Play It Again, Sam — or Just Download It onto My MP3 Player

Posted On January 4, 2010 | by AllenCaron

Jon Pareles has written a perceptive history of the MP3 player and its impact on the music business on the front page of the Arts & Leisure section of Sunday’s New York Times: http://www.nytimes.com/2010/01/03/arts/music/03tech.html?ref=music.  Although the technology and device are just over 10 years old, practically speaking, the levelling effect on the industry has been significant.  I have read that of all music sales, digital downloads only account for 15%, but that doesn’t take into account all the illegal downloads and file-swaps.  I have friends who buy CDs, translate the music to gigantic MP3 directories, and then give the CDs away (they take up a lot of space, after all); if that practice is as widespread as I suspect it is, then the “MP3 effect” is broader than just digital downloads too.

Meanwhile, Aaron Cohen’s article on “Reinventing the Music Business” takes a slightly different look at MP3 and how artists ought to view the opportunity: http://www.allbusiness.com/entertainment-arts/music-industry/13632876-1.html.  One angle discussed is that MP3 downloads ought to be viewed by artists as an opportunity for self-promotion, allied with social media outreach directly to the audience they want. 

This article about U2’s Bono is one of many artist statements of worry about downloads and file-sharing: http://www.thedailystar.net/newDesign/news-details.php?nid=120335

Clearly the 800-pound gorillas in this field are iTunes, Amazon and now WalMart, none of which is the sort of company we look at in this blog.  And there are file-sharing companies like Napster and its peers, where the rights of artists or labels have in the past not been as important as volume, to put it mildly.  But there are some smaller companies, public and private, that may be of interest.  First up might be NYC-based The Orchard Enterprises (Nasdaq: ORCD; http://www.theorchard.com/), which has adopted the strategy of buying licenses and copyrights to largely older music libraries, and redistributing them, with the largest outlet being iTunes.  They acquired the former Digital Music and a significant library of oldies-but-goodies, and also has deals with some current artists, some films, and some indies.  The market is not showing great enthusiasm for ORCD, which is chugging along at about $62 million in revenue, with gross margins in the range of 24% to 26%.  The shares closed out 2009 at $1.64 vs a 52-week high of $3.49 on very low trading volume, for a total market cap of about $10 million, and that is in spite of a fairly sizeable “catalog” of music (and quite significant losses).  It may be that the market likes to see higher visibility than The Orchard has achieved, or that their exposure to the whims of distributors like iTunes and Amazon are a inspiring caution.

Seattle-based Real Networks (Nasdaq: RNWK; http://www.realnetworks.com/) is not a pure play in music downloads, but it has a significant subsidiary, Rhapsody (http://www.rhapsody.com) , that is an up-and-comer, selling its tunes on a subscription basis, not unlike the business plan that NetFlix follows with movies.  RNWK shares closed 2009 at $3.71, with a 52-week high of $4.48 and a market cap of an even half-billion dollars, on average volume over 660,000 shares per day, but the bulk of the business is not Rhapsody.

Please keep in mind that we do not recommend stocks; we only write about companies we find interesting.  Please do your own diligence.

Privately held Denver-based Beatport.com concentrates on indie artists, remixes and club music, and has been building its business since January 2004.  Financials are not available.  http://www.beatport.com.

New York and Los Angeles-based Masterbeat Corporation* (OTCBB: GRNN; http://www.masterbeat.com) is one of the new kids on the block.  It announced last week that it has reversed into a public shell and its shares are now eligible to trade.  No financials have been published yet, but clearly there will be disclosure coming for year-end prior to March 15, 2010.  The Masterbeat website lays claim to 4 million song titles licensed from major labels, including a dizzying variety of club-music dance remixes of major artists like Rihanna and Mariah Carey.  Masterbeat CEO Brett Henrichsen is a noted DJ (as well as an IBM veteran), and the site seems to be downloading at the rate of about 40,000 songs per month, on virtually no direct promotion.

Finally, Milan-based Buongiorno SpA (http://www.buongiorno.com) is a download company specifically targeted on mobile-phone users.  It has trailing 12-month revenues in the range of € 270 million (about $385 million).  A large piece of that is ringtones, games, video and even wallpaper, but the first category listed by them is music, which would make them a noteworthy supplier, with a presence globally.  Buongiorno trades on the Borsa Italiana STAR segment under the ticker BNG (BNG.MI on Yahoo! Finance).  Its shares closed 2009 at €1.16 on hefty volume of over 500,000 shares per day. 

*client of Allen & Caron, publisher of this blog

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