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MP3.com: The Music Service Provider

I had a chance to visit MP3.com (MPPP) and meet its young CEO and founder, Michael Robertson. It's hard to believe that his company had only five employees in January 1999; now the company is bursting at the seams, with over 280 employees.

Michael Robertson had the vision to see that the Web would revolutionize the antiquated music industry, by disrupting the existing distribution system. As he says, "music is about moving bits around."

For MP3.com, the company is moving huge amounts of bits on its servers. In August, its page views were 77 million, with about 408,000 unique daily visitors.

While MP3.com has a strong relative valuation, I think it is poised to widen its lead. Here are the valuation metrics:

Company

Price

Market Cap

Annualized Revenues

Revenue Multiples

         

MP3.com

 $   31.75

2100

7.60

276.32

Musicmaker.com

 $   17.31

530

0.13

4076.92

Emusic.com

 $   18.81

295

0.20

1475.00

Liquid Audio

 $   36.38

685

3.00

228.33

Launch Media

 $   14.56

184

14.00

228.33

Oh, and MP3.com also happens to have $435 million in the bank.

Some Background

MP3.com has two kinds of customers:

Music Fans: Unlike most other music sites, you can actually listen to songs in their entirety on MP3.com -- not 30 second snippets. You can also set-up your own MyMP3.com. Here, you can keep track of the songs you like. In fact, as you do this, MP3.com will then begin to understand your tastes and recommend music to you. Top of Form 1 Bottom of Form 1

Artists: The music industry has undergone little change over the past decades. Perhaps the reason is that record labels make tons of money. So why change?

Dealing with a traditional record label is a raw deal. An artist signs a contract -- which is exclusive -- for five to seven years, which obligates about one album per year. The label owns the rights to the music -- forever. What's more, the label pays a paltry 10 percent of the CDs sold. However, this is net of the marketing costs the label had to spend to promote the album. Perhaps this is why many artists are broke.

Being an artist with MP3.com is much fairer. MP3.com does not own the rights. In fact, an artist can leave anytime (although, the attrition rate is very low). Revenues are split 50-50 -- and that's without subtracting marketing costs, or any other costs.

There are no fees for the artist. Instead, an artist must only agree to post one full-length song that is free to everyone. The artist can then elect to sell the rest of the songs or give them away.

In a sense, MP3.com gives the artists the means to run their own virtual record labels. MP3.com keeps track of vital stats, such as downloads, sales and traffic, as well as what regions the visitors are from.

The artists can create and sell their own CDs. It is an easy process, which can take less then 48 hours.

The system seems to be working. MP3.com has 27,000 groups, which have posted over 150,000 songs. About 200 sign up every day.

Conclusion

The site is divided into about 270 different music styles (country, alternative and so on). Each song is ranked within each category. The result is that artists are highly incentivised to generate high-quality content. In a way, the system is self-regulating. What's more, the artists are also motivated to heavily promote their work, which means more and more popularity for MP3.com.

With its loyal base, MP3.com has been tracking everything -- then mining the data for as much insight as possible.

This is what traditional labels cannot do. They don't know their customers, since labels transport CDs through distribution networks, which are then sold in retail stores.

Wouldn't the music labels really like to know what customers like? Wouldn't they pay money for this?

Well, there are major companies doing just that. In fact, MP3.com signed perhaps the most amazing advertising contract ever. The deal was struck on July 1999, in which Groupe Arnault committed to purchase $150 million in advertising, promotion and marketing services over the next three years.

MP3.com is not about a music standard; it is not about selling CDs; it is not even about content. Rather, MP3.com is a music service provider (MSP). Just as an Internet Service Provider (ISP) gives people the tools to surf the Web and Application Service Providers (ASPs) help companies run their networks, MSPs allow artists to promote their work. It's a distribution infrastructure that works. And much like eBay, it is an explosive viral model, which should be music to investors' ears.


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