March 9, 2012, 11:23 AM

Online music startup Popcuts is closing its doors

Popcuts was squeezed by margins on 99-cent downloads and rewards it offered buyers.

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Launching in 2008 with hopes of transforming the retail music business, Popcuts.com was counting on music lovers’ passion for choosing and sharing their favorite songs to ignite a big jump in online music sales. But after more than three years, Popcuts said today it will shut down at the end of this month.

“We set out with a grand vision: repair the broken economics of the music industry,” wrote the retailer’s co-founders, Kevin Lim, Hannes Hess and Yiming Liu, in a notice today on their web site that was also e-mailed and tweeted to customers. “We had high hopes for this new model to change the way music is sold in the digital age, but we weren’t able to realize this promise. One reason is that margins on 99-cent downloads are small, and they’re even smaller when you’re allotting part of it to fund rewards for previous buyers. So it’s inherently difficult to turn a music download store into a profitable business.”

The online music business has also been getting more competitive in the past year, with online behemoths Google and Amazon entering an arena where Apple’s iTunes still reigns supreme. In addition, Best Buy Co. Inc. last fall sold Napster, one of the original players in the online music business, to Rhapsody International Inc., providing Rhapsody with a larger subscriber base.

Popcuts used its own software to compile figures on its sales of downloads and ranked buyers as trendsetters when their chosen songs were then purchased by others. The more times a buyer let others know what tracks he purchased, the more credits he received for future purchases.

Popcuts attracted a lot of attention in its first years of operation, including recognition by Internet Retailer in the magazine’s Hot 100 Best of the Web list in 2008. “We give music fans a reason to care about how their songs sell,” Lim said in a Hot 100 profile published in December of that year.

In the notice today, Popcuts’ founders say they “probably could have been much more aggressive in convincing music labels and distributors to sign up for our idea.”

But they added that they still believe in the Popcuts business model and hope to apply it to other markets outside of the music industry. They did not offer more specifics. They said they will also make their technology available for licensing. A request for additional comment was not immediately returned.

Popcuts says its customers will be able to spend any credits they have on music downloads until March 31. “After that date, we’ll turn off the lights,” the founders wrote in the notice.

Popcuts has operated with support from Y Combinator, a firm that provides seed money to startups, and the UC Berkeley School of Information.

 

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