Vivendi/Universal Buys Brand & Technology with MP3.com
By Antonette Goroch
from the June 4, 2001 issue of Broadband Week
Vivendi/Universal cemented its strategy of buying into the Internet space, as opposed to building it, by acquiring online pioneer MP3.com for $372 million.
The deal comes on the heels of Vivendi/Universal's acquisition of the leading digital download vendor, Emusic, earlier in the month.
For Vivendi, MP3.com brings both technology and brand to the media giant, enabling it to compete in the rapidly consolidating online music market. The move also solidifies a trend towards market stability, which could help spur a variety of online media commerce beyond just the major music labels.
"Universal had pretty much failed to date in its Internet strategy with the fall of FarmClub," says Joel Karp, a research analyst with digital entertainment research firm Webnoize. "Their Version 2.0 strategy is to buy as opposed to build, to keep up with the Bertelsmann backed rival venture, MusicNet."
When Bertelsmann acquired Napster late last year, it marked a shift in the burgeoning online music industry, from a Wild West of freely flowing content to increasingly gated subscription services for licensed media content. This trend has been fueled further by court rulings against Napster and MP3.com, among others, which have reduced traffic for copyrighted music files and set a precedent for sharing copyrighted video as well.
Against this backdrop, streaming media giant RealNetworks announced in April that it had joined with Bertelsmann, EMI and AOL Time Warner (AOL) to form MusicNet, an online subscription music clearinghouse, which would offer an array of streaming and downloadable media content. While Vivendi announced a similar clearinghouse called Duet with Sony, MusicNet was considered the stronger service because of the branding and technology brought to the table by RealNetworks and Bertelsmann/Napster.
All that changed this month, as Vivendi countered with its acquisitions of both Emusic and MP3.com.
"The companies bring Vivendi both strong brand presences in the Internet space, as well as an established infrastructure to support online media commerce," says Webnoize's Karp.
MP3.com has a user base of more than 40 million, with an average of 1 million visitors per day, supporting a range of free and pay, streamed and downloaded services. Emusic, meanwhile, also has been a pioneer, with a licensed catalog of more than 700,000 titles available for digital download.
The establishment of two music superpowers in Internet music distribution, Duet and MusicNet, further sharpens the trend towards a more stable environment for commercial activity to take off. Pivotal court cases are being decided and settled, the most notable being the recent Napster decisions requiring the company to remove copyrighted material from its servers absent licensing agreements.
The music industry is continuing its offensive too, most recently with the Recording Industry Association of America's copyright lawsuit against file-sharing site Aimster.com.
As these rules solidify, "renegade" uses are going down, as evidenced by a drop of up to 40 percent in Napster traffic. A similar drop was seen in "OpenNap" servers, which also enable peer-to-peer file sharing.
"OpenNap servers fell by over 75 percent in the period from late February to late April 2001," says Kelly Truelove, founder and chief executive of Clip2, which tracks peer-to-peer networks.
Perceiving a safer environment, large media companies are starting to look more aggressively at online music distribution.
"We're having a land grab," says Karp, "The independent online companies are either folding or being bought up by the larger players as they seek to get into the space as fast as they can."
Indeed, commercial services will debut before year's end, perhaps as early as this summer, with a palette of tiered offerings. MusicNet already boasts more than 350,000 subscribers.
"There will likely be three tiers for both services," says Karp. A bottom tier for $2-$5 a few downloads/streams a month, with the rest priced on an a la carte basis. A second option of $9-$11/month gets more tracks and streams, similar to a larger package of minutes for a cell phone.
"The top tier is about $15-$20/month, with full access to the database, and wide latitude in portability and extended use," says Karp. This would allow users to make copies of their songs for MP3 players and CD burns.
The majors are clearly now in the space and will likely withhold licensing their catalogs to other services, like CenterSpan or OpenNap aggregators, in favor of their own clearinghouses. But they still may end up facilitating business for other, smaller players as well. By establishing stability in the market, other independent niche markets will find it easier to sell to consumers conditioned towards buying media online, as opposed to getting it for free.
"Until now, there's been an expectation that everything is for free," says Elton Ridge, CEO of Rodent Records, a San Francisco-based boutique record label that has offered limited free MP3s of its catalog for promotion, but now sees more of a future in digital commerce. "Now that the majors are in, consumers will be conditioned to buying music again, and that will help everyone."
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