Digital Music Goes Mainstream With AOL Acquisitions
By Spencer E. Ante and George Mannes
Staff Reporters
6/2/99 9:00 AM ET
SAN FRANCISCO -- America Online's (AOL:NYSE) purchase of Spinner Networks and Nullsoft may just be what the digital music industry needs to accelerate its transition from a fringe movement into a mainstream phenomenon.
AOL declined to break down financial details but said in a statement Monday that it values the two stock-for-stock transactions at about $400 million. The deals, while unlikely to shore up AOL's stock, mark another step toward the company's longstanding goal of becoming the online equivalent of a broadcast network. More importantly, they represent an endorsement of online music distribution from the most powerful online service -- and a company as well known for its massive online audience as for its traditional focus on ease of use.
"We think this is a great step forward for downloadable music and open formats," says Bob Kohn, chairman of GoodNoise (GDNO:Nasdaq), an aggregator of online music content. "A company like AOL stepping up in this area helps legitimize and facilitate the growth of the downloadable music market."
Spinner.com attracts 1.5 million unique users a month and broadcasts 2 million songs a day, with users averaging 91 minutes per session. Spinner users must download a proprietary piece of software, based on RealNetworks' (RNWK:Nasdaq) streaming technology, that allows people to listen to various genres of music.
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'AOL certainly bought into a leadership position,' says Nicholas Butterworth, CEO of SonicNet.
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AOL's other purchase will also help its users engage in do-it-yourself music broadcasting. Nullsoft is the developer of Winamp, the leading MP3 player for Windows, which has been downloaded 15 million times and claims an installed user base of 5 million people. Nullsoft is also the developer of the SHOUTcast streaming audio server, which enables individuals to broadcast their own content over the Internet, including MP3 files.
"The reason to buy Nullsoft was to buy the SHOUTcast server," says Jason Noah Ader, an analyst with H.C. Wainwright. "SHOUTcast allows anyone to become a DJ."
David Readerman, an analyst with Thomas Weisel Partners, says the acquisitions are in line with AOL's strategy of offering proprietary content. "It's consistent with AOL trying to enrich the experience for its users," says Readerman. "AOL is going to try to provide as many services for its users as possible to retain them." (Neither Wainwright nor Weisel has underwriting relationships with AOL.)
AOL is catching up to other content distributors, says Nicholas Butterworth, CEO of SonicNet, a music site owned by Liberty Media (LMGa:NYSE) and set to be acquired by Viacom's (VIA:NYSE) MTV Network. Butterworth points out that Yahoo! (YHOO:Nasdaq) is entering the online music business with its planned purchase of broadcast.com (BCST:Nasdaq), while AT&T (T:NYSE) has several online efforts going, including its a2b music system for delivering music over the Internet
"In some ways, what AOL is doing is regaining parity with other big players," says Butterworth. "The MP3 phenomenon is clearly one of the biggest trends in freeware over the Net over the past year. AOL certainly bought into a leadership position."
As the Internet world migrates to a high-bandwidth future, some believe Internet radio and music file downloads will be a must-have application for content providers. "These are great applications for the Internet today," says Butterworth, "but they have greater potential for broadband in the future."
Even though industry executives applaud AOL's move, some analysts say the acquisitions are unlikely to boost the company's stock in the short term. "People are looking for direction, especially with its broadband strategy," says Readerman. "This is an add-to-the-experience deal."
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