MP3 Rallies, but My.MP3 Payoff Remains Far Off

Talk about the dog that caught the car.

Online music company MP3.com (MPPP Quote), after incurring the wrath of nearly every conscious entity in the music industry, launched its new music-storage service, My.MP3, on Tuesday.

But now that MP3.com has opened up its wallet to settle My.MP3-related litigation, the company faces the monumental task of earning back the $170 million it estimates the whole courtroom adventure will end up costing. And the first stab at figuring out how much MP3.com could make off of My.MP3 indicates it will take more than a few dog-years to make back the company's upfront costs.

Investors reacted optimistically to the My.MP3 launch Tuesday, sending the stock up 63 cents to $6.63 at midday Tuesday as the broad market rallied sharply. Shares in MP3.com have swung between $2.50 and $40.13 over the last year.

Going to the Library

The My.MP3 service enables consumers to access or download music from a library of music MP3.com has encoded in the MP3 file format, as long as those consumers already own the corresponding compact discs. MP3.com launched the service earlier this year with a library full of MP3-encoded content, incurring a shutdown of the service and a boatload of copyright violation. Now that the dust from most of these lawsuits has settled, the relaunched My.MP3 has two service levels: a free, advertising supported account, which allows users to store up to 25 CDs, and a $49.95-per-year subscription account which allows storage of up to 500 CDs, additional features and less advertising.

Downtrend MP3 shares slip after strong start

Now, MP3.com may not necessarily have to make back $170 million for all that litigation to pay for itself; as of last month, it had paid, or agreed to pay, $106.5 million to record labels to end their lawsuits. And as of Sept. 30, MP3.com had more than $240 million in cash, marketable securities and short-term investments on its books, so it doesn't appear to face an imminent risk of an empty bank account.

What it does face is a long, slow payback, judging from one analyst's report. In a quick back-of-the-envelope calculation, Heath Terry, an analyst at Credit Suisse First Boston, estimates that MP3.com could capture anywhere from about $1.6 million to $8 million in subscription revenue next year, and up to $9 million in 2002, assuming that as many as 25% unique users of the site sign up for the $50 annual service. Adding in potential advertising revenue, Terry estimates the My.MP3 program could add $10 million to his 2001 total revenue forecast of $122 million.

Terry isn't hazarding a guess as to how long it would take to pay back litigation costs. It's unclear how much it will cost MP3.com, royalty costs included, to provide the service. But even if all the My.MP3 revenue drops to the bottom line, it appears that digging out of the hole could take years.

Many Ways

Terry, who rates MP3.com a buy, and whose firm underwrote MP3.com's initial public offering, says the subscription fees are only the first of many ways the company will try to make money from the new service; also promising as revenue sources are targeted marketing to MP3.com users, data collection for record labels, and rich media advertising that could pull in 10 to 15 times the money that banner advertising would. But it's too early to tell how widely the new service will be adopted, he says.

Can MP3.com make the service pay off? "We believe we can, or we wouldn't be in it," says a company spokesman. "I think we're in a great position to do that.

In MP3.com's favor, says David Bench, an analyst at Arnhold & S. Bleichroeder, now that the company appears to have its major legal agreements in place, "It becomes a distribution vehicle for the five major record labels. ... There's no other company out there that has deals with all five major record labels on this level." Bench has a neutral rating on MP3.com; his firm hasn't done underwriting for it.

"The real question," he asks, "is how many customers are going to pay $50 for the service?"