As appeared in U.S.News and World Report, July 26, 1999

They want their MP3

The popular online music distributor gets ready to rock Wall Street with an IPO

BY WARREN COHEN

Post-grunge chantress Alanis Morissette has a knack for writing songs that connect with her female fans. She has sold more than 19 million albums since 1995. The pop star also has an ear for investments. On her summer tour, cosponsored by Internet music site MP3.com, she has forgone a paycheck in exchange for shares in the company. Morissette will become richer next week if, as expected, MP3.com becomes the latest Internet IPO chart topper. Founded in March 1998 by Michael Robertson, 32, the company's name is synonymous with the Internet's most popular format for distributing music online. To the surprise of nearly everyone connected to the Web, mp3 has replaced sex as the most frequently searched term on the Internet, according to market researcher Searchterms.com.

Investor interest is intense. When the company originally filed for its IPO in May, it was valued at around $ 450 million. Last week, it increased its initial offering by 3.3 million shares and raised the price from the $ 9 to $ 11 range to the $ 16 to $ 18 range. That puts MP3.com's current valuation at $ 1.2 billion--before the shares even hit the market.

Streaming Geeks. Still, as with other Internet frenzies, the financials for the online music business may appear off key to traditional investors. In the first quarter, MP3.com had revenues of $ 665,785 and posted a net loss of $ 1.4 million. Even though the company's Web site contains more than 100,000 songs from 18,000 different artists, it still earns more from ads on its Web site than it does from music. That's partly because the five major record labels control 80 percent of the market along with the rights to the old recordings of popular artists. MP3.com's own stable of bands includes such little-known acts as Streaming Geeks.

Even if one of the company's bands becomes a hit, the MP3 format allows for unlimited copying, which could dilute MP3.com's sales. That's why the major labels are holding back from the Internet until a digital standard that prevents illegal piracy is created. An industry-led consortium is expected to decide on that technology by August so that the major labels can sell digital music before Christmas. Even so, with most homes lacking the high-speed Internet connections to quickly download large music files, the digital music emporium of the future is a long way off. According to market analysts Jupiter Communications, the online digital music market will reach only $ 147 million in 2003, or less than 1 percent of all music sales.

These caveats haven't dampened investor enthusiasm. Two weeks ago, online music companies Musicmaker.com and Liquid Audio had IPOs. Their stock prices have since shot up around 31 percent and 113 percent, respectively. With MP3.com the biggest name in the field, online music stocks could hit another high note.


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