Who Will Buy EMusic com?

By Richard Menta- 1/16/01

The recent news about EMusic.com - down to $16 million left of financing and forced to lay off a third of its workforce - seems to be endemic not just to the web as a whole, but to Net music sites in particular. We have already witnessed the deaths of Riffage and MusicMaker, the later an entity heavily funded by the major labels, and watched as Listen.com, Launch.com, and ArtistDirect announce significant layoffs of their own. Ever since Napster and MP3.com made headlines in the courts, VC funding has all but dried up. Worse than it has for Net companies in general because of the risk that part of any investment my find its way to fend off litigation.

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This was the second round of layoffs for EMusic, the company had already let go of 40 employees last June. Back then EMusic was losing between $10 and $12 million per quarter which gives an idea of how easily they could kill off the last $16 million if they didn't make changes. With the layoffs came the resignations of EMusic's CFO Joseph Howell, Executive VP of business development James Chapman, and COO Peter Astiz.

One can certainly make an argument that the vultures are circling overhead and the nearest oasis is nowhere to be found. For most Net music sites in financial trouble, that's the sad truth. Yet despite their troubles, EMusic is not one of them.

Why you might ask? Because EMusic has something the major music labels want, something they can't build themselves fast enough. Despite Big Music's seeming alliance against Napster and MP3.com through the Recording Industry Association of America (RIAA), they are competitors and EMusic is the biggest prize available. One of them will buy EMusic.

But doesn't Big Music want all of these Net music sites to die off so they can step in and take over? The answer is yes and no. What the music industry wants is control and whatever best gives them that control is what they are striving for. The truth is, if all the present Net music sites disappeared Big Music is not ready to step in and completely fill the void.

As we wrote in our article "Bertelsmann Claims Net Music Crown"

The game plan of the music industry - desperate to gain control over the same online music they dismissed two years earlier - was to wreck the existing leaders in this arena and then take it over with there own sites, rebuilding Net music in their image. But, traditional music companies are still flailing at what that image is to be. Outside of the RIAA's legal actions in their name, they have not been united in anything that might resemble a vision…

…When faced with the logic that Net music companies already have the skills the major labels still need, why not buy them? You get a built-in audience and the ideological expertise, both resources that would take time and significant investment dollars to re-create. So far, the first independent offerings from the major labels have met with mixed results…

Right now Net music stocks are at rock bottom. Still, Big Music has not stepped in for the most part. Scour was just recently sold off for its parts at bargain basement prices, but the music industry did not partake in the feeding frenzy. It was other Net entities that did the bidding including well-funded Liquid Audio and the same Listen.com that just let go of staff. Considering Bertelsmann's purchase of Napster, you would assume the music labels left out in the cold would have jumped on the Scour bandwagon.

The problem is, ideologically, the other labels are still struggling with the love/hate implications of P2P software. Jealous - even a little shell-shocked - as they may be of Bertelsmann's acquisition, they still couldn't pull the trigger.

But why is Emusic different?

First, EMusic is the biggest seller of online music period. The company earned $1.5 million last quarter on direct music downloads alone and another $3.1 million in a subscription partnership with Hewlett-Packard. The company's new subscription option is expected to increase the company's user base significantly when it's second quarter statement is released Jan 24 2001.

What is implicit in these numbers is not so much the dollar figures as the fact that EMusic has collected the largest list of digital music fans who are ACTIVELY paying for digital music downloads. This is the holy grail for the major labels who many feel have lost their opportunity to train Netizens that online music is something you pay for as opposed to something you trade for free. EMusic possesses this list and were the company to disappear from the face of the earth tomorrow there would be two problems.

The first problem is that should the one entity on the Net selling digital downloads in volume cease to be, there would be a void until the majors catch up. It would take the music industry about one to two years to recreate that list. Meanwhile, the number of people paying for their MP3 files would probably drop until the recreation of that list and such a state could only further reinforce the notion to other users that MP3 music is something that exists for free.

The next problem is what will become of the existing list of EMusic's customer base? Yes, EMusic would be chopped up to extract whatever value is left and Big Music could simply purchase the names, but the recent dot-com demises have shown a reluctance by many companies to sell member names and credit card information. This data was collected on the promise by the company that it would be kept confidential and secure. Selling those names would breach that promise and many users have become irate over the thought that their private information will be put in that hands of those who were never given permission to have it.

Even if these names are made available at auction, a company's parts many times are greater than its whole. Waiting for EMusic to go under may only bring a bidding war and inflated prices for those names. As we mentioned above, it can also bring about a great deal of bad will. On the other hand, if a record company buys 51% of EMusic, they have both the names and control of the human resources of the company and for probably not too much more than if they bought the customer list in a bankruptcy sale. Remember they don't have to buy all of EMusic, just a controlling share.

Second, EMusic has some desirable content resources. The five major labels own the rights to about 90% of the music sold in record stores. The remaining percentage is owned by independents, some quite successful. It is these independents that EMusic formed its deals with for their digital rights. By buying EMusic, Big Music gets control of the digital rights for much of Little Music! Remember we said this was an issue of control? Nothing could be a sweeter bonus than that for an oligopoly, control of the competitions digital rights. Boom!

Third, Emusic's brand assets. We're not talking of EMusic itself but two little entities it acquired along the way called RollingStone.com and Downbeat.com, two of the most name recognizable music publications out there.

What if?

So think for a second. What if Bertelsmann purchased EMusic tomorrow? How do you suppose the rest of the Big Five labels would feel if they witness Bertelsmann collect on the trifecta and pick up the triple crown of Internet music. With Napster on one end, EMusic on the other, and both filtering their audience wishing to also purchase CDs into CDNow, that is exactly what will happen. The recent addition of a CDNow button onto Napster is a brilliant marketing move in that it exposes that part of Napster's audience that IS willing to purchase the CD after sampling the tunes on Napster. What do you think it's worth to collect the names of users who pay for digital downloads from EMusic AND purchase the same music in CD form. There may not be that many of them, but for those who do it is a double dip for Bertelsmann. Getting buyers to pay multiple times for the same music is a goal striven by the music industry since the original release of the CD when everyone bought music they already owned in the new format.

If you were Universal or EMI or Sony or Time Warner, you would want those user names and data, the seasoned net music delivery staff, the Rolling Stone and Downbeat brand names, the possession of the digital rights of the independent record companies as well as your own. Most of all, you don't want Bertelsmann to have it, you don't want to give them the power.

EMusic's stock price has dropped well below a dollar. As of this writing, they may already have been de-listed from the stock exchange. Waiting for the company to flame out so you can collect the scraps may not be a prudent move as there are four competing music conglomerates ready to swoop in. He who procrastinates, loses. EMusic, for all its faults and confused direction, is the crown jewel right now.

Will there be a bidding war? Just sit back and see.


Copyright MP3 Newswire 2001

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