After slightly more than a year in the Internet music business and with no proprietary claim on the technology it helped popularize, MP3.com Inc. went public Wednesday and immediately became a multibillion-dollar force.
The San Diego company is the most popular Web site for those seeking free or nearly free music to download. It hopes to make money by splitting music revenue down the middle with bands. Thus far, though, the lion's share of the less than $700,000 it had in sales for the first three months of this year came from advertising.
After the investment banks underwriting the sale of 13 million shares more than doubled the initial price to $28, the stock exploded to open for public trading at $92 on Wednesday, then spurted to $105, briefly giving MP3 a market value of about $6.9 billion, just south of EMI Group. The stock closed at $63.31 on Nasdaq.
"They are the beneficiary of the right name, the right dot-com address and the right time," said Forrester Research senior analyst Mark Hardie. "The marketplace is just very heated with theoretical expectations."
The debut ranks among those of E-Toys, MarketWatch.com and other Internet IPOs that rocketed in their first day of trading. It made a billionaire of 38% owner and Chief Executive Michael L. Robertson, 32, a former computer programmer who has become the scourge of the music industry establishment.
Others profiting handsomely are Silicon Valley venture firm Sequoia Capital, Cox Interactive Media and singer Alanis Morissette.
Management company Atlas/Third Rail, which manages Morisette among others, got warrants to buy 658,000 common shares at 33 cents each in exchange for making MP3 a 1999 summer tour sponsor, according to regulatory filings. At Wednesday's closing price, that's more than $40 million in profit, at least on paper.
Atlas is affiliated with Charles Roven and Roven's cousin Thomas Spiegel, one of the most controversial executives in the nation's savings and loan crisis of the 1980s and early '90s. Morissette, Roven and trusts led by Spiegel are listed as second-round investors in MP3.
As head of Columbia Savings & Loan in Beverly Hills, Spiegel was one of the best high-yield, or "junk bond," customers of former Drexel Burnham Lambert executive Michael Milken.
Spiegel was indicted in 1992 on 55 counts of looting Columbia to support a luxurious lifestyle but was acquitted by a jury two years later.
In 1995, Spiegel settled a long-standing civil dispute with federal regulators by paying $275,000 in restitution to taxpayers, a fraction of the $40 million the government had initially sought.
Spiegel did not return telephone calls seeking comment. Morissette couldn't be reached.
In an interview last last year, Robertson defended his site's offering hints to consumers about ways to circumvent industry efforts aimed at stopping digital music from being pirated.
"Theft is a cost of doing business on the Internet," the Redwood City, Calif., native said. "I know the giant companies have spent more than a year trying to develop a universal encryption and 'watermark' security system, but I guarantee you the minute they unveil the thing, some hacker will figure out a way to get around it. It is impossible to secure digital music."
Web traffic to the site, a key measure for valuing Internet stocks, has soared, especially since the November introduction of the Rio portable player for MP3 downloads.
More than 6 million visitors come to the site, one of several offering free music, every month, according to the company.
"Our Web site contains over 100,000 songs from over 18,000 artists," the company's filings say.
For the traffic, as well as impeccable timing and buzz, analysts give MP3.com good reviews.
"They have overcome one of the largest obstacles you can have, which is: How can you get a couple million people to come to your sites on a regular basis?," said principal analyst Mark Mooradian of Jupiter Communications.
At MP3.com and other music downloading sites, most of the artists are unknowns.
"The big problem these guys have right now is the noise factor," Mooradian said. "Once you get 20,000 bands out there, how do you find the good stuff?"
Bands that do somehow make it big over the Net may still jump to record labels that can spend the money to market them.
On the consumer side, customers have other choices, such as Songs.com or other rival sites.
"Not only do they not own the technology, they have built no barriers to entry, and they are not selling into demand--they are just selling music that is brought to them" by artists, said Forrester's Hardie.