May 21, 2001 1:25 PM PDT

MP3.com buy: The taming of a generation

Vivendi Universal's acquisition of MP3.com is further evidence that online music's era of raucous, market-shaking experimentation is fading.

Although its star was eclipsed by Napster in the last two years, MP3.com and CEO Michael Robertson were standard-bearers for an often quixotic campaign against the major record labels as online music grew into a mainstream phenomenon in the late 1990s.

Launched before Robertson had experience with the music business, MP3.com made as many enemies as admirers as it flicked through business plans like tracks of a CD.

Vivendi Universal announced Sunday that it would purchase MP3.com for about $350 million, a move that follows Napster's own deal with media conglomerate Bertelsmann. Both deals mark a critical moment of detente and an admission that the labels need the help of their one-time enemies as they get serious about online distribution.

The deal "is a very symbolic nail in the coffin for the concept of the Internet as a liberating force from the major music labels," said Aram Sinnreich, a music analyst with Jupiter Research. "It will probably silence all but the most die-hard zealots who believe that the Internet makes the record labels irrelevant in this day and age."

Some skeptics say the deal also marks the culmination of a strategy designed to isolate the one-time upstarts. Analysts say a successive combination of lawsuits and restrictive licensing plans has been responsible for crippling the first generations of online music companies, making them easy targets for acquisition by the big media conglomerates.

"Vivendi Universal very aggressively pursued copyright lawsuits, driving the valuation down so that the company could be acquired," said Eric Sheirer, a music analyst with Forrester Research. "It's surprising that (this deal) hasn't been done with more attention (by) Congress."

End of the revolution?
To be sure, even if high-profile companies such as Napster and MP3.com are losing their rebellious reputations, a few services still remain as potential alternatives.

Swapping services including Gnutella and Music City continue to operate, although with far less music than Napster provided at its peak. If paid subscription services from the record companies don't give consumers what they want, these alternatives could again provide a place for disgruntled listeners to congregate and swap files.

The P2P myth MP3.com didn't foment the boom in online music, which stretches back into the early 1990s. But for a few years after it launched in October 1997, the site and its outspoken CEO were one of the trend's most visible leaders.

Robertson had little experience with the music industry when he created the first version of MP3.com, knowing that the term "MP3" had become one of the most popular things people were searching for on sites such as Yahoo and AltaVista. He bought the Net address for just $1,000 from a person who had registered it for a personal Web site and created a home for thousands of independent musicians online.

The next couple of years found him in constant struggle against an industry that associated MP3-formatted music with online piracy. Robertson did his best to stay on the right side of the debate, offering a place for independent and unsigned musicians to post their songs online, but his constant broadsides against the industry and projects such as the Secure Digital Music Initiative (SDMI) won him few friends among music industry executives.

"What the music industry really needs is an Internet enema," Robertson wrote in one of his periodic "Michael's Minutes" messages to the MP3 community in late 1998. "It needs to start over. This is the promise of music in the digital age."

Robertson's vision of the Internet allowing artists to sell directly to listeners was soon eclipsed by Napster, however. Instead of turning to MP3.com's massive databases of unsigned musicians, consumers took up the file-swapping habit, using Napster to trade major-label music, work by independent musicians, bootlegs, and any other songs or sound clips they wanted.

MP3.com continued trying new tacks,


Gartner analyst Robert Batchelder says the purchase of MP3.com by Vivendi Universal centers on the issue of control, and it sets the stage for the Duet music-subscription service in which Vivendi is participating.

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however--and it was one of these, the online music-storage system inside the My.MP3.com service, that finally gave the big record labels a legal weapon against Robertson. They sued his company in early 2000 in a case that has already cost MP3.com more than $150 million in damages and that continues to spawn copycat lawsuits.

But even under the threat of the lawsuit, Robertson managed to establish MP3.com's infrastructure as one of the strongest music-delivery systems online. Vivendi noted as much in its public statements about the acquisition, saying it would use its former enemy's technology as part of the backbone for its planned Duet music-subscription service.

Robertson himself is moving into a new role as special adviser to Vivendi Universal Chief Executive Jean-Marie Messier. Financially, he's also making out handsomely from the deal. According to recent regulatory filings, he owns more than a third of MP3.com, which would make his take from the $5 per-share sale more than $115 million.

On the other hand, Robertson's stake has shriveled from more than $1 billion in the past 18 months as MP3.com's shares have plunged by about 92 percent.

The suits jumped over the label
The acquisition highlights a question that has haunted the big record labels' recent warming to online distribution: Who is now in control of the online music strategy?

After years of opposing start-ups and wide online distribution, the major labels are moving more quickly than ever. But in many of the biggest announcements, it is the corporate conglomerates that are taking a lead rather than the labels themselves.

"Top-level corporate bosses of these consolidated media companies are recognizing that their record subsidiaries are not moving quickly enough," Forrester's Sheirer said.

The first visible sign of this came in October last year, when media giant Bertelsmann shocked the industry by announcing its e-commerce division would team with Napster to create a legal subscription service. At the time, Bertelsmann record label BMG Entertainment was in the middle of suing the file-swapping service for copyright infringement.

Many of the music label's top executives objected to their corporate parent's decision to pin its future on Napster. Executives including BMG CEO Strauss Zelnick and marketing head Kevin Conroy resigned from the company soon after the decision was announced.

In the case of MP3.com, Robertson will report directly to Vivendi Universal's Messier as a strategic adviser, rather than to an executive from Universal Music Group.

The online music-distribution arms appear in these cases to be falling into a larger frame of Internet commerce, rather than becoming solely an offshoot of the music business.

Is MP3.com "looked at as another media property or another arm of the record company?" asked David Pakman, founder of online music-storage service Myplay.com.

Whatever the outcome of the internal corporate skirmishing, much of online music's focus has for now shifted from the start-ups to the major labels' ventures: Sony and Universal's Duet, and RealNetworks' MusicNet project, which includes BMG Entertainment, EMI Group and AOL Time Warner.

That may leave little room for smaller companies to create thriving services unless they, too, can strike deals with the major labels. But the subscription services will have to prove they can satisfy consumer demand, a task the majors have so far been unable to accomplish. If they fall down in this task, new generations of music companies will spring up to close the gap, insiders say.

"There will always be room for continued innovation," said Bob Kohn, chairman of EMusic, which was also recently purchased by Vivendi Universal. "Those innovative efforts tend to come out of entrepreneurial efforts. There will be new start-ups with new ideas."

 

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