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Apparently Universal is taking $25M from the settlement with MP3.com and distributing it among their artists. By the time anyone gets anything it’ll be about $5 per artist.

MP3.com has settled but they still suck. They have no business plan… they have a domain name.

-Ian.

http://www.redherring.com/investor/2000/1116/inv-mp3111600.html

The song remains the same for MP3.com By Dan Briody Redherring.com, November 16, 2000

When it comes to a company like MP3.com (Nasdaq: MPPP) and its brand-new $53.4 million settlement with Seagram’s Universal Music Group, there’s one question you have to ask yourself before investing: if this company couldn’t make money when it was selling music illegally, how is it going to make money now?

“Good question. Very good question, an excellent question,” says Nitsan Hargil, an analyst at Kaufman Bros. who upgraded MP3.com from Hold to Buy on news of its latest settlement.

But investors chose to shrug off such petty concerns Wednesday and managed to boost the ailing stock 54.7 percent to close at $6.18, still 88 percent off its 52-week high. Even though news of the Universal settlement is undoubtedly a good sign, such a big move in the stock is a bit baffling when one considers the still unanswered questions on the table. For example, will a subscription-based model for music on the Web actually work? And how much money will MP3.com ultimately have to pay to settle its legal disputes with all five major record labels?

LEGAL SPEAK MP3.com has essentially been in stealth mode for the past six months or so, quietly settling out of court with all of the major record labels but Universal, including Sony Music Entertainment, Bertelsmann’s BMG Entertainment, Time Warner’s Warner Music Group, and EMI Music Group. The settlements were payment for illegally distributed copyrighted materials, which MP3.com offered for free on the Web through its MyMP3.com service if users were able to prove that they had already bought the CD. And if you think that’s confusing, wait until you hear the terms of the settlements.

The size of the settlements was kept under wraps on most of the deals, but it is believed that each major label netted about $20 million per settlement. However, a clause in the agreements specified that the contracts would be re-negotiated if forthcoming settlements proved to be more profitable. In other words, all of the labels involved get the highest dollar amount settled upon for any individual label. Kind of like playing best ball in golf.

But Universal held out of the early settlement rounds and chose to fight MP3.com in court. Ultimately, they settled out of court for $53.4 million, with both companies terming the arrangement a “judgment” rather than a “settlement,” which would have required MP3.com to go back and pay the other labels the difference. Whether it will get away with this slippery legal maneuver remains to be seen.

“It is a transparent attempt to circumvent paying the money, but it will hold up,” says Mr. Hargil. “The difference between Universal and the others is that Universal chose to pursue the trial to the bitter end … almost.”

Interesting. What’s even more interesting though is the fact that Universal, as part of the settlement/judgment, purchased warrants for up to 3 million shares in MP3.com. If these warrants were fully exercised, Universal would own nearly 5 percent of MP3.com. It now looks like Universal has a vested interest in seeing MP3.com succeed rather than bankrupting the company by forcing it to pay huge settlements.

SELLING OUT? With most of its legal hassles now behind it, MP3.com can get back to business. But the question there is: what business will they be in — music subscriptions or ad sales?

In the second quarter of this year, 96 percent of MP3.com’s revenues came from advertising, as the company hoped free music would generate a lot of traffic for the MP3.com site. The dependence on ad revenue lessened somewhat in the third quarter, with advertising accounting for 76 percent of total revenue. That’s still a hefty amount, but there are indications that MP3.com will rely less on advertising in the future. CEO Michael Roberston said in published reports Wednesday that the MyMP3.com service will start up again by the end of this month with two options: a free service, supplemented by ads and with restrictions on the music base, or a paid subscription version without ads.

The Internet has already seen countless companies fail to generate profits using an ad sales model, so a move to subscriptions makes sense. But if you look at the success of some of the subscription-based music sites, like Emusic.com (Nasdaq: EMUS), which is struggling to keep its head above water at $1.09 per share, there isn’t a whole lot of reason to believe that MP3.com will be any different.

Throw in the fact that Napster is still operational and free, and the competitive landscape really couldn’t be any more difficult. It’s true that the specter of a court battle and potentially devastating damage payments is gone, and it’s encouraging that Universal has decided it would rather try and keep MP3.com alive than force it to close shop permanently. But until the company can show investors exactly how it will make money, the road ahead for MP3.com doesn’t look much better.

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