I'd be interested to hear arguments in agreement or disagreement with
July 23, 2000|3:59 AM
Terror in Tune-Town: Music Giants Flail Before Download Upstarts
by Christopher Byron Bloomberg News
Would you like to know what the current fracas regarding "music over the
Internet" is all aboutI mean really all about?
Its not about some gun-toting rap singer getting to fancy himself up in a
suit and tie (or the rappers equivalent thereof) and sound off about
copyright infringement issues.
Its not about the zero-to-hero overnight fame of cyberspace teen wonder
Shawn Fanning, who wrote the software that allows you to download enough
room-emptying rock music off the Web, for free, to make the whole of
Pakistan go deaf in two minutes.
No, what this fight is really all about is whether the Internet is going
to turn the outpourings of the U.S. infotainment industry into a
commodity, with the result that its operating margins will shrivel up and
One of the companies caught in this fightSan Diegobased MP3.com Inc.has
already seen its stock plunge 87 percent, to about $14 a share, from a
high of $105 on its first day of trading one year ago this week. The
shares are now trading about 50 percent below their initial public
offering price of $28 on July 21, 1999. But the long-term prospects for
the company are actually quite bright.
The real losers in this fightover the long termare likely to be media
conglomerates like Walt Disney Company, Sony Corporation, and AOL Time
Warner Inc. (pending their merger), which are currently grinding MP3.com
to a pulp. They stand to losebig timewhether MP3.com survives or not. That
is because their businesses, and their stock prices, depend on the fat
operating margins theyve enjoyed from selling intellectual property as
opposed to tangible commodities. Now, as it has done with everything from
books to consumer software, automobiles, stocks and home loans, the growth
of the Internet threatens to undermine and destroy the operating margins
of developers and distributors of "content" as well.
In other words, bye-bye to the eight-digit deals that have made people
like Bruce Willis and Tom Cruise rich beyond reason simply for knowing how
to smirk. Bye-bye to the more than $22 million that Time Warner Inc.
chairman and chief executive Gerald Levin bagged in salary, bonus and
stock for running his company last year. Bye-bye to the well, you get the
In other words, folks, whats at issue in this fight isnt simply property
rights to the musical eruptions of rock groups like Metallica. Whats at
issue in this case is whether the people in collective control of the
American infotainment industry will continue to wallow in the King Farouk
lifestyle to which their oligopolistic control over the medias
distribution systems have accustomed them. What they face, thanks to the
Internet, is a future about as appealing, over the long haul, as that
enjoyed by salaried physicians in this era of H.M.O.s and managed health
careand the "music over the Internet" fight is where these latter-day
Romanovs have chosen to make their stand against that ultimate day of
I predict that, in the end, they will fail and the rabble will storm the
Winter Palace. I think there is no wayno breastwork of copyright laws or
anything elsethat will halt the advance of technologys ability to
distribute information to wider and wider audiences at lower and lower
cost until, in the end, anyone will be able to distribute essentially
anything, for the functional equivalent of no cost at all at which point,
copyright laws will have about as much deterrent effect as the federal law
that you apparently break by ripping the tag off a mattress.
If you havent been following the fight, its really been quite an amusing
spectacle. It began when this 19-year-old college kidyoung Master
Fanninggot real twisted over the fact that he and his friends couldnt find
their favorite music on the Web. So Master Fanning sat down and wrote
himself a little program of computer code that allows anyone who already
has some music stored digitally on his home computer to dial in to Master
Fannings machine and register the music. Then, anyone wanting to download
a song can query the Fanning computer to find out if it is registered on
the network and, if so, what computer is storing it. Then the Fanning
computer will simply route you through to the computer where the song you
want is stored and you can download itfor free.
Mr. Fanning started a company called Napster Inc. (apparently because hes
got nappy hair), and it took off. Meanwhile, a company called MP3.com,
which had gone into business to utilize a popular software program for
compressing audio files, had also been giving away music for free from its
Web site. And other companies had begun gearing up to do versions of the
Seeing all this, the music industry freaked out and began filing all sorts
of lawsuits against MP3.com and San Mateo, Calif.based Napster, claiming
they were violating the industrys copyrights on the material. This in turn
led to the recent spectacle of a days worth of hearings before the Senate
Judiciary Committee in Washington, in which fans of Lars Ulrich, of the
rock band Metallica, crowded the corridors of the Hart Senate Building,
hoping to catch a glimpse of Mr. Ulrich as he opined at the hearing that
the Napster phenomenon, if not brought to heel, would, in effect, reduce
him to penury.
Politically Incorrect host Bill Maher summed up the testimony this way:
"Lars Ulrich, the drummer for Metallica, said downloading music should not
be allowed because it would bankrupt musicians, and that, of course, is
the job of drugs and agents."
On the face of it, the music industry has plenty to be worried about. The
whole business is basically under the thumb of a mere handful of media
giants like Bertelsmann A.G. (the RCA and Arista labels), Time Warner Inc.
(the Warner, Atlantic and Elektra labels) and Seagram Company, which owns
Universal Music and the Island, Mercury and Motown labels, to name but a
This entire Seagram music operation was put together by Edgar Bronfman Jr.
when he acquired Polygram N.V. in 1998, and began gutting the Seagram
liquor business to establish the company as a leading player in "media
content." The music business accounts for 40 percent of the companys
revenue and 53 percent of its operating income, if you dont include
non-cash charges like depreciation and amortization.
Whats more, if you were to go even higher up Seagrams income statement,
youd find that the music segment probably accounts for an even greater
percentage of the companys gross profit. Reason? The next-most-profitable
business Seagram has is its liquor operation, and with that segment the
company actually has to acquire the grain and other raw materials it
transforms into booze. With the music segment, its cost of goods sold are
nil, which is why the company can pay staggering sums to recording artists
like Shania Twain, Sheryl Crow and, of course, Metallica.
Last month, MP3.com reached a licensing settlement with two of these
biggiesWarner Music Group and the BMG Entertainment division of
Bertelsmann. None of the parties have disclosed the actual terms, but
press reportswhich MP3.com does not disavowsay that MP3.com will pay a
total of $35 million to the two companies as a kind of make-good to get
things up to even.
Published reports further say that MP3.com agreed to pay each company 1.5
cents for each music track stored on the MP3.com computer for its users.
Each time a user accesses the track and listens to it, MP3.com has further
agreed to pay the two companies a third of a cent.
But no one can seriously believe this will change anything. All anyone has
to do is access an MP3.com file once, copy it, and suddenly its
everywhere. My own teenage daughter says none of her friends have bought
CDs in months, and that everyone now simply shares files back and forth on
When cassette tape recorders first began to proliferate, the music
industry went bonkers over the "copyright threat" those devices
represented. Then came the VCR, and the motion-picture industry raised the
same squealing objections. But these technologies never threatened the
media conglomerates in the first place, since there was no efficient way
for someone who made a tape of some song or, let us say, cablecast movie
on his home TV to redistribute the material to anyone else.
The Internet has now changed all that, and as broadband technology takes
hold in the market, the threat could be fatal. In the same way that
MP3.com and Napster are now trafficking in compressed audio files, other
companies will soon be springing up to distribute compressed video files,
instantly undermining the ability of the movie studios to sell
theatrical-release films to videocassette outfits like Blockbuster
Entertainment, to pay-TV channels like Showtime and HBO, and lastly to
broadcast TV. These are the revenue streams that help the studios recoup
the costs of nine-digit blow-everything-up monstrosities like Mission:
As for MP3.com, well, this company may prove to be a more enduring thorn
in the side of the media giants than they now appreciate. The company went
public a year ago in a Credit Suisse First Bostonunderwritten deal that
raised $360.4 million in net proceeds. As of March 31, the company had
roughly $224 million of it left. But the company also showed $145 million
of marketable securities and $9 million of short-term investments,
indicating a war chest of maybe $375 million. And the most important thing
is that the companys operating-cash burn-rate is running at only about $3
million per quarter, suggesting that the outfit is good to go for maybe
another 30 years at its current pace.
In short, this is one company that isnt going out of business anytime
soon, and with a third of a billion dollars at the ready, it ought to be
able to dragoon every lawyer in Washington to its cause as this fight
With 68 million shares outstanding, and $400 million of stockholder equity
on its books, the companys shares sell for little more than twice book
value, compared to 11 times book value for an outfit like Time Warner,
whose book value assets are the meal on which MP3.com, Napster and the
others are starting to feast.
In other words, over the long term, MP3.com looks to have a better shot at
rising than falling further, whereas the media conglomerates may have
nowhere to go but down.
You can reach me by e-mail at: cbyronAToptonline.net.
Christopher Byron is a columnist for Bloomberg News.
[from The New York Observer]
"We no longer have roots, we have aerials."
-- McKenzie Wark
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