Thread by Val Katayev

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  • Mar 2, 2022
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Song lyrics used to be the 2nd most searched category (sex was #1).

So, I started a company that made over $10 million in profit in 1st year.

We reached 500 million people every month

Here's the story of how I quickly monopolized this corner of the music industry
It all started in 2006. I needed to diversify away from Google with the digital ad biz that I wrote about earlier.


One of my top advertisers was Rhapsody Music. They were ahead of their time allowing people to subscribe to unlimited music. I thought that was the future (of course Steve Jobs thought otherwise with $0.99/song pricing for the iPod, and set streaming back many years).
I tried advertising Rhapsody on music sites as an affiliate (called publishers). So I reached out to a few, specifically lyric websites, because I noticed they had A TON of traffic.
It felt like the perfect fit.

A user looked up lyrics, saw my Rhapsody ad, and signed up.

It converted OK.
But I noticed something HUGE.

70% of the traffic for the lyric sites was non-US.

And Rhapsody only worked in the US. Meaning, I can't monetize a lot of the clicks I was getting. So I started to look for music related advertisers outside US.

I came across ringtones.
Once I tested marketing ringtones outside US, the conversions surprised me.

So I tested in US, and realized ringtones will crush Rhapsody for monetization. It worked well because the billing was through a wireless carrier, so the friction was minimal to subscribe.
The ads looked like this. Do you remember seeing these around?
I knew that I've found a gold mine, but there were several major problems I'd have to solve to make it a huge success.
Problem 1. Every ringtone provider only supported a very specific user. For example, Ringtone Provider A might only support Verizon & ATT carriers, in US, and they would only have 2 of 4 major music catalogs covered.
It was very fragmented.

Plus every country in the world had its own ringtone services because globally every carrier was collecting huge transaction fees from subscriptions. Typically about 50%.
Problem 2. I needed a moat. Either the ringtone providers or their marketing agencies/networks will go straight to my publishers with my own optimization techniques. I'd get cut out real quick.
Problem 3. Lyric sites were unlicensed. Music industry tried to shut them down for over a decade, and they couldn't win. Almost every lyric site was owned by someone in untouchable countries like Romania, China, Ukraine, Russia, etc.
Reality is, there was no mechanism to get licensed. But my vision was to build a sustainable business, so there had to be a path to legitimize the space.
Problem 4. Ringtone marketing was a dirty space. I never marketed them for that reason. Many affiliates used misleading ads to get premium subscribers (ie. "free ringtones"). US State AGs started to sue the carriers, marketing agencies, & anyone else involved for millions.
I was still a one man show at this point and running a very successful marketing business. But decided to solve all of these problems and see where it leads me. This is how I tackled each issue...
First. I built a simple system called "RingtoneMatcher". It just required one single link placement on a music website. The clicks would direct the user to the ringtone provider that matched geo, content, carrier for the specific ringtone they want.
This increased the revenue each click was generating by about 50-100% for the publisher.
Second. The best moat is the one that keeps the publishers and advertisers at bay. First thing I did was reach out to some of the ringtone providers and ask if they're willing to sign a non-circumvent in return for way more traffic.

Some agreed.
So I started prioritizing all my traffic to them. Others felt the pain and signed as well.
On the pub side I wrote up a simple 2 page publisher agreement that gives me the exclusivity to monetize their website for ringtones and music services.
It was annual and auto-renewing. Once signed, they were locked in, and if a ringtone provider tried to circumvent, the publisher would be in breach.
The agreement allowed me to focus on the long-term relationships rather than maximizing short term profits. Realistically I knew that with all these publishers being outside US, the agreement didn't mean anything.

I had to provide the best monetization and pay fast.
Third. To solve the licensing issue, I actually bought an unlicensed site (crazy!!) called LeosLyrics. It had a significant amount of traffic and allowed me to explore the process. I also got a chance to see emails of every offer that lyric sites were receiving (this paid off).
Fourth. The fact that ringtone marketing was the wild wild west played in my favor. After some providers and marketing agencies paid multi-million dollar settlements, ringtone providers shut off all 3rd party marketing.
Given my reputation in marketing brands, those same ringtone companies came to me for help.
So I got to work. Signing publishers left and right. They couldn't say no. My cold email was short and it killed. RingtoneMatcher was so consistent, that I can project what revenue a site would generate simply looking at Alexa traffic numbers. I'd cold email with a $$ offer.
The offer was to prepay, typically $10K+ for a 1 week test. In one case I offered $150K for a 1 month test. Balls were big.
It was so effective, each cold email I sent in the early days eventually made me on average over $500,000 in profits.
What boosted the machine is the network effect. As I got more pubs, other pubs noticed. It allowed us to negotiate better deals with providers AND get big enough to secure deals in smaller countries. 65 countries or so.

More countries = more pubs. The flywheel was spinning HARD.
Things started to take off but all the sudden I had one big issue.

There is an ad network, Shark Ads, a group of 5 guys whom I knew from the affiliate marketing days. They recently started Shark Ads after selling their first ad network for $10M+.

Shark boys noticed my game.
So they started to copy everything I do. Furthermore, some of their clients were ringtone providers. So they had direct relationships with them.
They went aggressively after pubs I have not yet signed.

I was outnumbered, and didn't have my own relationships with ringtone providers.

I was working my ass off to make sure RingtoneMatcher monetized the most countries possible in order to pay the most to the pubs.
And I would cold email as many people as possible day and night.

I outhustled them but we were still losing margins because we were both overpaying the publishers to beat each other.

So we decided to partner up instead.
We agreed that I send a ton of my ringtone traffic to them.

And they stop going after publishers.

Win. Win.
On a Friday we had a verbal truce with their CEO, Ken. That truce was meant to hold through the weekend. However a few hours later I intercepted an offer email from Shark to LeosLyrics (that site I secretly bought).
I felt betrayed, and called the deal off. They didn't know how I had this info. Nobody knew I owned Leo's Lyrics.

Leo's Lyrics was my secret weapon to get inside information on anyone trying to approach this space. So I was able to react very quickly. And it worked.
So I went at everything HARD.

Scorched earth.

My distribution and profits grew.

These guys lit me up and I wasn't going to stop.

It felt like Cold War
This is when I learned the power of distribution.

They had the demand, but I controlled and locked in much of the supply.

At that point I felt that I was in a very strong position.
I think once they noticed they were losing ground, the Shark boys started to reach out trying to cut a deal.

I liked one of the guys there, Matt, so I'd only pick up his calls because he was a nice guy and he knew I wouldn't speak to Ken.

Sometimes it pays off to be a nice guy.
One day he calls me up and begs to give Ken one more chance to talk. I agreed to a sit down at a NYC restaurant. Ken and I never met before.

At this meeting they propose a deal. These talks led to talks of a merger.

Merger made sense. We'd have a monopoly on this niche.
After agreeing to all the terms, we drew up the paperwork to form ToneFuse and agreed to sign in person at Ken's house in NJ.

Now you have to understand, the 5 guys on their side were 3 brothers, and 2 of their best friends. Ken and Matt were best friends.
The best moment for me happened seconds after we all signed the agreement.

I said "Guys, by the way, I'm Leo" 😎

The faces around the table all went WTF. I wish I'd record this moment. Matt loved it. He just loved to see someone stick it to Ken.
When we all laughed at the whole thing, I knew we had a good chemistry as a team. The 6 of us gelled.
Then at a shareholder meeting I asked the team who will be the CEO.

Even though I'd own majority of the company and have a lot of control, Ken was experienced. Cornell MBA and already sold one ad biz for 8-figures to a public company.
To that day I was successful financially, but always an army of one.

So I thought maybe he would be a better choice for CEO.

To my surprise, he says "Val you've been batting way over 500. I bet you will continue you to. You take us to the next level. You're the CEO."
Frankly I was surprised, but think he saw more than I knew about myself at the time.

(Maybe he just wanted to chill and let me do the heavy lifting 😂.)

So I laid out the organization and set responsibilities on each.
Everyone on the team hustled and worked hard. They had the hunger to win.

There was no stopping us from there. We were scaling fast.

The first year of ToneFuse, our NET profit was over $10M.
Our product was so strong that every music property started to add it. AOL, Yahoo, CBS, LastFM, Pandora...our ringtones were everywhere.

It was just 6 of us and a young developer running the entire operation.
This "little" operation had 500 MILLION people at it's finger tips plus we knew what music they love.

We drove about 10 million people to our partners monthly.

And signed up millions of subscribers with monthly recurring revenue.

The numbers were massive.
As we scaled, we quickly noticed two major trends starting in 2009:
- rise of mobile traffic
- lack of brand ads

So we launched two more companies to specialize in those areas:
1- @MobileFuse was started as a mobile advertising company. Today MF is very profitable, employs nearly 100, and on its way to do $100M in revenue. Led by none other than by co-founder and CEO, Ken Harlan. Yes, Shark Ken!
2- ToneMedia was founded to attract music enthusiasts on one platform for brands to reach. It quickly grew to become 2nd largest music property, only after YouTube/Vevo.

I'll leave these stories for another thread.
All the sudden I was the CEO of 3 companies. And each company had different shareholders, cap tables, and management teams.

In just 2 years I went from managing nobody & working from home, to leading 3 separate fast-growing companies simultaneously.
It was a great learning experience. I learned how important it is to delegate responsibilities. Managing 3 companies forced me to allow others to operate without myself micromanaging them.

The experience helped me understand how to hold multiple companies without the day to day.
So back to ToneFuse, things were going great.

We recognized that we massive scale to drive music enthusiasts. So ironically the industry went a full circle, and the network was responsible for helping launch a little thing called Apple Music, a streaming service.
We also started to see some interest in getting acquired. Our profits made the company attractive in the post-2008 era.

In 2012 we signed a LOI with subsidiary of a huge French media conglomerate, Lagardere. The subsidiary was mainly known for it's live music app, Bandsintown.
However it took a year to close the deal as the buyer had a very complicated, old-school structure that slowed everything to a crawl.
It was frustrating to close for a year, but at that point we were collecting a 7-figure profit every month as we wait. So we weren't in a rush.
The deal finally closed. We sold ToneFuse and ToneMedia simultaneously.

I agreed to stay on for some time as CEO of the advertising division. For the first time in my life I had a paycheck and a boss. But that didn't last.
I also had a board seat. It was also the first time I witnessed what happens in board rooms.

The way I thought decisions were made in corporate world was all wrong.

They control companies but don't always understand where the values are.
The journey had so many lessons from start to finish.

I handed over CEO role of MobileFuse to Ken.

Finished my stint at Lagardere/Bandsintown.

Went from 3 to 0 CEO roles.

And decided to "retire".
Give me a follow and let me know if you want me to share the story of how I leveraged this music audience of 500 million to launch the 2nd biggest music property, legalize the lyrics space, and sell ads to Pepsi Super Bowl Halftime.
Plus I'll continue to share stories of companies I've built, and things I've learned over 20+ years.

Or maybe I should write about the time I almost bought the company that acquired ToneFuse, and everything in it!

Too many stories, too little time :)
Forgot to mention one important part.

During this journey, was very happy that we were able to make a huge difference in lives of many publishers. Big and small.

100's of them experienced revenues going up 2x to 5x vs. pre-ToneFuse. Incremental revenue from a simple text link
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