before starting AudioMicro in 2007. As a photographer his work appeared in Forbes, Rolling Stone and People magazines. And an accounting background served him as an executive handling finances for a real estate startup and later a marketing startup. While proud of the success he has achieved, Born is open in talking about the failures he has experienced trying to expand the business over the past few years. There was Audioo, a voicemail sharing platform; Infographicstock.com., a site to license out infographics; ChooseTattoos.com, a website that allowed tattoo artists to upload their designs for others to use; and Cartoonsy.com, a licensing site for cartoons. All these business were given a try at AudioMicro until he realized they were not working. The lesson learned by Born was knowing when to pull the plug. “Part of that is knowing how to drop something and not be afraid of failure,” he said. With AudioMicro running well, Born said that an exit strategy is not on his mind. New lines of licensing could be in the future, and in the meantime he runs a lean operation in which he believes the employees have a good working environment and receive fair compensation. Also not on Born’s mind is a change in name. While AdRev is the big money maker, the AudioMicro title will stick. “We had to focus on what was important and renaming (the company) wasn’t one of those,” he said.