B] REEVES ON IPOs: In online music sales, buzz tops tech--for now
By Scott Reeves, Bridge News
New York--Jul 16--MP3.com has the buzz. Liquid Audio has the technology and
the alliances.
MP3.com's planned initial public offering will be a screamer and, riding
hype and strong retail interest, probably will outpace Liquid Audio's stellar
debut. However, there's just one catch: MP3 has shown it can build an audience,
but it has yet to demonstrate how it will make money.
* * *
MP3.com operates a Web site to promote and distribute music. The company's
growing music catalog contains about 100,000 titles from more than 18,000
performers. In June, users viewed more than 57 million Web pages, conducted
about 5.5 million searches and listened to or downloaded about 10 million songs.
The company also receives revenue from the sale of compact discs and from
advertisers for their sponsorship of CD samplers, which are distributed free of
charge to consumers and contain collections of music from performers who have
posted music on the company's Web site.
The potential market is huge. Worldwide sales of recorded music totaled about
$38.7 billion in 1998, representing one of the largest opportunities for digital
delivery of online commerce. By 2003, Forrester Research estimates that the
sales of recorded music through digital transmission will grow to about 7% of
all sales from less than 1% in 1999.
But from inception to Mar 31, MP3.com has derived 89% of its revenues from
the sale of advertising space on its Web site.
Groupe Arnault, a French company with interests in LVMH, Moet, Hennessy, and
Louis Vuitton agreed to purchase advertising, promotion and marketing services
valued at $150 million in the next 3 years. In June, Cox Interactive Media
invested $45 million in MP3.com and formed a joint venture that will focus on
providing downloadable music for affiliated radio stations across the US.
In addition, MP.3.com has a consulting agreement with Atlas/Third Rail
Management to conduct promotional activities such as its sponsorship of the
Alanis Morissette and Tori Amos "5 1/2 Weeks" Summer 1999 tour. MP3.com signed a
3-year license and promotion agreement with Boutit, also known as No Limit
Records, which represents platinum-selling recording stars such as Master P and
Snoop Doggy Dogg.
THE BATTLE FOR INDUSTRY STANDARDS
MP3.com currently relies on mp3 technology for the digital delivery of music
via the Internet and as a brand identity. Adopted by the Moving Picture Experts
Group, mp3 is an open standard that makes music files smaller and easier to
handle on the 'Net.
The major recording companies haven't encouraged the development of the mp3
format to deliver music because users of the technology can download and
distribute pirated copies of copyrighted recorded music via the Internet.
Instead, major record labels have backed plans to develop a standard for the
electronic delivery of music to be called Secured Digital Music Initiative, or
SDMI. In addition, major companies, including Microsoft, IBM, AT&T and Sony have
launched efforts to create proprietary audio formats that will compete with the
mp3 format.
While a pioneer in the field, the MP3 format may not deliver the best sound.
"The MP3 platform cuts out high-end fidelity -- that's how it saves on file
size," said Steve Harmon, senior investment analyst at internet.com in New York.
"What happens when broadband becomes common and the typical listener is no
longer concerned about system capacity but quality? MP3 may then become just
another format."
If a competing format emerges as the industry standard, MP3.com is stuck
with a stale name and an outdated, second-rate technology. The recording
industry is pushing a competing technology as part of a continuing effort to
protect its franchise and it's a safe bet that the technological giants will
push a format that puts money in their pockets.
TWO HOT COMPETITORS
On Jul 9, Liquid Audio opened at 41 after the company priced 4.2 million
shares at $15 each through underwriters led by Lehman Brothers. The stock hit 48
and closed Thursday at 32. Price talk was $14 to $15 a share, up from the
originally filed $10 to $12.
Liquid Audio provides a system for the digital delivery of music over the
Internet. The company's software and services give performers, record companies,
Web sites and retailers the ability to create, syndicate and sell recorded music
with copyright protection.
Through its Liquid Music Network Web site affiliates, the company helps
performers and record companies promote and sell their product. Consumers
preview the music from an expanding library before buying. If consumers like
what they hear, they can download music to compact disks, and later this year,
to advanced digital devices that are expected to be available for holiday
shopping.
Record companies using Liquid Audio's system to promote music releases
include major names such as BMG North America, Capital Records, Columbia House,
Dreamworks Records and EMI Classics. Liquid Audio also handles independent
record labels, including Beggars Banquet, Rounder Records, Rykodisc and
Twin/Tone Records.
Later this year, Liquid Music Network will begin offering syndicated music
through music retailer Web sites. The company has established relationships with
major names in the industry, including Adaptec, Amazon.com, Dolby Laboratories,
EMI Recorded Music, Intel, RealNetworks, Sanyo, Texas Instruments, Toshiba and
Towerrecords.com. Liquid Audio has established international alliances in Korea
and Japan to build its brand name outside the US.
Companies licensing Liquid Audio's software include Amplified.com, Platinum
Entertainment, Warner Bros. Animation, Audio Highway, Cell Ventures, K-Tel
International, Music Connection and Web Music Co.
On Jul 7, Musicmaker.com opened at 20 1/4 after it priced 8.4 million shares
at $14 each via Ferris Baker Watts. The stock hit 28 1/8 and closed Thursday at
18 15/16. The size of the deal was increased from 3 million shares at $7 to $9
each.
Musicmaker uses the Internet merely as a means to place orders. Buyers make
their selections and a CD is made and shipped. Liquid Audio represents a huge
jump forward because users can download their selections directly from the
Internet. Analysts say the advance is likely to push aside companies like
Musicmaker.com in about 2 years.
Consolidation of the online distribution of music sped up this week as
CDNow, an online music store, agreed to merge with Columbia House, a direct
marketer of music and videos jointly owned by entertainment giants Sony and Time
Warner.
Despite its huge number of downloads and popularity among listeners, MP3.com
has yet to translate its audience into a torrent of cash.
"MP.com leads in downloads, but CDNow has more buyers," Harmon said.
The major record labels once saw the Internet as a threat to their
franchise, but have embraced the new technology and moved boldly to dominate it.
But it's too early to say how the industry will develop or which companies
will emerge as the winners.
"There are more than a hundred online music retailing sites," said Paul
Bard, an analyst at Renaissance Capital, a money-management and institutional
IPO research firm in Greenwich, Conn. "To be successful, a site needs 2 major
things: Content and marketing."
"If a site doesn't have the songs customers want to hear, it won't sell.
Marketing alliances are extremely big. MP3.com has about 120 independent
companies in its catalog, but in aggregate those labels represent less than 20%
of the entire music market. Most of the content is held by the top 5 record
labels."
THE PLANNED OFFER
MP3.com of San Diego plans to offer 12.3 million shares at $16 to $18 each
via Credit Suisse First Boston, up from the originally filed 9 million shares at
$9 to $11 each. The company's proposed Nasdaq symbol is MPPP.
Net proceeds from the IPO will be used for marketing and promotional
activities, capital expenditures, concert sponsorships, and tours and facilities
expansion.
There will be about 65.7 million shares outstanding after the IPO. Existing
shareholders paid an average of $1.15 a share. After the offering, Sequoia
Capital will hold about a 14.2% stake in MP3.com and Cox Interactive Media will
hold about a 9.5% stake.
For the 3 months ended Mar 31, the company reported a net loss of $1.4
million on revenues of $665.8 million. The company warns that it
expect to report "substantial" net loses for the "foreseeable future."
MP3.com was incorporated in March 1998. In 1998, the company developed the
infrastructure needed to download music from the Internet. The number of
employees grew to 141 on Jun 30 from 8 on Dec 31, 1998.
Chief Executive Officer Michael Robertson, 32, founded MP3.com in March
1998. From September 1995 to September 1996, he served as CEO of Media Minds, a
developer of digital picture software. From January 1994 to August 1995, he
served as CEO of Mr. Mac Software, a developer of networking and security tools.
Competitors include providers of online music content such as EMusic.com,
Launch Media, Musicmaker.com and Tunes.com. Companies offering mp3 or other
audio compression formats include AT&T, IBM, Liquid Audio, Microsoft and
RealNetworks. MP3.com also competes with online music retailers such as
Amazon.com, CDNow and portals such as America Online, Excite, Infoseek, Lycos
and Yahoo.
FLIP AND FORGET
MP3.com's IPO will explode on the opening and soar in the aftermaket. Expect
first-day volume to be high as the smart money pockets quick profits and moves
on.
There isn't much in MP3.com's IPO for individual investors buying in the
aftermarket. Most of the gains will occur in the first day, and few retail
investors will get shares at the offering price. Those who buy in the
aftermarket on the first day will pay a stiff premium to put their money in
someone else's pocket.
MP3.com offers many performers the major labels won't touch because they
lack broad commercial appeal, but the company may be relegated to the status of
everyone's favorite little specialty book shop around the corner -- a great
place to browse and sometimes pick up an interesting thing or two, but nothing
more.
Assuming, of course, that another standard for downloading music from the
Web doesn't turn MP3.com into a dinosaur.
The long-term outlook for the mp3 format is questionable, but it won't be
crushed immediately -- and that's the equivalent of several geologic ages in
Internet time. Look for MP3.com's IPO to climb to the top of the charts for a
brief instant.
The reason for MP3.com's transient glory will shock veteran IPO market
watchers. "I think the correct word would be hype," said Mark Basham, new issues
analyst for Standard & Poor's. End
Bridge News, Tel: (212) 372-7122
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