Stocks Fools Love
MP3.com

By Rick Aristotle Munarriz (TMF Edible)
February 8, 2000

Trading at $28 1/2 as of February 7, 2000

Orpheus, I'm smitten. Is it Lorelei, singing a sweet melody -- luring me deeper into the surf? If MP3.com houses so many beats, why does it make my heart skip them so.

Have my cursed ears, in a Mozart-gone-Van Gogh way, failed me this time? What I hear as an amazing tune sounds like a fiscal cacophony to Wall Street. Shares of MP3.com are going for half of what they fetched when the company went public in July. Transpose the stock's graph onto a musical bar sheet and you see a cascade of notes -- pecking at the low keys right now. It's a fade out. It's a Coda. It's a not!

Crescendo, Fools! There is a lot to like, maybe even love given this time of year, about MP3.com. On the surface it has all of the Internet metrics working in its favor. Eight million registered users are checking out the more than 45,000 artists available at the site.

It's a global power ballad that is getting ready to kick into the bar chord refrain. MP3.com is the largest collection of digital music online and it has become a sanctuary to unsigned -- and even a few major -- recording artists. Jupiter Communications projects that domestic sales of online music will grow to $2.6 billion by 2003.

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. Listeners can archive their music collection and add to it through downloads. It's not just for computers, as I'm sure you've seen the variety of portable handheld MP3 players out there. Are car and home audio systems next?

But, wait, why would anyone want to hear tens of thousands of unsigned artists? Take MP3.com for a spin and check things out. 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." Electronic music is naturally an Internet strong suit, so it should come as no surprise that The Cynic Project and Sweden's trance [] control will keep you bouncing. And, yes, even my band, Paris By Air, has a room there. You can even sample the works of all the musicians who post on fool.com's MP3 message board at the Fool station on the site.

The musical acts have come to MP3 in droves for many reasons. It's free. It's a sleek-looking home-page presence for any artist. They can instantly create CDs consisting of MP3 tracks, let MP3.com handle all of the fulfillment, and pocket half of the proceeds. Since November, MP3.com has been paying out $200,000 monthly to its artists, based on site popularity. I know, it's less than a $5-per-musician average (and shrinking as more artists pile on), but that is pocket change incentive in an industry that so easily discourages the garage band millions.

What's in it for MP3.com? Well, they sell ads on those band pages, of course. They also profit from the CD sales. It's a great inventory-less system where the discs are made to order, and that has to have the traditional recording industry green with envy.

Or is that red with anger? Sorry, Cupid, nothing against red, but the sleepy record executives are rattled by MP3.com's success. Last month, MP3.com rolled out My MP3. It is a great free feature that lets any user set up their regular CDs for online storage. Just slip in a CD; it gets verified by the CDDB (the online compact disc database that identifies tens of thousands of CD releases), and if it's genuine (that is, not a bootleg) you will have it stored in your online musical library.

Think about the possibilities. Just about every CD you own, archived, and just a few clicks away from streaming audio airplay anywhere that you can access MP3.com. Set up playlists with your favorite tracks. It's your music.

Or is it? That's the beef with the RIAA (Recording Industry Association of America). They are suing MP3.com. No, it's not the art of archiving. You have a right to make personal copies of any prerecorded CD you buy. If you were to physically upload a CD into your own password-protected space on MP3.com, it would take up a lot of time and space but probably be perfectly legal. The problem is the "Beam It" technology MP3.com uses. It can store the CD in seconds after verifying its authenticity because MP3 bought the 40,000 most popular discs and already has them stored on its server. So, rather than record the entire CD, it grants you access to listen to that CD on the MP3.com server itself

It's a gray copyright infringement area that will be up for the courts to decide. MP3.com CEO Michael Robertson has replied.

While I'm enamored with My MP3, a service that will help convince even the most tightfisted music lover to embrace broadband, the issue is a sticky one that can go either way. If MP3.com wins, the generated publicity is going to draw throngs of music enthusiasts to the My MP3 service. If RIAA wins, MP3 might have some stiff penalties to pay.

Yet, beyond the legal challenges, it's important to consider how amazing MP3.com was even before the new service was launched. More than 250,000 songs have been uploaded to the site. Spanning all genres, even comedy and kiddie tunes, it will continue to be a major Internet magnet. It is generating more than 90 million monthly page views -- that's more than a half million unique visitors checking out a half dozen pages every day. These are amazing metrics that validate the online music industry giant with the perfect domain address. Will Wall Street embrace eardrums the same way it does eyeballs? Poco a poco.

For the December quarter, MP3.com generated sales in excess of $15 million -- more than its six previous quarters combined. With more artists and new revenue streams coming online every day, the top line should continue to show strong sequential growth. Yes, like many dotcoms, the company is not presently profitable, but losses are narrowing. Estimates are calling for just a $0.33-per-share shortfall this year.

Ultimately, one has to march to the beat of his or her own drummer. I was one of the first America Online (NYSE: AOL) users but never bought AOL stock. I was one of the first to sign up with eBay (Nasdaq: EBAY) and MyPoints (Nasdaq: MYPT) but never got around to sailing on those pleasant equity voyages. Maybe Lorelei, that deceptive siren that she is, scared the logic out of me. This time I'm at the edge of the pier with my headphones on. Something moves me.

Next: Primus »

MP3.com Company Information:
Trades on the Nasdaq under symbol MPPP
Website: www.mp3.com

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"Me and My MP3" -- 1/11/00

A Stock to Love represents the opinion of one Fool and in no way should be taken as the opinion of either The Motley Fool, Inc., the company in question, or representative of anyone or anything else other than that specific Fool's thoughts.

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