Let The Music Play

Early in 2005, a North Carolina mall owner approached managed-service provider Multimedia Digital Utility Services (MDUS) with a challenge: The mall was considering licensing a Kodak-branded digital photo-finishing kiosk to drive foot traffic. But the mall's owner felt there might be a way to use the kiosk technology not only to attract shoppers but also to bring in revenue above and beyond what could be made from the digital-photo device.

"They called us in to develop a business plan around it, to define what other services there could be," recalls Howard J. Gunn, president of MDUS, a Dallas-based provider of communication, information and transaction services. "Self-service was catching on. Photo kiosks were out there, and so were ATM machines."

Before long, an entirely new business model had evolved. The MSP linked up with Gastonia, N.C.-based DigiStream Technologies to create a robust managed-service approach that would generate revenue for content owners and the retailers that would host the sites. Because DigiStream had obtained access to music licensing through St. Paul, Minn.-based Mix and Burn, a digital-music content provider, the idea of a digital media store was born. The kiosks were designed to play song samples, create and distribute custom-made CDs and sell ring tones for direct download to handsets. Users can also plug portable MP3 players and flash memory drives directly into the kiosks and download music and video.

"We went through the idea of dispensing content directly to consumer devices because that's the way we saw things going," Gunn says. "Not everyone had a gigabyte flash drive, but it looked like we were heading quickly to a time when they would." In fact, that trend has continued to change the music industry, which is now actively preparing to move away from CDs to embrace the flash-memory phenomenon.

Because they had music licenses, Gunn and DigiStream targeted the university market. The timing was right. With universities under pressure from record labels to crack down on illegal music swapping or face copyright infringement lawsuits, licensed alternatives were welcomed on campuses. The trial site for the DigiStream offering is the University of North Carolina at Charlotte (UNCC).

Gunn also tapped his experience in selling to the military market. "When you think about the target age group, universities are the logical outlet," he says. "And the military bases have basically the same demographics. It made sense as a market to approach it as an early adopter."

MDUS had worked with those bases before, partnering with the Army and Air Force Exchange Service (AAFES), which operates retail sites on bases, with managed programs for pay phones and calling cards. Before long, the companies had a deal in place to establish a digital media store pilot program at Fort Bragg in North Carolina.

NEXT: Beyond traditional opportunities

The experience of Gunn and his partners underscores how the government and education IT markets offer much more than traditional opportunities for integrators, managed-service providers and other VARs, as opposed to private-sector vendors, which may lack public-sector contacts or experience.

IBM, for instance, has technology that could be used in similar kiosk settings, but that market may not yet be large enough to attract such players, Gunn says. "A kiosk might generate $15,000 to $20,000 at a store on small purchases, and that just isn't enough to attract the larger system integrators," he adds.

The pilot program with AAFES offers huge potential, Gunn notes. AAFES operates some 12,000 retail sites across the country on Army and Air Force bases.

Fort Bragg alone is the size of a small city, with 55,000 military personnel stationed there and 25,000 civilians from surrounding communities that work there every day, Gunn says. Beyond Fort Bragg, AAFES and the military, in general, can offer sizable market opportunities. For instance, the kiosks are small enough to fit directly in the barracks on some bases, giving soldiers and sailors fast access to music and other digital media.

Gunn says DigiStream is looking to populate about 2,500 sites within the AAFES family with its kiosks. The company acknowledges that the market may outgrow DigiStream's capacity to serve it effectively, at which point partnerships with larger national distributors may be an option. AAFES, too, wants to leverage the digital-music opportunity by partnering with device makers for customized MP3 players that can tune automatically into the FM channels that many bases broadcast.

Gunn and DigiStream are working with Compass, one of DigiStream's investors and a major provider of food-dispensing machines, to move beyond the pilot stage over the next couple of years. Retailers of all stripes are warming to the kiosk idea, Gunn says, seeing an opportunity to drive foot traffic into their stores. "The drive for self-service is ratcheting up," he says.

In the CD-creation part of the business, disks are sold for about $5 for three songs. Longer CD burns would take too long to be completed in the time the typical customer is willing to wait, market research shows.

With the purely digital-music approach, songs retail for $1.25 each--vs. the 99 cents that Apple's iTunes Music Store and other online outlets sell music for. "The additional 26 cents is for the convenience of being able to download the music directly," Gunn says. Retailers recognize the value of using the kiosks to drive foot traffic into their stores as well. "If they walk in, the retailers know they're good for about $7 in spending, so even before they realize the revenue from the very small space, it's a good deal for them."

NEXT: Another key selling point

The flexibility of the kiosks is another key selling point. While they were initially designed to sell hard goods such as CDs or printed photos, the possibilities with digital media are even broader, with the same basic technology able to store and deliver full music tracks, ring tones, interactive games for handheld devices, electronic books and even full-length videos for direct loading on portable devices.

"Once you have the distribution channel established, you can use it for whatever you want," Gunn says. One hurdle that's disappearing is wariness among content owners about making their offerings available in digital form. Fears of piracy kept many labels away from broad licensing agreements with kiosk operators, but that has begun to change. In fact, today, entertainment companies recognize that it's time to start moving to newer media formats.

"People don't realize the CD is 20 years old," Gunn says. As a result, record labels and others that may have just a few years ago been unwilling to make their content available in digital format now recognize the value of having consumers make the switch to more portable options.

Meanwhile, the means of content distribution is shifting too. Most likely, it won't be long before users can load their MP3 players by plugging into a kiosk or having music beamed to their handsets with close-range Wi-Fi technology.

While early versions of digital kiosks relied on Bluetooth technology to distribute content, that proved too slow for large files. But new versions of the 802.11 standard are more promising, as is the proliferation of flash-based thumb drives and media players, which can be connected directly to kiosks.

"There's lots of stuff inside one of those boxes," Gunn says. When the machines were mainly CD-burning stations, controls were needed to operate the robotic arms that grabbed the CDs or those that printed the song titles on the front of the disk. Gunn also integrated payment authorization and other systems with the kiosks. "We also had to get through the security issues. Now we have licenses from all four major labels." Licensing includes several hundred thousand ring tones, as well as talking books. In most cases, the kiosks become standalone data centers, containing a "terabyte or two" of data. "They're little data centers with sheet metal around them."

Beyond the government and education markets, the companies are looking at traditional retail locations and nontraditional sites such as truck stops.

"People don't realize that truck stops house 400,000 truckers every night," Gunn says. "They have a lot of downtime, so they watch everything they can get their hands on."

For studios, low-cost distribution via kiosk also poses an opportunity to repurpose content. "They might offer an old TV show for 99 cents," Gunn says. "Even if they get only that amount, the show was making them nothing before, so it's worth it."

Another piece of the puzzle being put into place is technology to better enable micropayments, especially among younger consumers who don't have credit cards. Preloaded debit-style cards--specifically for kiosks--are one option being tested with good results early on, Gunn says. "Everything is lining up," Gunn says. "And retailers, once they hear the story, are eager to get these things into their stores."