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CD-burning kiosks debut: Four years of work on the line for local media-technology company

May 15, 2006

As the after-work rush of customers came into a south-side Karma music store on a recent Wednesday, some wandered up to a new kiosk and gave it a whirl.

It was the public's first look at CD-burning technology, developed by local entrepreneurs, that allows customers to pick songs and immediately burn a CD mix before leaving the store.

If consumers like the kiosks, backers hope to sell video games, movies and even concert tickets through the terminals, which could be placed in airports, truck stops, hotels and a variety of stores.

If consumers don't bite, almost four years of work and an undisclosed amount of money will be down the drain.

It's a bet backers of Digital Kiosk Technologies LLC are willing to take.

The company, based downtown at the Chamber of Commerce building, started out as the brainchild of Jason Huntley when he was a student at Butler University in 2002. He developed a kiosk for people to pay for and burn compilation CDs of local artists.

At the time, Robert Cooprider, now DKT's chief operations officer, was working for D.C. Ventures Inc., the company that licenses and markets Karma music store franchises.

Cooprider got a call one day from the owner of the Karma store on Post Road, who said a Butler student had wandered in to see if he could test-market a CDburning kiosk.

"Can you have him call me in the next 30 seconds?" Cooprider remembered saying. Music retailers and the entire recording industry were already immersed in their well-documented struggle to find a way to stop music piracy and stem the tide of falling sales.

Cooprider met with Huntley, advising him to get licensing from national record labels, not just local acts.

"It's going to take a lot of expense and a lot of moxie," Cooprider told Huntley, advising him that trying to build a business on a local music base would be a struggle.

The meeting kicked off the partnership that led to the May 10 debut of the music machines. In March 2003, DKT was formed and creator Huntley is the company's vice president.

Retail space saver

At DKT's touch-screen terminals, customers can browse an enormous catalog of music, choose tracks, then burn a CD. The initial track costs $3.99 and additional songs are 99 cents apiece.

The idea is a blessing for store owners, whose biggest costs are tied to inventory. Carrying large numbers of CDs costs money and space. Carrying fewer CDs poses a risk as well: Customers will walk away if they don't find the CD they want.

South-side store owner Mark Peters said he's already sold a handful of compilation CDs. One customer came in looking for a rap single, which the store didn't have, and left with an eight-track mix.

"You just can't stock everything," Peters said.

According to studies by the National Association of Recording Merchandisers, about half of all customers leave a music store or department store music section not having found what they want.

But with the kiosks, which are about the size of an automated bank machine, stores can carry hundreds of thousands of artists.

"This allows the small retailers to have the inventory of an iTunes," said DKT CEO Philip Meyer.

The kiosks aren't completely new. Starbucks Corp. rolled out similar booths made by Hewlett-Packard Co. in 2004 and now has them in at least 13 locations, none local.

Other companies developed kiosks, but some reports put the cost per kiosk at $25,000 to $35,000, a price Cooprider said would be tough to make a profit on.

DKT officials think their product is different because it was designed keeping a retailer's costs in mind. Other machines are technology-heavy, which drives up the cost. But with falling technology costs and outsourcing some portions to keep costs low, DKT's machines run in the $10,000 to $15,000 range, depending on how the machine is configured. The company leases them to stores for roughly $250 a month.

That means stores need to get five to six customers per day to burn a CD to cover costs, according to Cooprider.

The profit comes mostly from the initial charge of $3 for the cost of the CD. Record companies are requiring that a higher-quality, higher-security disc be used than people use to burn CDs at home. But the cost is still below $3, and DKT and the retail store split the markup. Most of the per-track charges go back to the record labels as royalties.

Signing the labels

A big chunk of the work to get the kiosks to the marketplace was convincing the record companies to play ball with a startup out of Indianapolis. For this, DKT enlisted Milt Olin, the Los Angeles-based attorney who helped guide Napster Inc. from piracy to legal business realms.

"We have been at the very forefront and have created this [licensing] with the labels from scratch," Meyer said.

Now, the company has signed licensing deals with three of the four major record labels: Universal Music Group, EMI Group and Warner Brothers Music. Talks continue with Sony BMG Music Entertainment. And they've contracted with independent labels.

About 112,000 songs are available through the machines, according to Meyer. The company has minted contracts for and is now loading another 800,000 tracks to its system.

DKT grew over four years on the back of private investment and has a staff of 20. Officials wouldn't say how much has gone into the company, but said they expect to have "strong revenue" within a year and to recoup investment costs and cover overhead in two years.

DKT turned almost exclusively to local partners to roll out the project, a fact they say has helped keep their overhead low.

Indianapolis-based Hamilton Exhibits LLC built the kiosks. Indianapolis-based Klipsch Audio Technologies LLC is providing the sound system. A division of Carmel-based Telamon Corp. is taking care of upgrading the broadband lines and working with the telecommunication companies.

Right now, the Karma store at 4895 Kentucky Ave. has the only booth that's fully functioning. The store at 3802 N. High School Road should be online any day and DKT is attempting to get all 18 Karma stores, which are all in Indiana, online by June 1. Then, DKT will help roll out an advertising campaign.

If successful, the next wave, Meyer said, is other music stores. DKT is also developing technology that would let consumers download music from a kiosk directly to their MP3 players. Then it's on to placing kiosks in airports, Meyer said, hotels, truck stops and everywhere.
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