Back in 2002, Sean Neville had a hunch DVD mail-order rental biz Netflix (NFLX) was onto something big. Sure, DVDs were only just starting to be adopted on a massive scale. But Netflix, though also still under the radar screen of the general public, had acquired 2 million members in just three years. While taking a course to become a licensed securities broker in Canada, Neville had enjoyed listening to the audiobook versions of textbooks instead of reading them. Afterward, he would occasionally rent audiobooks from a store in downtown Toronto, but found it a hassle to get there, and expensive.
So Neville approached fellow Cornell B-school graduate and serial entrepreneur Sanjay Singhal with the idea of creating a Netflix for audiobooks. At first, Singhal was skeptical, since he had never heard of a successful rent-by-mail company for anything. Then he learned about Netflix's phenomenal subscriber sign-up rate. In 2003, the pair launched Simply Audiobooks out of Neville's basement.
Today, the 47-employee Toronto-based company is the most successful independent player in the online audiobook rental market. That market consists of about 10 independent players, including booksfree.com and jiggerbug.com, that compete with mainstream book publishers like Random House as well as offline mom-and-pops operating in brick-and-mortar locations.
Move Toward Temporary Ownership
In 2005, the Audio Publishers Assn. (APA) estimated the size of the total audiobook market at $871 million, up 4.7% from the previous year. The APA also released a 2006 study that found almost 25% of the U.S. population listens to audiobooks.
In borrowing Netflix's business model, Simply Audiobooks is not alone, though one of the most successful of the imitators that specialize in renting everything from video games to handbags. "There's an increased interest in anything that has to do with temporary ownership, as ownership of goods is less of a status symbol these days, and renting goods is seen as smart. Consumers also like to try out as many new 'experiences/goods' as possible, which means the Netflix model appeals," says Reinier Evers, founder of trendwatching.com, a consumer trends company with a network of more than 8,000 trend spotters who scan the globe for emerging consumer trends (see BusinessWeek.com, 1/9/07, "Smart Startup Ideas for '07").
No Patent Problem
Just four years after launch, Simply Audiobooks' sales have grown from $30,000 in 2003 to just over $6 million in 2006. It expects sales of around $6.5 million in 2007. Like Netflix, the business charges a flat monthly fee for unlimited rentals—ranging from $15 for one book at a time to $40 for four. The company runs four shipping centers in the U.S., Canada, and Britain, and plans to expand digital service in Europe and India as well as build about 200 brick-and-mortar stores, predominantly in the U.S.
The threat of Netflix filing a lawsuit against Simply Audiobooks, as it did against Blockbuster (BBI) in 2006, didn't dissuade Neville, 33, and Singhal, 41. "We went ahead with it, kind of thinking 'Damn all the torpedoes; we'll deal with that if and when it happens.' But I'd learned enough in [a] law course to know that the patent was quite likely nondefensible," says Singhal (see BusinessWeek.com, 2/5/07, "To Patent or Not to Patent?").
In the end, the pair didn't have to add that worry to their plates. "There are innovators and there are imitators," says Netflix spokesman Steve Swasey. "Imitators are those that just replicate the service. We went after Blockbuster because they copied our service from top to bottom. Those were models we had patented. I'd consider companies like Simply Audiobooks smart companies—how they took a business model for one service and tailored it to another."
Seizing the Opportunity
Still, things weren't so cut and dried in 2003, when Simply Audiobooks was raising money and taking on board members. "[At the beginning], investors were dropping like flies, because they were afraid to be sued. They were afraid to take a risk. We had four people who were looking at the business, wanting to invest, and two bailed when they began to understand the patent issue," says Singhal.
Originally, the plan was for Simply Audiobooks to be a Canadian company, serving Canada. A pilot program to test the U.S. market convinced Singhal and Neville to do otherwise. They placed a few ads on Google (GOOG) to see how fast they could sign up new subscribers. Eight joined the first day. The next day, Singhal and company shut down the ads and went to work establishing a warehouse facility and mailing operation in the U.S.
Simply Audiobooks understands that acting quickly to stay ahead of the competition is crucial. "When a series of processes converge to create a new business possibility, like YouTube, it happens for everyone at the same time. If you're not first or significantly better than everyone else, you'll get trampled. Within six months, we had people cutting and pasting from our home page," says Singhal. By fall of 2004, Simply Audiobooks says it had enough scale that it could outspend competitors on advertising and marketing, further lengthening its lead.
We'll Put It on Your iPod
The market for audiobooks isn't the same as DVDs. In fact, there are some fundamental differences, including the fact that about 30% of audiobook sales are still in the form of cassette tapes, leaving CDs and DVDs a life expectancy of at least 10 years (see BusinessWeek.com, 9/12/06, "Don't Nix Netflix Just Yet").
And though most online rental companies have shunned physical storefronts, Simply Audiobooks is betting that brick-and-mortar locations offer a huge growth possibility. The storefronts are not just going to be for selling traditional books on tape and CDs. Simply Audiobooks is planning to offer discounted downloads of audiobooks onto portable electronic devices. "There's a whole universe of people who want downloads for their iPod and aren't interested in going online—they'd rather pay for us to do it [in a store]," says Singhal.
Even though the entrepreneurs behind Simply Audiobooks borrowed from Netflix's business model, the two companies' future plans point in different directions. Netflix will continue to grow its online DVD rental business, while competing with the likes of Apple (AAPL) for the download market; bricks and mortar wouldn't suit its model or market.
"The reason more online companies don't go offline the way we are is because there's always an offline competitor that's stronger, because it came first. We're an unusual circumstance, because there's no clear leader in the offline audiobooks category," says Singhal. Now, the business is leading instead of following.
For short profiles on more startups that borrowed from Netflix, click here.