Fool.com: Me and My MP3 (Fool on the Hill) January 11, 2000

FOOL ON THE HILL
An Investment Opinion

Me and My MP3

By Rick Aristotle Munarriz (TMF Edible)
January 11, 2000

Lost in the haze of yesterday's record-breaking merger announcement between AOL (NYSE: AOL) and Time Warner (NYSE: TWX) was the dynamic recovery of a beleaguered sector that pioneered the art of adapting studio entertainment onto the Internet -- the online music purveyors.

While the blockbuster deal's coattails pulled shares of MP3.com (Nasdaq: MPPP), EMusic (Nasdaq: EMUS), and Platinum Entertainment (Nasdaq: PTET) into double-digit percentage gains on Monday, it was not an encore performance. All three, as well as audiohigway.com (Nasdaq: AHWY), were trading for less than a third of last year's stock highs.

MP3.com, which had another strong day on top of yesterday's $5 rise, claims the largest collection of digital music on the Internet. With 40,000 artists and more than 250,000 songs, it is the place to go for free online tunes -- as long as you temper your expectations on the bands you expect to find there.

While Alanis Morissette has a few featured tracks, and the Eagles' live version of Tequila Sunrise has become an MP3.com favorite, the site serves primarily as a haven for tens of thousands of unsigned performers.

Don't let that scare you away. If you like Elvis Costello, you will love GanFu's Insanity. Pop punk doesn't get any more infectious than Lucky 7's My Father's Son. Given the online medium, one would expect to find plenty of electronic music on MP3.com and the site clearly delivers on that front. Odds are that the techno and trance staples from The Cynic Project and Sweden's trance [ ] control will blow away whatever is playing at a rave club near you.

All of the songs are encoded in MP3 format and require an MP3 player. MP3, short for Motion Picture Experts Group-1, Audio Layer 3, is a compression technology that stores near-CD quality audio files into a file that is about 8% of its original size. The players are free and readily available at most sites, including MP3.com.

If you are looking for the MP3's of popular recording artists, beyond scouring the search engines for illegal pirated tracks, EMusic sells downloadable versions of mainstream acts. However, the phrase "mainstream" is subjective since EMusic's most popular artist last year was the alternatively hip yet ostensibly obscure They Might Be Giants. Streaming audio, and sometimes video, of popular artists can be found at ad-sponsored audiohighway.com (whose CEO/President was interviewed by our own Dave Marino-Nachison last month).

If you begin to piece everything together, sagging share prices notwithstanding, it appears as if we have a revolution on our hands. While the Recording Industry Association of America appears mainly worried over piracy issues, record company executives have to be scratching their heads over their place in the new music economy.

The industry has long resisted change. However, the inventory and distribution savings provided by the online medium are now too great to ignore. Slow-footin' it until a proper encryption technology has been ironed out (the Secure Digital Music Initiative), has only held off the inevitable since consumers are already "ripping" audio tracks off prerecorded CDs and illegally uploading them in masses.

Quivering copyrights, Scatman! But what is probably driving some music label A&R veterans into scouring the employment classifieds is the very existence of a music scene that does not involve record company support.

At MP3.com you will find active message board threads, which, while they often start up as nothing more than shameless plugs, often turn into mutual tutorials. From music critiques to recording tips to legal advice, if Bob Vila or Martha Stewart were to ever plug a six-string into a Marshall stack they would be on MP3.com.

With MP3's acquisition of SeeUThere.com, a one-stop site for event planning, the company is arming its roster of aspiring artists with the tools of self-promotion. This is not to say that the relationship between MP3.com and its registered talent has always been smooth. Some argue that the company can do more to market the artists who are giving away their music -- after all, MP3.com is profiting from ads it places on those pages.

MP3.com has responded. It has taken some of its more popular acts, like MP3 cover girl Emily Richards, on the road. While that still did not sit well with smaller artists -- and those who have not made it onto MP3 compilations or featured slots on its site -- MP3 finally delivered the compensation many have been asking for.

Every month, MP3.com is now paying out $200,000 to its artists based on site popularity. Last month's top earner, The Cynic Project, got a $5,261 slice. Still, with 40,000 artists on board, that averages out to only $5 a band. That might fetch you a cheap pair of drum sticks or a set of guitar strings, but little else.

That is where the DAM CD comes in. Artists can make their own CDs from the MP3 files they have uploaded. They can design the cover and inner booklet if they want to. They also set the price. MP3 handles the cumbersome fulfillment process and splits the proceeds with the artist. Will that silence the critics? Probably not. Us musicians are just born stubborn, but at least MP3 is providing plenty of revenue streams for its more ambitious artists to capitalize on.

As a recent member to the MP3.com roster, I'm impressed. My band, Paris By Air, has managed to land the #1 song in the New Wave genre, earned decent pocket change in the Payback for Playback promotion, and even sold a CD -- in Arkansas of all places. I'm tickled. My days of musical ambition faded away years ago, but now I have an interesting forum to share some of my compositions beyond anyone that is in ear's reach.

It has also, naturally, made me ponder shares of MP3.com itself. With a $2.6 billion market cap, its valuation might appear modest for a niche leader relative to other Internet gorillas. Two weeks from today, the company will announce its fourth quarter results. For 1999, the expectations are for a loss of $0.92 a share. This year that will be trimmed to a $0.40 deficit. Since the company raised $344 million in its IPO this summer it should have plenty of capital to work with and to find other timely acquisitions.

The fear of new technology making the MP3 format obsolete is not lost on me. It's bound to happen. It always does. MP3.com will probably not be able to acquire the same perfect titular domain address it does now. It is not like spoken-word specialist Audible (Nasdaq: ADBL), whose namesake site will transfer seamlessly. Still, the artist community will follow. And, if it means even better quality of sound and/or compression, won't it only make MP3.com even stronger in the face of the traditional recording industry?

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