Destiny comments on digital online music companies:
Streaming Media Streams Along
by Lauren Beukes
September 8, 2000
While expectations of MP3.com’s demise may be premature, digital online music companies probably aren’t a great investment right now. But in coming years, streaming media has the potential to displace TV.
Streaming audio and video could be “the next macro growth driver on the Internet,” according to Equity Research, which predicted TV-quality in the next two to five years.
For now, though, the high profile court ruling against online music distributor, MP3.com, (NASDAQ: MPPP) that dominated the past few days’ headlines has raised serious questions about copyright enforcement online and the future of the entire digital media distribution industry.
MP3.com saw its shares take a dive after the company lost its copyright infringement lawsuit by Seagram’s (NYSE: VO) Universal Music Co. Tuesday to the tune of between $118 and $250 million in statutory damages. The company’s share price fell to 5 5/8 by noon today, down over 9%. However, Nitsan Hargil, an analyst with Kaufman Bros, doesn’t see impending doom. A drawn-out appeal could take several years to resolve. “The likelihood of bankruptcy is very near zero,” Hargil said. “The appeal means that the company has more than enough time to turn its business around, especially when MP3.com is only burning through $10 million per quarter.”
Hargil has had a ‘hold’ rating on the company for some time now. “Apart from copyright issues tackled by the lawsuit, the company is still suffering from several operational issues,” he said. “The business pulls in well over 90% of its revenue from advertising, a model that has not proved very successful on the Internet. MP3 has some very valuable assets in the 10 million subscribers, but it needs to work out its problems with Universal. It also faces major competition from illegal services like Napster and Gnutella.”
As a matter of fact, Hargil doesn’t recommend investing in any online music distribution companies right now. “The record labels have conspired to make the online music industry a worthless business”, he says.
The record labels’ fear of digital music distribution is not unlike the film industry’s response to the introduction of video cassette recorders and, like the film industry, they will have to adapt to a changing and popular technology. Hargil believes that based on the current model, “the record companies will not be able to aggregate product or become powerhouses in their own right.”
Several recent events seem to bode badly not only for online music distribution but streaming technology, broadband and online video too. While MP3.com is appealing the ruling, the Universal court case could open the company to lawsuits from other music labels and publishers. Napster and video and music content provider, Scour.com, are both facing major copyright infringement lawsuits, and Scour.com recently laid off 53 of its 70 employees.
Some broadband companies are also suffering. Shockwave.com has laid off staff too while the much hyped online movie brainchild of Stephen Spielberg, Pop.com, floundered and died before the site ever even launched.
But several recent major digital media deals imply that, despite the problems, the industry still has huge growth potential.
Portal giant, Yahoo! (NASDAQ: YHOO) signed a deal with the Recording Industry Association of America to license music content for the more than 500 Internet and traditional broadcast radio stations Yahoo provides with online music services. Microsoft (NASDAQ: MSFT) announced plans to buy online music site, MongoMusic, to boost the offerings on the company’s Microsoft Network.
A new music-sharing site in the mold of Napster also launched recently. But that site, Aimster.com, hopes to avoid the legal tangle Napster is facing by exploiting a copyright law loophole that allows sharing of files between “friends,” in this case made through Aimster’s instant-messaging buddy network.
“The online music industry not only big business, it’s huge,” says Hargil. “If you accept the view that in the future music will be sold online exclusively, you’ll want to be part of it.”
Paul Andreola, manager of corporate communications at Destiny Media Technologies (OTC BB:DSNY.OB), a Vancouver, B.C.-based company that develops software solutions for streaming media and digital downloads, believes that all the brouhaha could have a positive effect on the industry.
“It's incredibly easy to distribute music and media over the Internet and in some ways it almost seems that’s what the Net was designed for,” Andreolo said. “Although I think the investment community is going to be leery of getting involved with companies where there is a copyright infringement issue, digital distribution is going to increase rapidly. I believe the recent commotion will solidify the industry leaders and cast a spotlight on those companies, like Destiny and Liquid Audio, that have some of the answers to the problems the industry is facing now.”
Destiny launched its MPE software solution only a month ago. The software allows secure transactions of media files such as MP3-format files, which can be partially previewed in full quality, but can only be viewed in their entirety after a purchase transaction, which is equally split between the company, the rights holders and the distributor. The MPE files use 128-bit encryption technology to prevent piracy, and are self contained so viewers don’t need to download software.
The company’s shares were last trading at 1 1/16, down over 5%.
Some of the other small caps companies involved in various aspects of digital music or streaming industries include, Audible Inc (NASDAQ: ADBL), AudioHighway (NASDAQ: AHWY), ArtistDirect (NASDAQ: ARTD), CDNow (NASDAQ: CDNW), MusicMaker.com (NASDAQ: HITS), Launch.com (NASDAQ: LAUN), NetRadio Corp (NASDAQ: NETR), Emusic.com Inc (NASDAQ EMUS), Streammedia.com (NASDAQ: SMIL), BigStar Entertainment (NASDAQ: BGST) and Internet Pictures (NASDAQ: IPIX). |
