May 30, 2001 12:35 PM PDT

Myplay buy highlights Net music trend

Bertelsmann E-Commerce Group said Wednesday that it will acquire online music locker Myplay and consolidate its music retail assets into a separate division.

The acquisition will allow BeCG to thread Myplay's music-storage service throughout its other online retail brands, such as CDNow and its BMG Music Service record club. People who purchase compact discs through these services will be offered ways to store and access digital versions of their purchases on Myplay.

The deal, according to sources close to the negotiations, is worth nearly $30 million. BeCG is the online retail division of German media giant Bertelesmann AG.

Along with the acquisition, BeCG will consolidate its online music holdings into a separate company. Dubbed BeMusic, the division will comprise Myplay, CDNow, BMG Music Service and the company's stake in file-swapping service Napster.

BeCG intends to create an umbrella brand that would combine BeMusic's properties into a single online destination. Company executives could name the site after one of its existing properties or create a new name. No details were offered on BeMusic's management team.

Andreas Schmidt, chief executive of BeCG, said the company was largely attracted to Myplay's recently introduced subscription builder technology. The software was designed to allow third-party Web sites to offer online music subscriptions to their customers.

BeCG will initially launch a subscription service throughout BeMusic's properties, Schmidt said. BeCG will also consider pursuing Myplay's original intention in being a technology provider, but would likely use the software for solely its own purposes.

"I would like to keep a little bit of a competitive advantage," Schmidt said during a press conference.

Whether Myplay will be used in Napster remains to be seen. Bertelsmann surprised the record industry when it announced a deal to take a controlling stake in Napster pending the creation of a legal file-sharing service. Meanwhile, Myplay recently restructured its direction when it introduced software that would allow Web sites to create their own online music-subscription service.

Sources said Napster's and Myplay's subscription services would coexist but not necessarily influence each other.

The end of the beginning
The Myplay deal is the latest example of the music start-up salvage operation being mounted by major music labels. Already, media conglomerates such as Bertelsmann and France's Vivendi Universal have made controversial deals for control of the same scrappy Internet companies that their record subsidiaries have sued.

The big record companies have stood firm against giving these companies any but the most rudimentary rights to distribute mainstream music in the past couple of years, leaving the start-ups with huge gaps in their businesses.

The majors have also restricted how far the start-ups can go, with lawsuits against Napster, MP3.com, and most recently Aimster and Launch Media.

The lack of available music and the downturn in the market have dried up funding and forced company valuations to plummet in the online music world. MP3.com shares, for example, have fallen from near $60 to less than $5 a share.

"It's probably cheaper for them to buy than it is for them to build, given the valuation of the companies," Forrester Research analyst Eric Scheirer said.

The buyouts are in one sense a maturation of the online music industry, as technology-oriented companies realize they need the traditional record labels to survive in the music business. MP3.com CEO Michael Robertson, once one of the music labels' biggest critics, now says working with merger partner Universal Music is necessary to bring "the full promise of digital music...to fruition."

But more critical minds in the start-up and analyst community have speculated that the labels deliberately starved the online companies of music to minimize the potential competition. Intentionally or not, the fire-sale buyouts are a direct result of that policy, critics say.

The deals are creating a patchwork of new Internet options for the big labels, which have struggled to establish a foothold online in the past with services such as GetMusic or Jimmy and Doug's Farmclub.

Vivendi Universal and BMG each will have an online music-storage service, in the form of MP3.com and Myplay, respectively. Universal originally funded rival music-locker service MusicBank, which also won licenses from BMG and the other labels, but that company went out of business before launching its commercial service.

Both have also taken various pieces of technology that will bolster subscription efforts. Universal inherits the download services of Emusic and the streaming capabilities of MP3.com, along with the brand names of both. Bertelsmann and BMG still plan to launch a subscription service along with Napster.

Where all of these efforts fit into the labels' larger online plans remains unclear, however. The past several months have seen all the big labels move toward a subscription service of some kind; BMG, AOL Time Warner and EMI are backing the MusicNet service, while Sony and Vivendi Universal are behind the rival Duet product. Each subscription service is designed to be sold to other Web sites so that companies such as Yahoo can offer access on their own pages.

But by purchasing companies such as Myplay, at least a few of the labels appear to be indicating that they foresee a more direct role with consumers online.

 

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