David and Goliath Are Interacting : Bertelsmann and Upstart Plan Music Label for CD-ROMs

In what would be the recording industry’s first interactive music label, Bertelsmann Music Group will soon announce a multimillion-dollar joint venture with Ion, an upstart multimedia firm that until recently operated out of its founders’ living room in west Los Angeles.

For BMG, the pact is a first foray into an area the firm hopes will aid its expansion into other forms of entertainment as the interactive market evolves. For Ion, it is the realization of a dream cherished by hundreds of cash-starved multimedia entrepreneurs--plus a real office.

The lopsided nature of the alliance, which pairs the world’s second-largest media conglomerate with a 6-month-old firm boasting one half-developed product and no revenue, is likely to become more common as established entertainment companies look outside for technological and creative talent to lead them into the interactive age.

“Let’s face it,” says Christian Jorg, vice president of BMG’s new technologies unit, “we don’t know how to program CD-ROMs. But we do have capital, distribution and access to repertoire.”

The emergence of interactive CD-ROMs--compact discs combining video, text and graphics on a personal computer--has sparked keen interest in the music business. The idea is to give users a music video they can control--a kind of cross between MTV and Nintendo that lets users select a song, choose the orchestration and attach it to a variety of still or moving images.

Because of their huge capacity, CD-ROMs could also include more. A guitarist might narrate a studio tour, for instance, and users would also get to read the lyrics, which often aren’t included in audio CD packaging.

But since no one’s really sure who within the primordial pool of multimedia developers can produce the new medium’s equivalent of a hit, few entertainment firms have been willing to commit to large sums or long-term deals even with well-established software publishers.

While the terms of BMG’s interactive venture were not disclosed, the music company’s 50% equity stake in Ion is comparable to what other companies have spent hiring techies to start interactive units. The difference is that BMG has committed to financing Ion’s interactive music projects while allowing it to function as a virtually autonomous label.

How Ion’s four founders climbed from their living-room headquarters to the triangular negotiating table at BMG’s 44th-floor New York office may become an entrepreneurial model in an industry where precedent is in precious short supply.

It began last summer at the Digital World conference in Beverly Hills, where Ty Roberts met John and Ann Greenberg, a Los Angeles couple with entertainment industry ties who had caught the multimedia bug. Roberts, a computer game designer who had already started a software company from his Mill Valley, Calif., loft, had been trying for years to interest Hollywood in multimedia publishing.

Ann, who was working as director of marketing for film producer Edward Pressman’s company, used her contacts to open doors. John had done technical and production work in the music industry and had a previous association with actor Dennis Hopper, who encouraged the fledgling firm by expressing strong interest in working with it.

Ion also recruited Lou Beach, a respected graphic designer who has done record covers for Atlantic, Virgin and A&M.;

Thus began a seemingly endless series of demonstrations at nearly every studio and record company in town. Reactions ranged from wild enthusiasm to utter incomprehension, but in neither case was any money forthcoming.

“One president of a record company refused to get within six feet of the computer,” Roberts recalls. “He was afraid I’d ask him to operate it.”

Ion’s first break came when David Bowie’s business manager, Bob Goodale, was referred to Roberts by Apple Computer, for whom he had produced digital music videos that the company uses to promote its QuickTime software.

Goodale liked what he saw and gave Ion the go-ahead to produce its first title, an interactive Bowie disc using audio tracks from his “Black Tie White Noise” compact disc, plus interviews with Bowie and an “editing suite” that lets users create their own music video.

Roberts left the company he founded to work full time on Ion. Ann Greenberg quit her job. John Greenberg dug into money his grandfather had left him, which had been earmarked for his son’s education. Beach spent long hours at the Greenberg’s makeshift home office. They all borrowed computer equipment and pressed friends for favors and donations. Decision making by consensus made for prolonged meetings and occasional flare-ups.

By spring, the Greenbergs were paying Roberts’ rent, unsure they’d be able to pay their own. They were mulling the sale of John’s baseball card collection when Jorg came to the rescue.

Jorg’s desk had been piled with CD-ROM demos long before the company created its emerging technologies division in June. He was usually unimpressed. But Ion’s Bowie demo caught his eye. In April, he visited Ion to begin exploring a deal.

Jorg’s task: convincing BMG that investing in an untested company to create experimental technology for a virtually non-existent market was worthwhile. To that end, he invited the Ion quartet to a meeting of BMG’s international managing directors in May.

“These were the day-to-day music guys, and to them multimedia sounds nice but, you know, what does it do?” Jorg said. “But when they saw it, it was like, ‘Wow, this is really cool.’ They understood it.”

By late July, Ion’s founders were hammering out their agreement at BMG’s sci-fi offices, paneled with TV monitors. Last week, after a lot of faxing and lawyering, the papers were signed.

It was all a bit overwhelming for a company that still occasionally refers to itself as a collective. Now Ion’s executives are looking forward to their first paychecks in a year--and their next project. An interactive Elvis retrospective is likely.