Beyond Binary

PASADENA, Calif.-Of all the losses suffered by the music industry, one of the biggest may be the fact that nearly all of the investors that once were building digital music services have moved on.

"There are not a lot of entrepreneurs involved in this space," said David Pakman, a music industry veteran and now venture capitalist at Venrock Associates.

MySpace Music President Courtney Holt (left) listens on as venture capitalist David Pakman (center) speaks at a panel on the future of the music industry.

(Credit: Ina Fried/CNET)

By Pakman's count, there have been 109 venture-backed digital music start-ups. Fewer than five, though, produced a substantial return, he said.

"Investors lost a lot of money in this space," he said, speaking on a breakfast panel at the Fortune Brainstorm: Tech conference here. The loss for the industry, he said is that entrepreneurs have moved on to areas like Twitter and Facebook.

Those two services both have an application programming interface that allows anyone with an idea to connect to their service using generic terms. That, Pakman, said, is missing in music.

"What the music industry never encouraged or even allowed was building an ecosystem around its product," Pakman said.

For his part, MySpace Music President Courtney Holt said he thinks a big part of his opportunity is in providing new tools for music artists, building on MySpace's existing strength of helping connect musicians with their fans.

He also wants to make more of the "social music leaders" on MySpace.

"There are people at MySpace that curate music that have audiences that would rival terrestrial radio," Holt said. "I'm trying to figure out how I can give them more power."

Pakman agreed that such influencers are a key factor. "Bloggers are the music critics (of today)," Pakman said.

MySpace CEO Owen Van Natta and News Corp. digital chief Jonathan Miller (far right) appear on stage with Kara Swisher and Walt Mossberg at D: All Things Digital in Carlsbad, Calif.

(Credit: Ina Fried/CNET)

CARLSBAD, Calif.--MySpace's problem is pretty simple, says former Facebook executive Owen Van Natta, who is now MySpace's CEO.

"If you don't continue to innovate...people are going to shift interest elsewhere," Van Natta said, appearing on stage at D: All Things Digital, along with with News Corp. digital chief (and former AOL executive) Jon Miller. "We need to continue to innovate a lot more rapidly than we have been."

Van Natta said that, on the plus side, MySpace is more open than a lot of its rivals.

"There's a lot of self-expression that is happening," he said. "We need to seize on that."

Van Natta took over as MySpace CEO last month, shortly after Miller was installed to lead News Corp.'s digital efforts.

Kara Swisher asked Van Natta to compare Facebook and MySpace.

"I think they are both driving this notion of social activity on the Webl," he said, but adding there are fundamental differences, such as the role of music and self-expression on MySpace.

Swisher pressed them on whether MySpace can regain lost ground.

"Certainly we're not the darling of the press right now, that's pretty clear," Van Natta said. At the same time, he said the company still has a huge audience if it can deliver compelling features. ""We already have 130 million people that are coming to the site every day."

Miller said that the trick for companies coming from behind is to not focus on checking the boxes of things offered by competitors, but rather to figure out what you need to do to leapfrog those rivals.

Van Natta said that opportunity is part of what attracted him to the job.

"'When I look at MySpace there's just so much to build." Van Natta said, noting that in high school he used to always choose construction jobs because he likes "to build stuff."

Van Natta was asked whether the company's ad deal with Google has paid off. He said it had for them. As for Google, he said, "You'd have to ask Google."

But he said, long-term deals often take work to be mutually beneficial. "Good partners work together to close the gaps."

While some attendees grumbled that speakers were less than forthcoming, that could most certainly not be said for Rupert Murdoch, who was plenty outspoken in his evening chat.

I posted my take earlier, but here's some video, courtesy of the All Things D site.

Part 1:

Part 2:

Click here for full coverage of the D: All Things Digital conference.

CARLSBAD, Calif.--Rupert Murdoch, who is no stranger to the Microsoft-Yahoo affair, said even he is shaking his head at the lack of a deal.

"I'm mystified," Murdoch said. "I cannot understand the whole thing. Jerry Yang is a friend who we all love and admire and he's emotional about it."

Murdoch said that Microsoft offered a price that the vast majority of shareholders wanted but that Yang managed, at least for now, to fend them off. At the same, time, he said he's surprised Microsoft didn't press the point, something he said comes from their lack of mega-deal experience.

"They're not used to big deals, to buying big things," Murdoch said.

Murdoch said if he were Microsoft, he would have put the offer out there and let shareholders do the work for them. "You aim the gun. You decide to fire the gun. You've just got to sit and wait. It will come to you."

He is dubious, though, that a Microsoft-Yahoo deal isn't a merger that will actually come to fruition. "I think that will be rejected by the board, by everybody."

Murdoch also put in his two cents about whether Yahoo deals should be held up by regulators. "It would be very sad," he said. "Google is so good. (The have the) best search engine by far. They are just going on, getting bigger and bigger. It is just gushing money. You can see why Microsoft is worried."

On Carl Icahn's move, he said, "That's not serious. He wants to make a couple hundred million dollars for himself."

The noise helps Microsoft's cause, he said, but as for the actual proxy threat, he said, "If I were a Yahoo director, I wouldn't be worried about that."

Although Murdoch himself was once a player in a potential joint venture that would combine Microsoft, Yahoo, and Fox's MySpace assets, he said that deal appears to be off the table.

Murdoch also addressed plenty of other topics.

On Hulu: "We wanted to control our copyrights and we thought this would be a pretty good way of doing it."

On Google's gripes about social-networking advertising: "They shouldn't be griping," he said. "They said they never expected to make that money the first year."

That said, "we want them, whatever happens, not to lose money at least on the third year," Murdoch said. He also praised them as "great partners."

"We love them," he said. "I think they are the greatest company in America."

He did say that the public does want choice: "You don't want anybody to be a monopoly and own everything."

On Yahoo: They made a fatal mistake. They bought Overture and sat on it for two years. "They have a huge job a head of them to hold onto their 20 percent, let alone to grow it. I wish them a lot of luck."

On Microsoft's search ambitions: "How can they build on their 8 or 9 percent? God knows. I'm not an expert, but this doesn't appear to be their expertise."

Asked about Fox News, Murdoch responded that broadcaster, like Brit Hume, have both sides represented on their shows.

Conference co-host Walt Mossberg responds: "He has both sides on, but he kicks the crap out of one of them."

Click here for full coverage of the D: All Things Digital conference.

In an update to a tragic case that I wrote about some months ago, a federal grand jury on Thursday indicted a Missouri woman who allegedly participated in a cruel online hoax that ultimately ended up with a 13-year-old girl committing suicide.

Lori Drew, from the St. Louis area, allegedly posed as 16-year-old Josh Evans on MySpace.com, striking up a relationship with neighbor Megan Meier, a former friend of her daughter's. After befriending Meier, "Josh" then abruptly ended the friendship and sent hurtful messages to Meier, who took her own life shortly thereafter.

According to an Associated Press report, federal prosecutors charged Drew with "one count of conspiracy and three counts of accessing protected computers without authorization to obtain information to inflict emotional distress."

The federal charges announced Thursday come after local prosecutors in Missouri were unable to find evidence of a state crime having been committed.

I'll try to get more details from the indictment.

With Yahoo apparently off the table, it's time to see what Microsoft's back-up plan looks like.

Microsoft has said for some time that it has a strategy with or without Yahoo, but it's a strategy clearly in need of a jump-start.

In search, for example, Microsoft has been trying to take on Google for some time, but it remains a distant third in search queries and also has struggled in the all-important battle of monetizing each search query.

Microsoft outlined two key reasons for buying Yahoo--adding its talented engineers and getting the significant boost in scale that would come from buying the No. 2 player.

Clearly, Microsoft could use just a fraction of those billions and get a ton of engineering talent. The scale problem, however, is a more challenging one. As Microsoft CEO Steve Ballmer himself said in a meeting with employees on Thursday, there just aren't that many companies out there with any significant scale.

As for where else the company may look, Ballmer's recent comments to The Wall Street Journal offer a cheat sheet to the short list.

"There's really only five or six that really have any scale," Ballmer said in that interview. "Worldwide, you'd maybe get seven or eight."

Among those companies with scale that Ballmer named were Facebook, MySpace.com, and AOL, along with the Yahoo, Google, and Microsoft itself.

Although Facebook and MySpace have huge audiences, selling advertising against those sites has proved to be trickier than in search. Plus, Microsoft had to agree to a massive $15 billion valuation for Facebook just to get an ad deal and a small slice of the company. MySpace, meanwhile, has an add tie-up with Google. AOL is certainly seen as in play, having been a frequent rumor target as a potential partner for Yahoo.

Still, Ballmer said in his letter to Yang and in a public statement that he will look at other business moves and may expect other deals to follow.

"I wouldn't be surprised to see Microsoft going on a buying spree to buy some of the things they thought they might be getting from Yahoo," said Gartner analyst Allen Weiner. "I think they'll look seriously at some of the significant Web 2.0 companies and what they might add to the Microsoft label."

There's also the possibility that Microsoft makes another try at Yahoo once the dust settles a bit. I'll explore this in a follow-up piece.

News.com's Stephen Shankland contributed to this report.