More upheaval at BurnLounge

BurnLounge has announced that CEO, Alex Arnold, will step down from his post effective immediately. Grant D. Johnson, one of the company’s Board of Directors and founding investor will take the helm. Johnson is also founding managing partner of Benevolent Capital, a hedge fund investing in private and public companies.

The Federal Trade Commission went to court this week to ask for an immediate shutdown of the controversial music service, but the court granted the company a stay. Although it still remains operational, the damage has been done. I think you’ll see a number of members canceling their memberships.

The business model BurnLounge presented to the market is seriously flawed in its ability to support the individual BurnLounge operator in generating enough revenues to cover costs of doing business. The Federal Trade Commission recognizes this and will continue to work towards either shutting down the service or forcing positive change.

The argument has been that the more BurnLounger’s a current member signs up for a member package, the more money will be made on the subscription fee and not the actual sales of music, which have an extremely low margin after splits with the labels, distribution, BurnLounge and anyone–as I’ve heard it–four to six levels above a new member signing up. In some cases, your split on music sales might be half a penny per track.

An individual would have to sell tens of thousands of songs to recoup their original investment. BurnLounge suggests this is fair. Once they sign you up, you’re on your own. They take your cash knowing that you’re already under the bus and it will be months or years before you see a profit.

BurnLounger’s have argued that access to ticket sales and cell phone service would be their savior. More products to sell means more revenue. I argue that BurnLounger’s have to compete with Ticketmaster, and many other fly by night ticket resellers, ticket agencies and illegal scalpers. There are just not enough tickets in a market to support individual BurnLounger’s who think they are going to make money with this business model.

With Amp’d Mobile filing for bankruptcy and AT&T getting ready to sell 3 million new iPhones in the next 30 days, I doubt BurnLounger’s would have any traction selling mobile phone service as well. You have no store, no customer service, no handsets to subsidize the cost of service. The retail market online is still only 5% to 10% of all retail, and a recent news report suggested that this number is leveling off.

What BurnLounge was doing was going after the long tail market. That’s fine, but drop the initiation fees. That was their biggest mistake. Let people set up a BurnLounge store for free and see the magic happen. Charge them fees to get involved and you’ve got yourself in trouble looking like a pyramid scheme.

Oddly enough, a BurnLounger called me up two weeks ago to pitch me on a “new revenue stream for my business” and that his BurnLounge store had licensed tracks from all the major labels. Instead of telling me he was working with BurnLounge, he tried to get me to believe it was his business and that his site had licensed the tracks. Once he gave me his site URL and I took a look and saw it was a BurnLounge site. I asked him why did he lie to me and tell me his company licensed the tracks? Of course, he didn’t have an answer to that, and I politely hung up on him.

This is another huge issue for BurnLounge. They can’t control their message. They have forty thousand voices all speaking gibberish. Bad for business, bad for music.

Maybe they can salvage it, I don’t know. I wouldn’t be on it. That’s just my opinion.

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