EMusic Agrees to Be Acquired by Universal Music for $23 Million

EMusic said Monday it agreed to be bought by Universal Music Group, the world’s largest music label, for less than $23 million in cash, a sign of the difficulty many upstart independent Web music companies had competing with song-swap services such as Napster.

Universal, a unit of France’s Vivendi Universal, said it plans to start a tender offer for EMusic’s outstanding shares for 57 cents each.

Shares of EMusic, whose sites include RollingStone.com and DownBeat.com, were up 10 cents to close at 54 cents. Before the company disclosed its acquisition talks last week, its stock had been as low as 16 cents.

EMusic traded as high as $35 on the OTC Bulletin Board in June 1999, just before its shares were listed on the Nasdaq National Market system.

The Redwood City, Calif., company had been struggling to win over a large user base against the backdrop of competition from the controversial Napster service, among others.

EMusic offers digital downloads by artists on smaller independent labels, including Elvis Costello, Tom Waits and Creedence Clearwater Revival.

It started this service first on a fee-per-download basis and later on a subscription basis, which allowed users unlimited downloads for a monthly fee.

The latter model gained popularity as an alternative to Napster, which offered users the ability to download music for free from other people’s computers, in most cases without the permission of artists, labels and publishers.

“EMusic was forced to spend millions of dollars to buy the exclusive rights to music that was being distributed through the Napster system for free,” said Pacific Growth Equities analyst Brian Alger.

Earlier this year, Universal and the four other largest record companies in the world successfully argued for a court injunction on Napster to block access to songs identified by the labels, accusing Napster of copyright infringement.

But for EMusic, the ruling against Napster came too late.

EMusic said last week it would finish its fiscal third quarter with 10,000 subscribers, ahead of the 8,000 it had earlier expected. As of March 31, the company had $10.9 million in cash and short-term investments.

The deal follows the formation last week of the Duet service, a partnership between Universal and Sony Music Entertainment, along with Internet media company Yahoo.

Universal declined to comment on whether EMusic would become a part of the Duet service. “The deal hasn’t even closed yet,” a spokeswoman said. “It’s really premature to say.”

Duet would be a stand-alone company jointly held by Universal and Sony, she said, while Universal alone would be buying EMusic.

Last week, the other three major record labels--AOL Time Warner’s Warner Music Group, Bertelsmann’s BMG Entertainment and EMI Group--announced a similar deal with Internet software firm RealNetworks.