Rande
A Little Web Music
July 12, 1999
THE BUZZ surrounding digital music is sounding more like a roar these days. The word "MP3" now rolls off the tongues of even the over-30 crowd. (In case you've just returned from a really long vacation, MP3 is the name of the most popular audio file compression format.) This week alone Barnesandnoble.com (BNBN) launched its music store, and two new digital music companies went public. Meanwhile, the Secure Digital Music Initiative (SDMI) members worked around the clock to try to arrive at industry standards. Don't blink: The landscape will change on you again.
Fortunes will certainly be made in digital music. But by whom and how is far from clear. While large corporations like America Online (AOL), Intel (INTC) and EMI Music are pouring hundreds of millions of dollars into the field, these companies obviously can't offer investors the chance to bet on the digital music revolution alone. But some of the little guys can.
In today's screen we take a look at a few digital music Web sites -- specifically, eMusic.com (EMUS), Liquid Audio (Sorry, no snapshot available) and Launch Media (LAUN). These are three of the closest things we could find to pure plays in the arena. But be forewarned: The entire sector is still untested; the stocks are highly speculative investments at best. Why so risky? First, industry standards aren't yet settled. Second, there simply aren't many publicly traded companies that focus on digital music to choose from...because industry standards aren't yet settled. Get it?
Fearless investors could just follow their music tastes. If you sing along to Top 40 radio, you might like the digital music companies that are trying to work closely with the Big Five recording companies. If you scrounge for rare tracks in specialty stores, you might prefer companies that work with independent labels and relatively unknown artists. But, of course, it's not just a matter of taste; the pop and alternative business models are radically different.
Digital Music Players?
COMPANYMARKET CAP*TRADING RANGE1Q99 LOSS*1Q99 REVENUES*1998 LOSS*1998 REVENUES*eMusic.com
(EMUS)$3751/2 to 35$2.3$0.02$1.7**$0.02** Launch Media
(LAUN) 212 11 11/6 to 36 11/16 6.7 2.4 13.4 5.0 Liquid Audio
(LQID) 662 34 1/2 to 48 4.1 0.53 8.5 2.8 Table last updated 4:45 PM 7/9/99
Sources: FreeEDGAR.com, Bridge
*In millions
**eMusic (formerly GoodNoise) was founded 1/8/98
eMusic.com started trading 4/27/98, Launch Media 4/23/99, Liquid Audio 7/9/99
eMusic.com
You won't find any Ricky Martin on eMusic.com; headliners include Grandpaboy and '60s surfers' faves Dick Dale and the Deltones. EMusic, formerly known as GoodNoise, actually sells music downloads in the MP3 format, charging 99 cents for singles ($8.99 for full albums). EMusic offers harder-to-find indie bands and owns the rights to distribute them. Of course, anyone who downloads a song for a buck can then copy it and pass it along to 100 friends. But the company figures those Dick Dale fans won't want to wait for somebody else to pirate the music they want.
"It has huge potential," says Jason Ader of HC Wainwright & Co. (one of only two analysts covering the stock). "The future is downloadable music, and the major labels will be slower than people think to get there." Ader applauds the indie strategy, which he thinks suits the Internet's cheap distribution. He has a Strong Buy, speculative rating on the stock. Speculative, because the company is riddled with risk. This fiscal year (ended June 30), the company is estimated to bring in only $142,000 in sales -- including ad revenue. And eMusic is spending lots of money to build its library of exclusive content. Meanwhile, the stock has already enjoyed quite a ride, opening on the Nasdaq National Market (jumping over from the OTC Bulletin Board) on June 2 at its record high of 35, but then falling back to Thursday's close of 25 7/8.
Liquid Audio
Another newcomer daring to charge for downloads is Liquid Audio, which went public Thursday night, raising $63 million through its 4.2 million share offering. In contrast to eMusic.com, Liquid Audio has ingratiated itself to the major labels. That's because Liquid Audio is best known for offering secure download files -- which aren't as popular with consumers who want to swap files with friends. Liquid Audio's Web site offers singles for $1.99 -- that's double eMusic's price. On the other hand, mainstream music listeners will find some of the music they know and love, as well as 300 smaller labels' offerings.
In addition to download sales, the company offers encoding and delivery services to the music industry for online sales through other sites. Last calendar year Liquid Audio's revenues were a respectable $2.8 million. And recent deals with EMI, Tower Records and Amazon.com (AMZN) could spur rapid revenue growth. But early investors who bid the stock up as much as 220% on Friday must have thought so, too.
Launch Media
Launch Media has an even tighter bond with both the major labels and the major retailers because it doesn't plan to enter the online retail world -- ever. It poses no threat to CD sales because it offers music online as a freebie promotional tool. "Selling singles downloads is not a business," says Chief Executive Dave Goldberg. "This is a way for consumers to see what they like." The site gives away singles -- currently a new Beastie Boys track -- to visitors who register and provide information about themselves and their musical tastes. Launch, which pays the labels for the use of their music, is planning to make money via advertising and sponsorships. Last reported quarter (ended in March) Launch had 1.1 million registered users, and $2.4 million in net revenue. At the same time, the company lost 79 cents per share.
If free music downloads perk up sagging music sales, Launch could be very popular with the industry as a promotional tool. Investors were won over, sending the stock up 69% on its April 23 market debut. And a couple of analysts like it, too. "We believe Launch will be Generation Y's destination for music discovery and community on the Internet," said Paul Noglows of Hambrecht & Quist when he initiated coverage of the stock with a Buy on May 21. "With backing from premier industry players including Sony (SNE), NBC (a division of General Electric (GE)) and Intel, Launch is poised for explosive growth as record labels increasingly focus their efforts on reaching new customers via the Web." (It should be noted that H&Q was an underwriter of Launch's IPO.) But what if the anticipated launches of VH1's and MTV's new sites, as well as Rollingstone.com, thin out the advertising dollars? Will there be enough to go around? That depends on the future of broadband access, download standards acceptance and online security -- to sound just three of the many sour notes out there.
But as winners and losers begin to emerge in the digital music world, let's just hope we learn some valuable lessons. After all, we have to start preparing for the online video revolution.
-- By Cintra Scott
Copyright © 1999 Dow Jones & Company, Inc. All Rights Reserved.
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