1Mby1M Deal Radar 2010: Music Wizard, Boulder, Colorado

Music Wizard Group is a software company that creates, develops, and produces music video games that use real music on real instruments. Its flagship product, Piano Wizard, has been developed into a full-blown music-education-in-a-box product known as Piano Wizard Academy. The Boulder, Colorado-based company was founded by CEO Chris Salter, who had no formal music training before college. He earned double undergraduate degrees in music and linguistics, which he leveraged into a master’s degree at UCLA in how some cultures learn music as if it were a native language. He spent two years in Brazil with a Organization of American States fellowship, which gave him key insights into a very different model of music transmission that he then incorporated into the music game system he developed. Years later, as these thoughts germinated into a full video game design, he founded the company and built a network of investors, consultants, and strategic partners to bring the project to realization. The music video game market is about $3 billion, with the larger video game market estimated between $20 billion and $30 billion worldwide. These markets are projected to double in three to five years. The music education industry is much smaller, with the entire music merchandise industry being worth $5 billion including instrument manufacturers, publishers, software, and so forth. Music Wizard’s target segments are current Rock Band or Guitar Hero customers looking for something deeper, people who want to be musicians, and parents who want their children to learn an instrument. The company has a variety of products for children and adults. Packages include a keyboard and software including the learning game and songs. More advanced packages have the ability to import musical instrument digital interface (MIDI) files, piano lessons on DVD, and printable sheet music. Prices range from $129.95 to $549.95. Music Wizard’s business model changed dramatically in the past year owing to the economic pressures and challenges. Whereas before it went after large licensing partnerships with Fisher-Price, Mattel, US Music Corp, (with Disney), Suzuki and others, in the retail space it found those relationships to be asymmetric, difficult to manage, and subject to macro economies and personal whims of management in those entities. The cost of goods included keyboards, which was a heavy, profit-challenged capital burden, especially in the consignment terms retail space. As the company retracted to survive the recession, it refocused on its high-profit high educational line, the Piano Wizard Academy, which it sells directly to consumers online through joint venture agreements and affiliate programs and marketing. The company also struck win-win agreements with Hal Leonard Corp, which fulfills keyboard orders on a just-in-time basis instead of tying up valuable capital with container loads of keyboards. It worked out royalty deals and revenue sharing to allow its programmers to move forward on new development projects without upfront expense. Finally, it signed agreements to fully integrate Hal Leonard Corp’s library of more than 100,000 songs into its WizardTunes.com website to become the largest legal MIDI song resource online. So, in sum, the company sells online direct to customers a $500 product with 400% gross profit, pays affiliate commissions and keyboard costs after the sale, and then invites customers to become affiliate resellers and consumers of new content. At the time of the company’s founding in 2001, there was no Guitar Hero or Rock Band – these emerged after 2005 – but there were other music game concepts that, says Music Wizard, basically shared their shortcomings; that is, they were music simulation not playing real music. The MIDI piano software tutorial market was basically as it is now, a small market player that promises a lot but fails to engage most people seriously. At this time, the market is dynamic and different from when Music Wizard was formed, which its feel is to its advantage if leveraged well. Guitar Hero and Rock Band have shown the video game and music industry the true market potential; that is the number of people who want to be musicians. In England, 27% of Guitar Hero users surveyed went so far as to take guitar lessons. Unfortunately for most of these wannabe musicians, says Music Wizard, most music lessons are rooted in outdated practices and techniques, nothing like the dynamic game feedback students enjoy with a game that stimulates their interest. Even MIDI-based music software tutorials are either not interactive with the instrument in real time, or very notation or tablature based, and require tremendous physical and mental dedication to succeed. Music Wizard feels that the music video game industry is in its infancy and that in the next ten to fifteen years there will be hundred of titles. The challenge for all of them will be to move from simple games to complex music. Music Wizard believes that its approach, starting from sheet music and simplifying it to a color-coded musical grid that allows even small children to play Bach, sets it apart. Music Wizard has aimed to produce a music video game learning system, an entire ecosystem with interoperability across instruments, platforms and time and space. The company has about 15,000 registered users after five years on the market The Fisher-Price toy products sold about 350,000 units total. Music Wizard is not yet profitable, but with the new online marketing of the educational package, the company sees a clear path to profitability even in this overall weak market. It earned $1.2 million in revenues in 2007, about half of which were from the licensing deal with Fisher-Price. Revenues fell in 2008 and 2009, but Music Wizard is on track for more than $1 million in 2010. Through a network called CEO Space, it had seed and equity rounds of $25,000 and $125,000, respectively. It’s in the process of seeking about $3 million in funding. As for growth, Music Wizard intends to polish its tools and bring its value proposition to them in the most powerful way possible. Mobile marketing is one area in which the company has recently signed key strategic partnerships to move into that space. It will focus on direct market educational sales to gain immediate traction and high profits, and as new versions come out with the right hardware partners it can re-enter retail, but with much improved positioning and less risk. Finally, its back-end content engine WizardTunes.com is about to get a content upgrade. Salter says that several exits are possible, including a merger/acquisition in either the music video game space or the educational space (McGraw Hill, Pearson) or staying private and giving investors dividends on a cash cow company, possibly buying back stock should conditions allow. Recommended Readings Deal Radar 2009: Sheet Music Plus Guitar Wizard: Guitar Hero with a Real Guitar (from Engadget)

This segment is a part in the series : 1Mby1M Deal Radar 2010