Sunday, August 06, 2000

A downloader's delight

But don't bet on the death of CDs - just yet, anyway

By Matt Krantz
USA Today

        LOS ANGELES — Forget about Metallica, Napster and all the noise in Washington over online music.

        Investors should focus on how to make money from the $13 billion music industry about to supernova at the feet of the Internet.

        Online music is here, it's happening and it's huge. Some say it's the first killer use of broadband.

        Roughly 11 percent of music revenue will come from downloaded music by 2001, says Salomon Smith Barney.

        “It's not hard to see what's around the corner,” said chief operating officer Tom Frank of RealNetworks.

        The rapid success of Napster — a site that already has allowed more than 10 million registered users to download music — shows online music is no longer just for techies.

        And expect to see record labels, hoping to steal Napster's lead, making larger parts of their collections available online, said Dennis Mudd, chief executive officer of online jukebox maker Music Match.

        Artists are also dying to break free from record companies' control.

        For instance, Matt Johnson of the band The The has blasted his record company, Universal, on his Web site.

        “Media conglomerates are sowing the seeds for their own destruction,” wrote Mr. Johnson, who stunned the music world by offering free downloads of songs from his new album, with the help of publicly traded Artistdirect.

Cashing in
        The tough part, though, is knowing which companies to invest in. Napster is out of the question, because it's mired in legal troubles. Beside, it's private. Those that stand to profit are often behind the scenes, publicly traded companies not associated with online music.

        Some tips:

        • Don't bet on the death of CDs, yet. Sure, downloadable music allows users to listen to tunes on their computer or download them to special portable hand-held computers. But that doesn't mean CDs are dead.

        Aram Sinnreich, analyst with Jupiter Research, is bullish on the makers of CD drives that allow customers to create or “burn” CDs.

        There already are 8 million of these CD-RW drives in use and by 2005 that number should jump to 50 million, he said. It's a positive new business for makers Philips, Thomson, Hewlett-Packard and Creative Technology.

        • Make sure companies have chosen enemies and friends carefully. When Microsoft releases Windows Millennium this year, it will come equipped with the latest version of its Media Player, which is used to listen to and store music on computer.

        It'll be a fight for Real Networks, which offers a rival product called Real Jukebox. So far, 38 million people have downloaded it. Real Network has paired up with America Online Inc., by agreeing to outfit the top access provider's network with gear to transmit multimedia files.

        But that's not to say companies can't overcome tough competition. For instance, MusicMatch, a San Diego company owned in part by Thomson Multimedia and Intel, has sidestepped Microsoft. It's done this by having Dell Computer and Hewlett-Packard load its software on their machines.

        • Beware of investing in online music content companies. Shares of eMusic, Artistdirect and Launch all have collapsed as they kept changing their business models, looking for a way to make a profit. They have all cut back on the amount of cash they use so they can tread water looking for sources of profit. But it's still unclear how many times they'll have to change business models before they're cash-flow positive.

        • Look for companies not waiting for the major labels to put music online. XM Satellite and Sirius Satellite have technology to let car stereos pick up national radio broadcasts for $10 a month. Expect to start seeing car stereos equipped with this in 2001 models, said Peter Doyle, portfolio manager of the Internet Fund.

        And companies such as Inktomi, which make gear that speed up the Internet, also will be likely early winners. AT&T, building networks to transmit music files, has committed to buy Inktomi gear.


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