Open Season on Web Music Firms

Like bargain hunters swooping down on a sales rack, giant information and entertainment companies have been moving to snap up online music companies--often at fire-sale prices.

The deals, including Vivendi Universal’s proposed purchase of MP3.com Inc. and Yahoo Inc.’s pending purchase of Launch Media Inc., signal a wave of consolidation that’s thinning the ranks of online music suppliers. And several other online companies already find themselves on the auction block as well.

“It’s an excellent sign that the digital music space is evolving from a novelty into an industry,” said Zack Zalon, general manager of Radio Free Virgin, an online music service tied to Virgin Group.

Price is driving the deals. Insiders say online music companies lost their glitter over the last year as ad rates plummeted and lenders grew wary. With their stock prices crashing, online companies had far less time than they originally expected to establish their businesses.

“It’s the squeeze play that comes out of those two factors that, I think, really has caused these companies to be willing to sell for what they’re willing to sell for,” said Tuhin Roy, an executive vice president of Echo Networks Inc., a privately held online music company.

Another factor, some say, was the labels’ aggressive use of copyright-infringement lawsuits. MP3.com has paid more than $100 million to settle copyright infringement claims, and Launch was hit with a lawsuit the day it was due to close a life-preserving $5-million loan.

“There’s a legitimate concern that litigation is hastening the consolidation,” said Jonathan Potter of the Digital Media Assn., a trade group for online music and video companies.

The most recent deal came Thursday, when Yahoo agreed to pay $12 million, or 92 cents per share, for Launch, an online radio and music-video service. Investors had sunk more than $112 million into Launch, which was established in 1994 and backed by such corporate titans as Sony Music, Microsoft Corp. and Intel Corp.

“These people are buying some of these things for cents on the dollar,” said James Glicker, president of music services for FullAudio Corp., an emerging online music-subscription service. “They’re getting assets that are cheaper than what they could build them for themselves.”

The acquisition streak began April 9, when Universal Music Group agreed to pay $22 million, or 57 cents a share, for EMusic.com Inc., which sells downloadable songs from independent artists. EMusic had once been worth more than $250 million and had traded for as much as $35 per share.

On May 20, Universal’s parent company, Vivendi Universal, agreed to pay about $372 million for MP3.com, the Web’s largest supplier of authorized free music. The price per share was $5. In the heady days after MP3.com went public in July 1999, the company commanded more than $40 per share and boasted a market capitalization of more than $2.7 billion.

On May 30, Bertelsmann, the parent company of BMG, agreed to pay an undisclosed sum for Myplay Inc., an online music storage and subscription service. Privately held Myplay also relied heavily on advertising, and it had reportedly been running low on cash.

Bertelsmann had previously acquired CDNow, an online music retailer, and is investing in the new, fee-based song-swapping service from Napster Inc.

But why buy now, when investors and lenders have all but abandoned the online music field?

One factor is the decline of Napster’s free online song-swapping service, which had more than 50 million registered users at its peak. A federal judge has forced Napster to block users from copying much of the popular music they used to find on its service, sending many consumers off in search of new sources of music online.

The labels all are developing subscription music services, through either affiliates or independent licensees. But the terms of those deals are still being negotiated, and the acquisitions could help the labels wrest a larger percentage of the profits than they’ve traditionally received, said Ashish Singh, a vice president at consulting firm Bain & Co.

“They’re now in a position to try and change the way the evolution of the electronic world happens,” Singh said.

The online music companies also give Vivendi, Bertelsmann and Yahoo valuable information about the tastes and buying habits of music fans. Those insights can help a company such as Yahoo sell not only music subscriptions and related products, such as concert tickets, but also targeted advertisements, noted David Goldberg, chief executive of Launch.

Glicker of FullAudio said there’s a bit of a pack mentality at work too. “I think there’s a wave of acquisitions because people prefer activity over inactivity. . . . You look better off buying something.”

The online companies, meanwhile, have discovered that technology skills alone can’t turn a bunch of song files into a profitable business, said Richard Wolpert of MusicNet, an online distribution business backed by BMG, EMI Group, Warner Music Group and RealNetworks Inc.

In the long run, Wolpert said, the Internet will prove to be just another distribution pipe for the record companies and other media powerhouses. “The companies that stand to profit the most from additional media distribution,” he said, “are going to be very serious players in this space.”

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Wave of Consolidation

* June 28: Yahoo Inc. announces agreement to buy Launch Media Inc. of Santa Monica for about $12 million. Launch’s Web site offers personalized online radio stations, music videos on demand and music news.

* May 30: Bertelsmann announces agreement to buy privately held Myplay Inc. of Redwood City, Calif., for an undisclosed sum. Myplay provides free online lockers for consumers to store and play back music.

* May 20: Vivendi Universal announces agreement to buy MP3.com Inc. of San Diego for about $372 million. MP3.com offers music, free or by subscription, from unsigned artists and some independent labels.

* April 9: Universal Music Group announces agreement to buy EMusic.com Inc. of Redwood City for about $22 million. Emusic sells downloadable songs from independent artists, and it owns the Web site for Rolling Stone magazine.