And MP3.com, a huge database of creative efforts from largely anonymous acts, is in my opinion a great service for musicians and aficionados. More broadly, the ability to compress and transmit music files electronically will almost certainly revolutionize the industry once the multimillion-dollar players figure out a way to secure the files and minimize piracy, protecting profits. But does that mean investors should have the same vision for MP3.com? Stop the music.
Fools need to be careful not to confuse the company for something it isn't. It neither developed nor owns the MP3 file format, which allows easy compression and transmission of sound files ranging from burping noises to Kid Rock singles and everything in between (if there is anything in between). Even if they had, the pirate-friendly MP3 format is just one of several, and hardly likely to be the choice of the RIAA as it works to determine the best way to use digital technology.
So let's look at MP3.com for what it really is. The company's annual reports say it best: MP3.com is a media aggregator, a place for people to visit and download, for free, samples of the bands who've uploaded their music onto the site. A small portion of the visitors occasionally buy a CD, but the company recently stopped including those sales figures in monthly "Key Metrics" releases because, the story goes, it didn't want to be mistaken for an e-tailer.
Fine, then. We'll call MP3.com an online content business supported by ad revenue, which made up 94% of total revenues in 1999. I don't believe Web-based content is dead, because if that were the case I might just have quit (or lost) my job by now. I will say, however, that if any consumer-focused Web business is going to successfully differentiate itself from the glut -- and there is a glut in online music -- it will probably need a proprietary, monetizable edge in the way of either content, community, or technology.
CD sales and free digital downloads, well... you could go to MP3.com, but why there and not somewhere else? It's a young, developing sector, and as a Fool looking for market-beating investments, I'm looking for a company that will rise above the pack. (And it hasn't been the most melodious-sounding pack of late, as MP3.com and similar companies have seen their market value crushed in recent months.)
MP3.com believes it has at least two reasons for optimism. The first is its new My.MP3.com service, which allows users to access their music from anywhere they have Web access, through a corporate database after verifying ownership of a particular CD. Trouble is, MP3.com apparently built its database without the consent of the record labels whose music it was using -- a move somewhat akin to selling tickets to a showing of the Titanic DVD in your living room. MP3.com agreed to take that music offline while the suit is in court.
MP3.com CEO Michael Robertson believes it's a fine point tilted his way because My.MP3.com essentially constitutes a consumer listening to music they've already bought and paid for -- though they're listening to MP3.com's copy. Got all that? It's still in the courts. Whatever happens, it's clear MP3.com hasn't gone out of its way to curry favor with the "Big Five" record labels that might help it stock its site with name-brand content -- something I would venture it must do to become a major player in the music scene. And with some independent labels now piling on, the sound quality appears likely to get fuzzier before it clears.
Perhaps sensing that, MP3.com's second grand scheme is to parlay its music library (some of which is provided by the artists who upload their songs onto the site, some is obtained in other ways) into recurring, non-retail sales. The company recently launched a subscription service offering consumers streaming access to thousands of classical tracks for a monthly fee. It also plans to offer its music to retail establishments -- sort of like Muzak, but with actual music.
The former is seen as the company's next real moneymaking opportunity after ad sales, but I doubt that a) classical music addresses MP3.com's hot-spot demographics, and b) Sony <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SNE)") else Response.Write("(NYSE: SNE)") end if %> and its ilk are about to open up access to its popular music catalog for $10 per month. Instead, some studies suggest increased use of downloadable music will only help the current industry's fat cats further fatten sales of physical CD sales in the next few years.
That the company wants to monetize its music library is honorable enough, since MP3.com compensates its artists when it makes a sale. Intimately familiar with the Fool's compensation practices, I think I can safely say Rick could use a few extra bones to keep him in keyboards.
But to assume such an enterprise will be a driver of cash flows without significant increased developmental and promotional spending -- not unlike what should be done by the "Big Five" firms that MP3.com hopes to trump -- might be a bit too optimistic. While the Internet has certainly served as a wonderful interface for the exchange of information, it's yet been proven that there's a market for said unsolicited wisdom, knowledge, and talent. To succeed in that market -- a completely different endeavor than operating a free music website -- may very well demand that the company produce acts that can generate buzz and popular momentum.
That's not something MP3.com, for all its nearly 70,000 acts, has been able to do. A company like Jive Records, meanwhile, has about 30 artists in its stable -- many of which had no previous recording career -- and helped more than half to gold record sales levels or better. (Watch out for England's Groove Armada, a personal favorite.) I wonder how long it would take Paris by Air to jump to Jive if they got the offer?
Of course, not every band need be the Backstreet Boys to be termed a success, thank heaven. But for MP3.com to be more than just another website or a tool for the world's most devious record companies, it may need to find a way to more effectively leverage the talented groups and individuals who distribute their work on its pages. MP3.com's almost completely hands-off method of artist management has already done a lot for thousands of hungry musicians and curious audiophiles. It hasn't paid off for investors, though, and that's the bass... er... bottom line.
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