Inside:
by Susan Karlin
November 05, 1999
Keyboardist Mark "Nubar" Donikian thinks MP3.com is the greatest thing since reverb. Last
January, Nubar and the other members of his then-unsigned electronic dance band Hypnogaja
put up a page and sample tunes at the free music download portal. The traffic they generated
helped them land a national distribution deal. Now their self-produced debut CD "Revolution" is
climbing the college charts.
"I call MP3.com the Brill Building of the ?90s," says Nubar, whose band?s music has also aired
on HBO?s "Sex and the City" and Fox?s "Melrose Place." "It?s turned out to be a great
promotional vehicle. The attention we got through MP3 was instrumental in our getting a
distributor."
Not everyone is so enthusiastic. MP3.com "believes that intellectual property protection doesn?t
matter, encryption is bad and music should be free. It?s a utopian philosophy based on college
student use and differs greatly from rest of the music industry," says Gerry Kearby, a former
Grateful Dead sound engineer who?s now CEO of Liquid Audio, a company that supplies secure
music-downloading technology.
MP3.com CEO Michael Robertson "is the Internet version of Rush Limbaugh raging against the
machine," Kearby adds. "But the whole site is designed to create revenue for him and his
investors, using musicians as fodder. He?s done a really good job of creating community, but it?s
primarily all the music that nobody wants."
The Money Game
Thus the controversy over MP3.com rages on. The site launched in November 1997 on the
coattails of the 12-year-old German music compression/decompression (codec) technology
(Moving Picture Experts Group Audio Layer 3) for which it?s named but in which it has no
financial stake.
Since then, the company has ballooned from four people working out of their bedrooms to 250
employees (median age 27) working in a 60,000-square-foot office space.
This year, money has poured in from several sources: $11 million from Sequoia Capital and $45
million from Cox Interactive Media in exchange for a combined 24 percent of company equity, as
well as $150 million in advertising, marketing and promotional services over three years from
France-based Groupe Arnault. Topping it off was the company?s headline-grabbing July 21 IPO
that garnered a whopping $382 million ($362 million in net proceeds), which, according to
Searchterms.com, catapulted "MP3" over "sex" as the most used search word.
Along the way, MP3.com has become synonymous with free music downloading and the
charismatic Robertson, 32, the leading critic of the traditional record-label model. "The music
system doesn?t compensate artists for their work well enough. They have to turn over too much
of their song rights," he says. "We don?t own any of their music. We?re about giving artists the
power."
But it?s one thing to get noticed and quite another to survive. By the first half of 1999, the
company?s net revenue totaled $2.6 million versus a net loss of $7.7 million. After fluctuating
between $105 and $23.31, its stock price on Oct. 8 logged in at $42.25. Analysts say
MP3.com?s long-term viability will rest on whether it can find sufficient revenue streams beyond
advertising and CD sales, lure big-name acts to its site and distance its brand from the rapidly
aging MP3 codec technology.
"The company has no big-name content, but it has an incredible name to trade on, which makes
for potential revenue streams, such as licensing content, partnerships, and charging bands and
consumers for services," says Malcolm Maclachlan, a media e-commerce analyst with
International Data Corp. "If they get into enough different businesses, they could stick around.
But it?s obvious that something?s got to change in the way they do business."
Singing a New Tune
MP3.com is changing its business model, but not in the way strategists might think. "A lot of
music companies approach the Internet by simply transferring the record-buying experience onto
the Net and selling CDs and singles online," Robertson says. "People interact differently with
music on the Internet. The Net is all about interaction and sharing musical taste."
MP3.com works on a kind of barter arrangement. Bands supply free songs in exchange for free
technology tools and marketing statistics that enable them to build a base of fans from
MP3.com?s heavily trafficked site, where 7 million registered users can search 154,000 songs
from nearly 27,000 artists. Between July 31 and August 31, the number of MP3.com?s average
daily unique visitors rose 17 percent to 408,000.
MP3.com offers to manufacture, sell and ship CDs by its bands for a 50 percent split of the
earnings, although bands can choose to sell their CDs through other online stores, such as
Amazon.com. The company derives 80 percent of its revenue from advertising and 20 percent
from CD sales and T-shirts. Robertson hopes to shift the mix to 45 percent advertising, 10
percent e-commerce and 45 percent offline revenue. That means expanding the brand beyond
cyberspace rather than concentrating exclusively on Internet ventures.
Examples include events such as MP3.com?s Music and Technology Tour, which fashioned
daylong music and technology festivals at 28 college campuses in October. Attendees paid $20
to check out new music technology and the hottest local bands, topped by a Goo Goo Dolls
concert. Another venture involved distributing free multimedia CDs containing 103 top MP3.com
songs in eight genres. Revenue came from advertisements on the CD.
Two annual summer digital music conferences, the MP3 Summits, earned revenue through ticket
sales and sponsorships from such companies as Microsoft, RealNetworks and Diamond
Multimedia. MP3.com is also expanding its presence on the Web. Earlier in the year, MP3.com
formed a joint venture with Cox called mp3radio.com, a music portal network for radio stations
that earns MP3.com revenue through e-commerce and advertising.
Finally, there was the October deal that had Pearson Television International and Peace Arch
Entertainment Group using 30 songs from MP3.com bands on its Sci-Fi Channel drama "First
Wave." Pearson would license songs directly from the bands, while weaving MP3.com into the
series? storylines. The show would promote a compilation music CD of the chosen MP3.com
bands, with MP3.com and its artists sharing the sales revenue. MP3.com brass hope the
promotional venture will encourage the TV and film markets to regard MP3.com as a potential
music library.
"Instead of publishers banging on doors trying to sell music, this allows producers to shop online.
They can try music mixes with their footage first, then contact the band if they want to use their
music," says Steve Sheiner, executive vice president of sales and marketing.
Robertson expects to drive traffic mainly through "viral" marketing. Last summer?s
MP3.com-sponsored Alanis Morissette/Tori Amos tour gave opening spots to the five top-rated
MP3.com bands, with each band performing during one week of the five-and-a-half-week tour.
The Music and Technology Tour doled out festival slots to the most popular local MP3.com
bands. "That way, the bands are energized to get the word out to customers to listen to their
music at MP3.com and make them eligible to play at MP3.com tours," Robertson says. In
addition, MP3.com sends registered users highly targeted bimonthly e-mails promoting new
music tailored to their past listening habits.
No Chart Busters
"If you want Britney Spears, don?t come to our site," says Robertson. "We?re not about the big
stars. There?s a whole world of music that people can?t access anywhere. From Celtic to swing
to rock, the diverse selection we give people is key to our growth. We?re adding 150 new bands
every day."
But MP3.com?s nonchalance about big-name talent has the rest of the industry scratching its
head. Music analysts and site managers wonder how the company will sustain its long-term traffic
with relatively few celebrities at its URL. Some major labels prefer music aggregators like
Launch.com and Tunes.com that offer the option of protected downloads and a less-antagonistic
philosophy. Warner Music Group talked Tom Petty into pulling one of his songs from MP3.com
after two days, while DreamWorks Records begrudgingly allowed one of its newer bands, the
Long Beach Dub Allstars, to post a song on MP3.com?s site for a week.
Indeed, most of MP3.com?s star association has come from tour sponsorships, fueling
speculation that the company has had to essentially purchase big-name talent for its site. Would
TLC have donated a song to MP3.com, even for a good cause (the company donated funds to a
charity based on the number of TLC downloads), if it hadn?t sponsored their tour?
"They?ve done a fantastic job of building a pretty large audience around music that people don?t
really like," says David Goldberg, CEO of Launch Media, which owns Launch.com. "The
consumer probably would prefer Mariah Carey, Puff Daddy and Bruce Springsteen to 25,000
bands they?ve never heard of.
"MP3.com has some choices about which way they can go as a business," says Goldberg. "One
is to be more like a record company, but in a digital space, where they sign artists and put out
records. Or they can be more of an aggregator and have content from all sorts of different record
labels, competing more with people like us. But those scenarios seem pretty unlikely, given what
they?ve stated publicly and the fact that they?ve really antagonized the major record labels, which
are very unlikely to give MP3.com any of their artists or content to do aggregation around."
"MP3.com doesn?t have to worry about startups," says Lucas Graves, an analyst with Jupiter
Communications. "Their real long-term competitors are record labels, which might be tempted to
become more involved in their own distribution online." One example is GetMusic, the joint
e-commerce music venture from Universal Music Group and BMG Entertainment that launched
last April.
If You Can?t Beat ?Em
Yet at least one of those Goliaths no longer regards MP3.com as the enemy. "We?re not trying to
avoid working with them if they have ideas to help market music," says Larry Kenswil, president
of global e-commerce and advanced technology at Universal Music Group, which is exploring
some co-marketing ideas with MP3.com. "The fact is that a lot of visitors go to the site, and
record labels want to market where there are people to see the material. Where Robertson may
have a problem is with his most devoted following. Since he came into this business with a
political agenda, turning it into a business may mean disaffecting that core, which is something
he?ll have to work with."
Analysts also wonder whether the technological improvements that will eventually render the
MP3 codec obsolete will also antiquate MP3.com?s brand. "MP3.com is so closely associated
with the MP3 format that if it stops being the popular way to listen, it might be like calling
themselves 8-track.com," says IDC?s Maclachlan. On the other hand, as Graves points out,
"MCI stood for Microwave Communications and they don?t use microwaves anymore."
Robertson, understandably, is siding with the MCI theory. "The concept of building a brand
involves taking a term that has no meaning and giving it an association," he says. "MP3 is no
longer about compression technology. We?re already using other codecs on MP3.com. Joe
Consumer doesn?t care. When people stopped buying records, Tower Records didn?t change its
name to Tower Cassettes or Tower CDs. It?s the same with MP3.com."
Ultimately, success will be the best advocate for MP3.com?s model. Success of one of its bands,
that is.
"The Internet is still largely underutilized by the majors," says Hypnogaja?s Nubar. "But at some
point, there will be a band that breaks through solely through marketing via the Internet, and it will
change the face of how the music industry runs."
URL: upside.com
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