Audible: Silent for How Long?

Since its IPO in July at $9 per share, Audible (ADBL)
has been rocky. After reaching a high of $25, the stock is now at
$8-5/8.

Unfortunately, last week the company’s 40-year-old chief executive officer, Andrew Huffman,
died of a heart attack. The chairman and founder of the company, Donald
Katz, will serve as the interim chief executive officer.

Despite these major setbacks, the company actually may represent a
compelling investment.

Let’s first see how the Audible technology works: For a fee, you download
premium content from the Web, such as the Wall Street Journal or a book or
a
magazine. The content is transmitted into a mobile player and you can
listen to the content virtually anywhere.

The model is similar to the audio books market except that you have more
flexibility, as well as more timely content. The audio books market is
about $1.6 billion per year.

Audible has some savvy investors, like Microsoft, Compaq, Intel, Kleiner
Perkins and AT&T Ventures. Perhaps the reason Audible attracted these
backers is that the technology provides for a secure download of compressed
audio content.

Knowing they will be able to control distribution (and see
some revenues), companies using Audible technology are now more willing to
distribute their premium content over the Web. These backers have made it
easier for the company to strike some major deals, such as:

  • Microsoft: In this deal, Audible will support the MS Windows Media
    platform. Thus, the 40-million user base of this platform will be able to
    use Audible’s products.

  • RealNetworks: Similar to the Microsoft deal, users of the RealPlayer G2
    can
    have access to Audible’s premium content. In fact, users can purchase the
    content from www.RealStore.com. There is also a co-marketing campaign
    planned. There are over 72 million users of the RealPlayer.

  • Wireless: Audible has struck distribution agreements with portable device
    manufacturers such as Casio, Compaq, Everex, Motorola, Philips,
    Hewlett-Packard and Diamond Multimedia. For example, in a recent deal,
    Hewlett Packard has agreed to place Audible technology in its Jornada 430se
    Palm-size PC.

The market for audio players is expected to grow fast. According to IDC,
the market should soar from 630,000 in 1999 to 6.8 million in 2003.

The company is different from, say, MP3.com (MPPP)
since Audible deals with spoken content, not music, or audiohighway.com (AHWY)
, which is advertising based. In fact, MP3.com is partner of Audible.


Momentum

In its latest quarter, revenues surged to $478,834 from $70,704 in the
same
quarter a year ago. However, revenues actually fell 9 percent from the prior
quarter. But this was largely due to Audible phasing out its hardware
division, which is a smart move. Audible’s core competency is as a
content aggregator, not a device maker.

There were other growth metrics. For example, the customer base increased
51 percent to 8,600, of which 47 percent of sales were from repeat customers.
The total number of hours of content available went from 17,000 to 18,800.
Further, the number of titles increased from 7,500 to 8,800. There was
even
an improvement in gross margins, which increased from 45 percent last quarter to
50 percent.

The company is still in the early stages of this emerging market. But it
is
quickly amassing a valuable library of content and signing distribution
deals. What’s more, the company plans to launch an aggressive marketing
campaign. Interestingly enough, Robin Williams will be the spokesman
(interestingly enough, he is taking equity as his compensation). This
will raise the visibility of the company, as well as the customer base.
With the stock at $8 per share, there appears to be lots of potential
upside.


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