A Ma Bell for Music

Apple Computer (Nasdaq: AAPL  ) once again sparked a revolution when it launched its iTunes music store in April. Listening to the sound of profits, a rash of companies is gunning for the online music market, including Wal-Mart (NYSE: WMT  ) , Dell (Nasdaq: Dell  ) , Amazon.com (Nasdaq: AMZN  ) , Sony (NYSE: SNE  ) , Hewlett-Packard (NYSE: HPQ  ) , and Roxio (Nasdaq: ROXI  ) . The result: a frightening display of real-time commoditization.

This was clear yesterday when software giant Microsoft (Nasdaq: MSFT  ) and digital media provider Loudeye (Nasdaq: LOUD  ) announced a new service that allows just about any company to set up a sophisticated music store. The $30 million barrier to entry -- the price of building an online store -- has melted away.

This does not mean Apple's business model will go bust. In fact, Apple readily acknowledges that selling online music is a loser. Rather, it makes money if there is something else to sell, such as iPod digital music players.

But the market clearly thinks Loudeye is on to something. The company's stock surged more than 32% after the announcement of the joint venture with Microsoft. At first blush, it might seem like a valuation acid trip given the miniscule revenues.

But assuming online music is a commodity, it makes sense to outsource it to a company like Loudeye. In a way, Loudeye is a music utility, collecting a fee based on usage. So expect a variety of more deals for Loudeye, which should keep the stock buzzing.

How big of a threat is Loudeye to iTunes? Swap your opinion with your peers on theApplediscussion board.

Tom Taulli is the author of six books on investing, such as Investing in IPOs (Bloomberg Press), as well as a professor of finance at the USC School of Business (don't worry, but he does come out of his ivory tower). You can reach him attom@taulli.com.


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