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Will Songs.com Be Music to Investor's Ears?

Remember The Tortoise and the Hare? If you believe slow and steady can win the race, songs.com is an Internet company to watch.

Started in 1995 out of Nashville by three musicians, songs.com is staking out a slice of what is fast becoming a huge market online music sales. While the Internet is littered with free downloads of amateur music (and pirated copies of commercial offerings) the big boys like Amazon.com (AMZN) are ramping up their online CD sales effort. Jupiter Communications projects online music sales online music sales will reach $2.6 Billion by 2003.

There are already innumerable Internet music sites chock full of the good, the bad, and the unlistenable. Songs.com takes a different approach. You won't find Puff Daddy, 10,000 Maniacs or garage bands at songs.com. Artists have to qualify to make the cut at songs.com and the company claims only a small percentage of those who do apply make it.

More than 350 artists have signed on with songs.com which features solo acoustic guitar and vocal to fully orchestrated pop, rock, blues and R&B. There are plenty of free cuts along with the CDs for sale at the site.

Songs.com also provides each artist with their own Web site. If you're into music of this type you may recognize many of the names, such as Janis Ian, in song.com's stable

"There is a lot of bad music out there on the Net, but songs.com has attracted some decent artists," said Van Baker, analyst at market research firm Dataquest.

"I think there is a need for sites that perform the function of record labels, to filter the music and offer a pre-selection for consumers."

"We emphasize strong melody and lyric content," says songs.com CEO and co-founder is Paul Schatzkin.

The strategy hasn't been a big money winner or loser. You'd think a team smart enough to start an Internet business in 1995 might already be an established, big name player with a huge valuation. After all, songs.com began about the same time Amazon.com geared up to take the world of book selling by storm, but songs.com is no Amazon. Schatzkin says songs.com has demographics similar to National Public Radio which at least sounds affluent if not youth-oriented a la MTV. The company's own Q &A backgrounder at its Web site includes the question: "Why haven't I heard of songs.com?"

One reason is the company's slow growth approach. From an anemic $750 in initial funding (kicked in by the three company founders), songs.com has broken even every year, but that's about it, according to John Slater, who's Slater & Co. investment banking firm is helping songs.com raise capital.

"They spend every penny, but it's not been profitable. I got involved because I saw a real business opportunity to help singer songwriters, and big name performers who aren't being heavily promoted, build their career. That got me excited."

Slater's firm took equity in songs.com instead of a fee and is also helping with strategy and positioning.

At its current run rate, Schatzkin anticipates revenues for the next twelve months will be approximately $800,000 (about $300,000 for all of 1999) not bad considering the company now operates with only six part time employees. Revenue comes primarily from CD sales and Web site development services for the artists in the songs.com roster. Part of the company's mission is to eliminate all but one layer of middleman (there are usually four in the record biz) and preserve the margins.

The immediate capital goal is to raise the less than whopping sum of $5 million. Schatzkin breaks it out as follows: $2 million to upgrade operations and $1 million each to get into the music production business, branding and marketing, and acquisitions. Why no more?

"We've grown organically, and I want long-term value," Schatzkin said.

"I don't want to burn through $20 million a month. As important as the money is, an investor's relationships and the partnerships he can bring to our table are equally if not more important in our quest for capital."

Like most Internet businesses, songs.com's competition is just a mouse click away. One barrier to entry is songs.com's established lineup of artists. Shatzkin admits to concerns he's up against better financed competitors trying to lock in long term digital distribution rights.

"But we have a high measure of loyalty," says Shatzkin. "We bust our butts for our people."

Sounds pretty aggressive for a tortoise.


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