MP3's highway to investor hell?

Internet music companies that delighted Wall Street with recent stock debuts are playing a more sombre tune as investors take another look at their plans to reshape the music industry.
Written by ZDNet UK, Contributor

Take what many consider to be the industry's flagship company, MP3.com Inc. The San Diego, California-based start-up lets visitors to its Web site download more than 100,000 songs for free. The company's stock, originally priced at $28 (£17) a share, hit a dizzying high of $105 in its first day of trading last month before closing up 126 percent. But the price has steadily eroded since then, shedding $6.375 on Tuesday to close at $33.25.

Other Internet music stocks tell the same story.

Liquid Audio Inc., which makes a secure format for compressing music files and is building a network to distribute digital music, fell $2 to $24.625. Its high was $48. Custom online CD compiler Musicmaker.com, which peaked last month at $28.125, fell $1 to $12.56 on Tuesday. EMusic.com, which also offers an online song collection, shed 87.5 cents to $15.625, down from a recent high of $35. And Launch Media Inc., whose Launch.com site offers streaming music videos and music news, has fallen from a peak of more than $36 to $9.875 on Tuesday, down 87.5 cents.

"The rhetoric is so far in advance of the financial reality that some stocks go out like Fourth of July fireworks, but anyone who does their homework finds the economics just aren't there," said Mark Hardie, a senior analyst with Forrester Research who follows Internet music.

Indeed, none of the listed companies are so far turning a profit. That's nothing new in the Internet space, but it seems to be hitting music companies especially hard. That may be because consumers are used to getting digital music for free, thanks in large part to the lack of anti-piracy features on the popular MP3 file format that has let people make near-perfect copies of CDs and post them to the Internet for anyone to download. "When people get used to free, it's hard to make it not free," said Travis Kalanick, vice president of strategy for Scour.net, a search engine that seeks out video, audio and radio content on the Web.

While financial details are scant for the sector, companies are measuring quarterly sales in the hundreds of thousands or millions of dollars, while enjoying market capitalisations of hundreds of millions to billions of dollars. "Nobody's buying a lot of music, and we're early in the market and the infrastructure is not built, there's not a lot of personal digital music players," Hardie said.

Liquid Audio, which reported second quarter results on Tuesday, said total revenues were $745,000, compared to $500,000 in the year-ago period. MP3.com last week said its second quarter revenues rose to $1.9 million from $247,000 a year earlier. Both companies posted widening losses: $6 million for Liquid Audio and $6.3 million for MP3.com. "I can't say what the business model is going to be that leads to profitability in the digital download world," Edmond Sanctis, chief operating officer of search engine Snap.com, said at a conference recently.

Moreover, the big music labels, slow out of the gate to embrace the Web's potential, are taking it more seriously. With their deep pockets and vaults holding decades of popular music, analysts said they will pose a threat to the start-ups. "The majors have woken up and they can still bring strengths and capabilities formidable in this market," said Geoffrey Sands, a vice president of management consulting firm Booz-Allen & Hamilton. "There's no question we're going to see more consolidation, outright consolidation. I think that's the next wave."

Despite the uncertainty, analysts agree that the Internet will radically change the way people buy and listen to music. Store shelves will soon be stocked with an array of cute portable devices that store CD-quality music on a chip or card. New formats to rival MP3 are delivering better sound quality and pleasing record labels with guards against illegal copying. "I am extremely optimistic about digital distribution -- it is the future of the business," Hardie said. "We're not at the inflection point yet, and we won't be until early next year, after a year of promotion and an installed base of players in the hands of consumers."

Take me to the MP3 Special

Editorial standards