Digital Audio: Oughtta Buy Audible
By Mitch Ratcliffe, Columnist
Audible might be the best play on the MP3 trend.
Digital audio is in the spotlight this week - both in this column and the market. On Monday, I wrote about the first in a two-part series on the topic, addressing the case for investing in MP3.com (Nasdaq:MPPP - news).
Just one day after that column, the company took the next move in its long battle with the recording industry when it agreed not to allow users of its My MP3.com music storage system to upload music owned by members of the Recording Industry Association of America, Bertelsmann Music Group, EMI, Sony (NYSE:SNE - news), Universal/Polygram, and Warner Music, a division of Time Warner (NYSE:TWX - news).
MP3.com's stock rose 11.58% on the news during Thursday trading. I expect the company will reach a revenue-sharing agreement with the RIAA within the year.
There are a number of technologies vying for adoption. Today, I'll look at Audible (Nasdaq:ADBL - news), the only revenue-generating system that is already in portable MP3 players.
Warning: Read On at Own Risk. Now, before I go any further, a major disclosure. I have been involved with Audible since before the company was founded and hold a lot of its stock. You should take every word I write about this with a massive grain of salt - at the same time, nothing I write here reflects any inside knowledge about the company, with which I maintain a publishing relationship.
Back to the Story
Audible's devices, which can be carried away from the PC, are the keystone of this market because they will supplant the personal CD player.
On Wednesday night, Audible announced a strategic relationship with Bertelsmann-owned Random House to launch an online spoken-audio book imprint. The two companies had been in business together before, but the new relationship dramatically expands Audible's access to Random House titles and gives the book publisher a channel for introducing new audio content that would lose its timeliness if it went through the cassette-book production process.
The news sent Audible's stock soaring -- up 37.33% on Thursday. Nonetheless, the shares are still trading near its lows at 6 7/16.
Audible Value Proposition
The key to the Audible value proposition is two-fold. First, it has assembled a large library of content to which it has rights. More importantly, Audible has a set of patents on a core technology for secure distribution of audio content that has been licensed by a slew of MP3 player makers, including Diamond Multimedia, a division of S3 (Nasdaq:SIII - news), which makes the Rio player.
The Rio player, for those of you who follow history, is the gadget first attacked by the RIAA when it appeared on the market. The Ninth U.S. Circuit Court of Appeals ruled that the Rio was a legal device for home recording last June. Since then, the device has been selling like hotcakes.
Predictably, the recording industry has failed at every juncture to beat back digital distribution schemes that threaten their exorbitant fees for CD-distributed music. It's an industry in the throes of change, even if executives want to fight evolution to their bitter end.
Trying to Break the MP3 Wave
Since it lost the Rio case, the RIAA has been trying to subdue the MP3 wave by developing and distributing the Secure Digital Music Initiative (SDMI), a technology that can be embedded in music players to prevent illegal copies from being played. Even more ominous is the SDMI's ability to track a copy back to its source, so that pirates can be punished.
However, the technology is doomed, because hackers have pledged to break the digital locks and, critically to its business success, the difficulty of implementation by MP3 player makers.
You see, the SDMI technology will require some pretty hefty computational power to protect music, and that may not be possible to manufacture into small, inexpensive gadgets like the Rio.
Enter Audible. The company patented a technology in 1996 that is perfectly applicable to music and which is already being built into MP3 players. Audible's total Q1 2000 revenue increased only 60% year over year, but it exited the hardware market during that same period. It jump-started the market for spoken-audio players with its own device.
Audible has a fee- and subscription-based content business model that works, with current revenue growth of 60% quarter to quarter and 457% year over year in the most recent quarter. This from just spoken word content, where Audible will stay focused. Yet it can do a nice business licensing its security technology to the music world.
Heavyweights Are Listening
Audible has demonstrated Tallyrand-like acumen in assembling competing powerhouses as investors. Motorola (NYSE:MOT - news), AT&T (NYSE:T - news), Microsoft (Nasdaq:MSFT - news), Compaq (NYSE:CPQ - news) and Amazon.com (Nasdaq:AMZN - news), along with others, have money in the firm.
A chance encounter with a Microsoft executive recently underscored for me the opportunity Audible has as the audio industry searches for a secure delivery standard. Sitting next to the executive on a flight from Seattle to New York recently, I noticed he was reading Audible's core patent, which deals with the management of access to digital audio files.
Audible's gathered this cadre of major companies because it has an alternative - a friendly one - to the recording industry's ugly SDMI program to ``keep honest people honest.'' Better yet, it's already being built into most of the MP3 players on the market.
As the Microsoftie said when I queried him about why he was reading the patent, ``they really did their work on this.''
Cheap Leader
Whether it remains the low-priced acquisition target it appears to be today or the consortium of investors it has assembled keeps it independent, Audible has a significant role to play in the migration of audio content from physical to digital distribution.
And today it trades almost a third below its $9 IPO price.
Don't believe me. Check it out for yourself. |
