On the Record with Gene Hoffman

The market hates uncertainty. Plain and simple. Perhaps nowhere is this tried and true adage more apparent right now then in the digital music stocks sector of the Internet investment universe.

Check out a 52-week chart of any digital music stock lately. The valuation melt down continues.

The current high profile lawsuits being waged by the entrenched traditional music industry against renegade music file sharing service Napster and MP3.com have cast a huge impenetrable cloud over this once promising sector.

Upstart online music company eMusic.com finds itself right on the edge of this fray. Down over 90 percent from its 52-week high, this seller of digital music downloads now finds itself battling for survival amidst a pack of major record labels that have announced plans to sell digital downloads online as well.

We recently caught up with eMusic President and CEO Gene Hoffman to get his thoughts on this volatile sector.

ISR: Why have digital music stocks been battered so severely? Clearly, b-to-c companies overall are out of favor, but what specifically is hurting digital music?

Hoffman: Well, I think you have two trends that you pointed out. Obviously, b-to-c is one, but then for some reason digital music has particularly soured in the investment community. I think a lot of that has to do with the management teams in the space. You didn’t see a whole lot of people really maturing their companies and going after “how do I make my company sustainable and defensible here?” That has a lot to do with it.

ISR: So the whole group gets pulled into the muck and mire.

Hoffman: Unfortunately, the good ones get dragged down with the bad ones. The good ones are ARTISTdirect , ourselves, and obviously RealNetworks doesn’t deserve the beating they’ve taken because they’re even profitable! From that perspective, I think it’s just an ugly sector at this moment. The best way to compete with that is to just go out and focus on fundamentals – drive revenues.

ISR: I almost sense though what’s really holding back digital music stocks are that investors are still in search of the winning business model for this arena?

Hoffman: I think people are looking for a leader because what is clear is that no one has been hands-down the leader. I think there are some people that have a definite inkling by saying – “what eMusic and ARTISTdirect is doing is very strong, what’s this Launch Media thing, how does MP3.com fit in, and who are these Musicmaker.com guys?” That doesn’t really help point out the leader, though.

ISR: No, it just leaves investors with even more questions.

Hoffman: I think you’ll see that leadership position emerge over the next six months and what partially will drive that is the bigger labels learning the lessons they need to learn about what it’s going to take to actually be effective.

ISR: Do you think that any of the big music labels have a clue yet about what their true online digital music strategy really is?

Hoffman: Well, I think there’s going to at least be serious trying. I don’t think they yet fully comprehend the issues. I think they’re focused on the wrong things. They’re not focused on the things that are important. Such as – how do you sell it? How do you make it easier for people to discover it and not just the classic ways? Just putting up a Web site and talking about the new NSYNC release is not enough! You need to be able to start doing things that are affinity and community based that allow other people outside of yourself to make recommendations.

ISR: Like Napster?

Hoffman: In some ways, I think that of all the things that Napster is good at, it’s many of the same things that the major labels aren’t good at doing. The challenge is making those sort of Napster-like scenarios very easy fo

r customers to do the right thing.

ISR: What would that mean for example?

Hoffman: I think it means like being able to allow customers to subscribe to music instead of purely “pay as you go.” I think it’s the ability for you to share music with another person for very, very cheaply. I think there’s a model that says – “come to our Web site that you subscribe to. If you want to send a friend an album, we’ll give it to you for twenty-five percent of the actual value.”

ISR: But that’s throwing the notion of secure encryption and digital rights management out the window?

Hoffman: Absolutely. Instead of worrying about protecting, it is worrying about expanding. It’s about making certain things that make a lot of sense inexpensive because they help you too. Maybe the model is that you don’t allow albums to be passed, but you do allow singles to be passed. So if you subscribe to my service, I let you send up to 40 singles a month to anyone you want for $4. Basically, I’m getting some money for that, but what I’m really getting is that you’re promoting it to your friends.

ISR: What are your thoughts on Napster and MP3.com’s My.MP3 services? To me, the excitement over these two services suggests that subscription models for digital music make sense?

Hoffman: Yes. I have to believe that’s where we’re going. There’s just no way out of it. It is a product in the sense that there will be products in that service, but the service itself should be what you’re making available. I think you should make “a la carte” available too because I think that’s more customer friendly. However, what I really think My.MP3 and Napster shows is the future. Now, I don’t think they did it right – to be blunt. But I think those sort of services are exactly the way music should be.

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