The lesson learned in the courtship between Vivendi Universal and MP3.com is that record companies and technology companies need each other to succeed in the whipsaw world of Internet music.
The world’s five largest record labels are racing to launch alternatives to Napster, the once popular song-swapping service now barred by a federal court from offering most songs copyrighted by the labels.
And Vivendi, which owns the world’s largest record company Universal Music Group, is betting that MP3.com will raise its online presence and offerings above its competitors.
Vivendi plans to launch a music subscription service called Duet this summer with Sony Music Entertainment.
“Vivendi needs MP3.com to make the Duet service work,” said David Goldberg, chief executive of Webcasting company Launch Media Inc.
It will compete with MusicNet, a joint venture between AOL Time Warner Inc., which owns Warner Music Group; Bertelsmann AG, owner of BMG Entertainment; EMI Group Plc.; and Internet media delivery company RealNetworks.
MP3.com is viewed by industry experts as Duet’s technological answer to MusicNet’s RealNetworks.
“Vivendi didn’t have any technology to deliver the service,” Goldberg said. “It would have been very tough to have the service up by the summer, if they had to build the technology from scratch. That’s what MP3.com brings to the table. It’s a great technology platform.”
FORTY MILLION USERS
The other benefit that MP3.com brings to the table is a loyal user base of 40 million registered users.
“Every record company is dying for (online) customers and there they are just sitting there,” said Fred Wiersema, a fellow with consulting firm Diamond Cluster. “Finally Universal saw the light and they’re picking up those customers at a price that’s dirt cheap.”
He noted that Bertelsmann was one of the first companies to recognize that need for customers and technology, when it signed a deal late last year with Napster to build a subscription service.
Some industry observers have noted that the implementation of MP3.com in the Universal and Sony’s Duet service is not a sure thing, since the acquisition was made by Vivendi Universal alone, not jointly by Duet.
“I’m not sure Sony will want their partner completely controlling the technology of the joint venture,” said one record company executive.
Sony declined to comment. But MP3.com Chief Executive Michael Robertson noted that Vivendi Chief Executive Jean-Marie Messier notified Sony before the deal was announced. “He got Sony excited about it,” Robertson said.
For MP3.com, the benefit to the merger is that the company “gets bigger faster,” Robertson said. “It’s been a ‘get bigger or go away’ landscape. And we’ve seen a lot of smaller Internet companies go away because it’s expensive to build this technology and getting the licenses. The only way to get a return on that investment is to get bigger.”
DEVALUE AND CONQUER?
Some observers have a more cynical take on the transaction calling Vivendi’s strategy “devalue and conquer.”
Vivendi’s Universal Music Group was the only record company of the five major labels to refuse to settle a copyright infringement suit with MP3.com.
The suit stemmed from a service that allowed customers to register compact discs they own and listen to them through any computer connected to the Internet without the actual disc. The upshot was that MP3.com ended paying Universal twice what they paid other labels to resolve the suit.
Vivendi executives did not return phone calls seeking comment.
Other Internet companies have argued that the licensing deals offered by the record companies are too onerous to allow the fledgling companies to make a profit and consequently cannot afford to offer major label music.
The labels, for their part, have argued that the reason those companies can’t survive is that they’ve had to compete with Napster, a service that allows users to copy music for free from other people’s computers, in most cases without permission from artists, labels and publishers.
Indeed the share prices of publicly traded Internet music companies have been anemic. MP3.com share price closed at $4.85 on Monday, compared with a high of $105 on the day of its initial public offering in July 1999.
EMusic, a music download site, traded as high as $35 on the Over-the-Counter bulletin board in June 1999, and was bought by Universal for 57 cents a share. Launch Media reached a high of $36.69 in April 1999 and is now trading at 40 cents a share.
MP3.com’s Robertson sees no conspiracy to devalue Internet companies before taking them over at bargain basement prices. “That’s too X-Files for me,” he said.
“You can’t deny the irony that six months ago we were in court on opposite sides of a very expensive issue,” he said. “But this is about Vivendi, who has a giant vision of distributing music and videos across multiple devices. They looked at MP3.com and said, ‘They have the technology to power that.’ That’s why they purchased us.”