N.Y. Firm Buys Out MusicNet

A New York venture capital firm said Tuesday that it had taken over MusicNet, an online music service formed in 1999 by three major record companies and RealNetworks Inc.

Baker Capital, which focuses on communications companies, said it had bought out all the MusicNet shareholders for an undisclosed sum. MusicNet is the only music company in Baker Capital’s portfolio, which includes investments in e-commerce, wireless Internet and networking equipment companies.

By contrast, three of MusicNet’s four previous shareholders were media conglomerates -- Time Warner Inc., EMI and Bertelsmann -- and RealNetworks is a technology company specializing in online media distribution.

Baker Capital’s stated strategy is to invest in companies poised for rapid growth, then either sell them or take them public within five years.

A wholesaler, New York-based MusicNet supplies music services to half a dozen outlets, including Time Warner’s America Online, Virgin Group’s Virgin Digital and Trans World Entertainment Corp. It has more than 500,000 subscribers -- a large number in the fledgling online music industry but only a fraction of the music-buying public.

Privately held MusicNet has never made money for its shareholders, but its losses have been shrinking. For example, RealNetworks’ share of MusicNet’s losses fell to $4.4 million last year from $6.3 million in 2002.

Analyst Van Baker of market research firm Gartner Inc. said the change in ownership would help MusicNet take a more long-term view of the industry. But a crucial question is how long the new owners can wait for the public to embrace MusicNet’s most profitable offer: renting an unlimited amount of music online for a flat monthly fee.

“Most people are used to buying music and owning it,” Baker said. “We don’t think that’s going to change very fast.”