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MusicBank Gets Record Label Deposits

By Dave Marino-Nachison (TMF Braden)
June 9, 2000

The press area of upstart MusicBank's website has only one item currently listed, but it's an interesting one. The company, an online music website, yesterday said it reached an agreement with BMG Entertainment giving its users "secure, on-demand streaming access to BMG's entire music catalog. MusicBank will allow customers to store, manage, and listen to their entire CD collections via the Web without having to encode or upload the content."

BMG, the music and entertainment division of German media giant Bertelsmann AG, owns more than 200 record labels, including Arista and RCA. Though financial details of the arrangement weren't disclosed in the press release, a story on the Mercury Center website said MusicBank will pay BMG royalties for the songs its customers play from the site.

Close watchers of the online music scene will note that MusicBank's service sounds more than a little bit like the My.MP3.com service downloadable music hub MP3.com (Nasdaq: MPPP) recently developed for its users. Both services allow users to verify their ownership of CDs, then use MP3.com's technology to access copies of their songs using the Internet. (Other services have a similar mission but require users to upload their CDs manually, which, using telephone lines, can be an extremely tedious process.)

The key difference in MusicBank's case is that it's working out agreements with the record labels before it puts the songs online. MP3.com, meanwhile, simply bought the CDs and put them on the Internet without the labels' permission. The matter went to court, and MP3.com is now in the process of settling with the record labels to get access to their music catalogs. The company has settled with two so far -- Warner and BMG -- and the total settlement costs are estimated at about $100 million. (Disclosure: My bearish argument against MP3.com doesn't appear to be panning out too well at the moment. Great job, Rick!)

MP3.com's service will probably also require some kind of royalty payment. "The settlement agreement," Warner exec Paul Vidich said in a press release today, "clearly affirms the right of copyright owners to be compensated for the use of their works on the Internet."

With a fat war chest, MP3.com can afford to pay off the settlements with money to spare, and the stock market's reaction to the settlement has set the shares alight. That could mean more cash down the road should the stock stay up and the company sell more equity. Though the inclusion of major-label music makes MP3.com's service very viable and attractive, investors must nevertheless watch MP3.com's future financial statements closely as the company integrates those new costs into its business model and expense structure.

The importance of the MusicBank announcement, from an investor's perspective, is difficult to gauge. MusicBank, for one, is in the early start-up phase and isn't public -- though it is staffed with an interesting mix of online music veterans such as Lycos-owned (Nasdaq: LCOS) Sonique co-founder Michael Downing and EveryCD.com founder Pierce Ledbetter. Other executives come from such organizations as Oracle (NYSE: ORCL), Levi Strauss, and E*Trade (Nasdaq: EGRP).

What it does offer is proof that record labels and digital music organizations can work together. And though MP3.com, along with file-swapping software site Napster, has helped lead the chorus of acrimony in recent months, that song seems to be growing more melodious as well. The next step will probably be to determine how the record companies can use digital formats as a delivery vehicle for album and single sales, something nearly everyone who has tried to monetize Web content has been unable to do convincingly.

As with all evolutionary processes with regard to the consumer arena, the question might be as much about consumers growing comfortable with new technology as the development of the technology itself.

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