Until ArtistDirect Finds Own Beat, Online Music Vision Is Still Far Off

With strong ties to the music community, support from the mainstream industry and several years of experience online, ArtistDirect Inc. seems to have all the makings of a true “new media” record label.

There’s the ArtistDirect talent agency and record company it manages, where unknown musicians’ works are marketed and sold over the Net and in the real world.

There are the exclusive Web deals with more than 100 well-known artists, who receive an undisclosed chunk of equity in the company in exchange for letting ArtistDirect sell their merchandise and concert tickets directly to fans.

And there is its Ultimate Band List, one of the Net’s oldest indie music-oriented sites, and iMusic, a community hub for music fans.

The Encino company, poised to go public early this year, even has the financial support of four of the five major record labels. Late last year, the company pulled $97.5 million in investments from Universal Music Group, BMG Entertainment, Sony Music Entertainment and Time Warner Inc., as well as Web powerhouse Yahoo and an affiliate of Cisneros Television Group, according to regulatory filings.

Despite all that, analysts say ArtistDirect’s public offering could be met with lukewarm results. Online music may be the future, but the sector is still very young and the record industry is “hedging its bets,” said Dan O’Brien, a media analyst with Forrester Research.

Indeed, ArtistDirect rival Listen.com also has the financial support of the industry’s label giants. Listen.com, a directory of digital music available on the Net, has positioned itself as an intermediary between consumers and more than 400 sites with music files that can be legally downloaded.

“Right now, no one knows who is going to be the leader of this space,” O’Brien said. “This is a very, very competitive space.”

In the stock market, investors have been fickle with their support of Net-based music companies.

MP3.com Inc., the San Diego-based online music giant, has become a hub for digital music. The company’s stock enjoyed a brief jump recently after MP3.com posted a fourth-quarter loss smaller than Wall Street estimates on revenue that rocketed twentyfold. But as the company has become embroiled in litigation--a lawsuit filed by the recording industry, and a countersuit by MP3.com--its stock has been on a fairly steady three-month decline from the $60s to the mid-$20s.

So what does ArtistDirect, which plans to raise $55 million by issuing 5 million shares priced at $10 to $12 each, offer investors that rivals don’t?

The company has enjoyed quiet growth in its net revenue: $2.8 million for the third quarter ended Sept. 30, up from $2 million for the same time a year earlier.

Yet its losses over the last five quarters have grown rapidly because of acquisition and expansion costs, according to regulatory filings. The company reported a net loss of $26 million for the third quarter, compared with $845,000 in the year-earlier period.

And while ArtistDirect boasts a large stream of daily visits to its virtual stores dedicated to various artists, surfers don’t necessarily translate into sales and profits.

The eventual key to success, the company says in its filings, is its product diversity and ties to the artist community.

Touting the philosophy of artist ownership and revenue sharing, ArtistDirect was founded in 1996 by Marc Geiger and Don Muller, known for launching the Lollapalooza concert tours in the early ‘90s along with former Jane’s Addiction front man Perry Farrell. Geiger is chief executive of ArtistDirect Inc., and Muller president of ArtistDirect Talent Agency.

Geiger’s vision of the future was simple: Instead of buying music on CD, fans will be able to buy digital files or “rent” music with a flat monthly fee that allows them unlimited access to a vast cyber-archive of songs. The music would be streamed to listeners much like radio, but with the listener able to create the playlist.

But that future, when it won’t matter whether the music is stored as an MP3 file or in some other digital format, is still far off, analysts say. Today, ArtistDirect offers promotional music files for free, and sells CDs.

Analysts say the company was among the first technology players to understand that digital distribution of music was inevitable.

Indeed, researchers at Jupiter Communications project that online sales of recorded music in the U.S. will grow from $327 million in 1999 to about $2.6 billion in 2003. More than 15% of all music is expected to be acquired digitally by 2003.

For consumers, this distribution change promises more choice and control. Downloaded songs from companies such as ArtistDirect can be stored on recordable CDs, or loaded into a growing array of solid-state devices that play back with CD-like quality.

For artists, the Internet cuts virtually the entire cost structure out of record distribution, raising the prospect of more sales.

Tapping into this, ArtistDirect offers artist “channels” containing everything from MP3 downloads to T-shirts. As technology evolves, the company hopes to incorporate more multimedia products into these channels, such as music videos and daily news updates, according to regulatory filings.

The channels are devoted to a range of artists, from the Rolling Stones and Tom Petty to Beck and the Backstreet Boys.

ArtistDirect “may have support among the big labels, but the reality is the labels are still slowing down the process,” said Van Baker, vice president of the e-business group at the research firm Dataquest. “The recording industry is buying time, and hedging its bets, until it can come to grips with what’s happening and try to retain control over it.”

The Recording Industry Assn. of America continues to work with computer, software and consumer electronics companies to spur development of a technology--dubbed secure digital music initiative--that would prevent music files from being copied illegally.

But internal fighting over how such technology will work--and who will benefit from it--has caused product delays and created a market opportunity that even the major labels can’t ignore.

Time Warner Inc.’s back-to-back deals with America Online Inc. and music giant EMI Group signaled a serious--and pricey--push by a major label to figure out a way to make digital distribution work.

Earlier this month, Sony launched its first stab at a digital download service in Japan. The service, called BitMusic, lets consumers buy and download individual tracks for about $3 each.

And artists themselves are starting to roll out their work online. Petty, Alanis Morissette, Chuck D and the Beastie Boys, among others, have made songs available for downloading for free or a minor charge in efforts to build buzz, sign up fans on an e-mail database or draw traffic to a Web site.

“There’s so much that’s out there, the question is how do you find a focus,” O’Brien of Forrester said. “Without focus, it’s hard to distinguish yourself from everyone else.”

*

Times staff writer P.J. Huffstutter, who covers technology and youth culture, can be reached at p.j.huffstutter@latimes.com.