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Upstarts: MP3

MP3 technology is changing the way we listen to music. And as usual, where there's change, there's start-up opportunity. A look at several new companies that have begun to capitalize on the digital music revolution.
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Tunes on the Web

A Little Net Music

The way we listen to music is about to change. Again. But as usual, where there's change, there's start-up opportunity.

Before 1997, MP3 was a little-known technology that computer geeks used to download compressed music files free off the Internet. But Internet time moves fast -- so fast that by 1998 large pockets of the general public and the mainstream media were talking about MP3, not to mention taking advantage of it.

At first the music moguls were afraid of MP3. Protecting copyrights was hard enough without easily accessible Web files enabling any old joes to access -- and copy -- their favorite music. But when the Recording Industry Association of America (RIAA) started filing lawsuits against the Web sites and technology companies responsible for providing that capability, it was clear the industry had started to take MP3 seriously. Music on the Web was going to be big.

Today on the Internet, only the word sex generates more searches than the term MP3 does. Musically inclined Web surfers can purchase their favorite CDs and listen to the radio online, download their favorite songs, and even custom design CDs. And wouldn't you know it, start-ups have begun springing up in a variety of niches to capitalize on the digital-music revolution.

Hey, kids -- what's that song?
During that rare block of commercial- and chat-free music on your favorite radio station, you hear that song. You know, that song, the one you hum all day during work. The one you just have to own. If only the DJ would stop the music long enough to tell you the name of that song. But alas, the music continues without interruption, and you're left with a void in your CD library, and the record company with a void in its sales.

That happened to Robert Goldman just often enough for him to identify a gap in the retail music market. Goldman, who has a degree in psychology, studied impulse buying -- specifically, what drives consumers to purchase CDs. His findings suggest that the radio generates 95% of the impulse for buying music. "You listen to the radio, and if you like what you hear, you're going to buy it," Goldman says. That is, of course, if you know what you're listening to. And that's where GetMedia Inc., Goldman's start-up, based in San Jose, Calif., comes in.

Noting the emergence of Internet music sites and the popularity of E-commerce, Goldman saw the Web as the perfect environment to track radio-station play lists in. In 1997 he gathered a development team to create technology that would help radio listeners follow what their favorite stations were playing in real time. Further, he embedded a commerce option in it so listeners could purchase music directly from their trusted radio stations, bringing the point of purchase directly to the point of impulse.

GetMedia launched its Web service in May 1999 and went live on a handful of stations, including Mix 93.3, the CBS/Infinity Broadcasting station in Kansas City, Mo., which started using the service in November. Now when Mix 93.3 FM broadcasts, say, "Learn to Fly," a popular single from the band Foo Fighters, listeners can tune their Internet browsers to www.Mix93.com, click on the "Now Playing" link, and find a list of recently played songs, with their album titles and the time Mix 93.3 played them. Play lists also feature "info" icons next to each listing, where, for instance, Foo Fighters fans can get in-depth information about the band's latest album, There Is Nothing Left to Lose. Site visitors can even sample songs from the CD.

Of course, the real key to this application is the "Buy" icon. After just a few clicks and a credit-card number, GetMedia will ship There Is Nothing Left to Lose to a Mix 93.3 listener, and the station will pick up some extra cash. "This lets the radio station make money on music they already play for free," Goldman says. GetMedia takes a percentage of each sale -- a revenue model similar to that of major credit-card companies. And unlike online music retailers, GetMedia taps into established radio-station audiences and doesn't need to spend millions on driving traffic to its own site.

So far, 35 radio stations throughout the country have gone live with the service. Some 2,200 stations are on GetMedia's waiting list, but Goldman doesn't have the resources to set them up as fast as he'd like. Last September, GetMedia got some help to the tune of $10 million in venture capital from IDG Ventures, Menlo Ventures, and the Rosewood Stone Group. Goldman plans to use that cash to beef up his 60-person staff and outfit those stations awaiting the service.

Record label goes digital
There's a part of the music industry that thrives on rock-and-roll renegades that lead the way to sweeping change. The current indie darling of the Internet music scene is Al Teller, who a few years ago was anything but independent. Since receiving two engineering degrees from Columbia and an M.B.A. from Harvard, Teller has had a 30-year career that includes stints as the head of MCA Music Entertainment Group and president of CBS Records. In February 1999, Teller took the plunge with his own capital and launched Atomic Pop, a fusion of music, radio, video games, and television that all comes together at www.atomicpop.com in what looks to be a model for the record label of the future.

Teller's label offers artists a better deal than they can get from the major record labels. Artists can use the site for promotion and distribution, and to supplement traditional retail channels with online sales. "The basic deal is a 50-50 split of the profits," Teller says. "Majors' star royalty is roughly 20% of retail price. Per unit, with us, artists can make twice what they're making at the major labels." By cutting the multilayered fat of giant marketing and promotions divisions, the 30-employee Atomic Pop hopes it can enjoy heftier margins than the majors do.

This new way of doing business was music to the ears of rap giants Public Enemy, the first group that signed with Atomic Pop. Last May, Atomic Pop promoted Public Enemy's new album, There's a Poison Goin' On, and sold it on the site for $10 before it was available in stores. Teller also sold digital downloads of the record for $8, a price that would be tough for majors and retailers to match. The real buzz for the album came with the prerelease single, which some 300,000 fans downloaded -- free.

Although Atomic Pop doesn't have the marketing strength that major labels use to get new singles on the radio and on MTV, Teller notes that fans at his site have actively sought the song out instead of simply hearing it passively. "You have to proactively download a single," he says. So far, There's a Poison Goin' On has sold about 90,000 copies -- 10,000 of which were sold on the Internet. "And that ratio is going to change," Teller promises.

Still, those numbers represent about half the sales of Public Enemy's previous albums. Teller blames the shortfall on a less extensive concert tour surrounding the new release. But he remains optimistic about future sales. Typically, he says, record sales fall off after promotional efforts cease. "We will continue to market and promote the record for months to come. The traditional labels will walk away from records after a short period of time."

For its first full year of business Atomic Pop saw revenues of about $2 million. The company has yet to turn a profit, but Teller anticipates one soon. By signing new groups such as the Gas Giants and creating a robust list of releases, Atomic Pop hopes to be aggressive in 2000. The company has also acquired the digital rights to 4AD -- the British indie superlabel that boasts such 1980s punk stars as the Pixies and Bauhaus. Add that to its $10-million capital infusion from New Valley Corp. and a recent partnership with Microsoft, and Atomic Pop isn't looking so indie anymore.

The MP3 piracy police
The RIAA is getting serious about piracy. It recently filed numerous lawsuits against music-related upstarts, claiming they've created a black market for illegal copies of digital music.

But not everyone online is on the RIAA's bad side. A handful of savvy start-ups have joined the antipiracy brigade by offering secure online distribution and easy-to-use licensing as a legal alternative to the MP3 free-for-all.

Reciprocal Inc., headquartered in Buffalo, N.Y., operates on a simple principle: all music, whether it's on CD, the Internet, or the Paleolithic eight-track tape, comes with an implicit license agreement. "You can't legally make 1,000 CD copies and sell them on the street," says Reciprocal senior vice-president Howard Singer. But online, it's a different story. Music is far too easy to copy and distribute illegally, and sometimes consumers are entirely unaware of their own illegal activity. "You can buy a song from Emusic.com, put it on your computer, post it on a Web page, and send it to your friends," says Singer. "There's no technology in place to put any speed bumps in the way of doing that. And the major record labels don't find that satisfactory."

Think of Reciprocal as a speed bump. It enables record labels to attach conditions to downloading and distributing protected intellectual property. Reciprocal handles the creation, storage, and issuing of licenses for digital property such as songs and research reports. Reciprocal then reports back to the content owners (record companies or publishing houses) on those transactions. The content owners in turn pay the recording artists any royalties due.

Reciprocal started out as part of Softbank Corp., a Japanese holding company with interest in more than 120 Internet companies. It spun out in 1997 and has diversified its offerings to include services for the text- and software-publishing communities. But with the proliferation of digital music distribution, the market for such a service in music alone is huge.

The concept has been a hit with the investment community. Last November, Reciprocal completed a $35-million round of mezzanine financing that included technology- and music-industry heavyweights like Hewlett-Packard, Xerox, and TVT Records. Microsoft had even made its own investment of $15 million in March 1999.

Singer believes that although music currently represents the lion's share of Reciprocal's transaction-based revenues, its text-publishing division may ultimately become the company's biggest moneymaker. And that's just a simple matter of price point. Textbooks and research reports can cost buyers anywhere from $80 to $4,000. Even if consumers make a practice of downloading entire albums, Singer reminds us, "you're still looking at a $10 to $15 item."


What the Heck Is MP3?

Unless you're a techie or a teen, you may not be familiar with MP3, the hot new method of music distribution. With MP3 the artist records his or her music in digital form and uploads the file for that music onto the Web. Consumers can then download files for their favorite tunes onto their computers and enjoy the music through their home sound systems. They can even store the files on special MP3 listening devices for their mobile listening pleasure.


Q& A

Music to Your Ears?

To help sift through the hype surrounding MP3 technology and music on the Internet, Inc. enlisted Joanne Marino, CEO and editor-in-chief of Webnoize, a research company and news outlet based in Stoneham, Mass., that focuses on digital entertainment.

Inc.: What are the basic challenges in the MP3 marketplace?

Marino: The fundamental problem is that it's hard to create a viable business in an environment where music is being given away for free. Young consumers are active shoppers and are easily swapping files. It makes it a tough environment to break into and actually make money. There are a lot of hot new music start-ups, and I don't know if a lot of them will make it through the end of the year.

Inc.: So who's going to last?

Marino: The businesses that are the most exciting in the long term are the ones that are able to build more meaningful relationships with the creators and consumers. They might offer higher royalties or increased market reach to the artist and maybe give consumers the ability to share music and information with other listeners. I'd be very wary of the so-called MP3 portals that are aggregating all these artists in one place but are not adding anything to the users' experience.

Inc.: Will we see a lot of acquisitions?

Marino: A lot of these companies will have no choice but to sell. They don't have viable business models. Right now, it's a race. If you have the money and the means to make it through the full marathon, then you'll do all right. A lot of these companies don't have any revenues coming in, and they'll either get bought or go bankrupt. You can't give everything away just to get people to pay attention to you.

Inc.: Do you think we'll be listening to CDs in 10 years?

Marino: No. We're going to be wearing our music like our clothing. Our experience is going to be mobile, it's going to be personal, and it's going to be intimate. But for us to get these kinds of services, we're going to have to put up with a lot more marketing and advertising. That's the catch-22.


Please e-mail your comments to editors@inc.com.




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