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Music Types Not Buying MP3's High-Valuation Spin

The stock is up substantially despite increasing competition and an unclear business model.

Ask not for whom the bell tolls. It tolls for MP3.

In a universe filled with overvalued Internet stocks,


may be the most staggering story of all. The Web-music start-up offers songs no one wants through a technology it doesn't own. Its market: anyone bored enough to rummage through the offerings of more than 30,000 artists in the hope of finding the next

Celine Dion


But wait, there's more.'s top executives include Thomas Spiegel, who ran a California savings-and-loan into the ground a decade ago, costing taxpayers more than $1 billion, according to regulators. Spiegel, obsessed with personal security, built two antiterrorist bomb shelters at his S&L's headquarters. A 1990

Los Angeles Times

story reported that he had as many as 19 private security officers protecting him, some armed with automatic weapons. hired Spiegel in July. He's in charge of "strategic business opportunities."

For all this, investors have rewarded with a valuation of more than $3.5 billion. Even for an Internet stock, that valuation is generous, at roughly 50 times MP3's projected 2000 revenue. (Yes, that's revenue, not profit. Like most Internet companies, MP3 isn't expected to be profitable for the foreseeable future.) By way of comparison, the average Internet stock trades at about 20 times next year's expected revenue, according to

Goldman Sachs


Day of Reckoning

But the day of reckoning may be approaching for, which faces increasing attacks from both traditional record companies and other Internet music sites. The announcement last Tuesday that



will open a true Internet music label,

Jimmy and Doug's Farm Club

, is only the first shot in the coming battle among traditional record companies to retake the Internet. (Since Seagram's announcement, stock has fallen to just over 50 from 60.

wrote about Seagram's announcement.) Meanwhile, must fight for consumer attention with newer Web start-ups like

Launch Media


, which features news and songs from established artists at its


"Most consumers of music want music that they already know they like," says Dave Goldberg, Launch's chief executive. "What is MP3 doing? They're basically making unsigned artists available to consumers. That's pretty easy to replicate. The bigger question is, do consumers care?"

To be sure, Goldberg has his own bias, since he's staked his company's future on working closely with major labels. But independent industry analysts agree with his assessment.

"I do not see anything that has or has built up that protects it from more recognizable music from people we know and trust," says Mark Hardie, a senior analyst covering entertainment for

Forrester Research

, the technology consulting firm, which as a policy won't disclose whether it has consulted for companies mentioned in this story.

With its huge variety of bands, is a "flea market" of music, Hardie says. "But a flea market is not where most people shop on an regular basis. ... In discussions around the music industry, I think there is very little support for MP3's model as the future of the music business." Three other independent analysts echoed that sentiment but asked not to be identified.

Indeed, very few of the people who visit buy music from the site. In October, for example, about 470,000 people visited the site on any given day, according to the company's figures, but the company sold only 18,300 CDs for the entire month -- or just 600 a day. In other words, barely one person in a thousand found music worth buying at In addition, while the number of unique visitors to continues to increase, the number of pages each person views per visit has fallen from 6.7 in July to 5.6 in October. That drop is more proof that is having a tough time keeping visitors interested in its offerings.

So what's's long-term plan? The company's not saying. After repeated requests for an interview for this story, responded that only Chairman and Chief Executive Michael Robertson could speak for the company and that Robertson didn't have time to comment.

The sell-side analysts who follow, all of whom work for investment banks that underwrote the company's July offering, also didn't return requests for comment. But their research reports downplay the importance of's music sales to its overall revenue growth.

Credit Suisse First Boston

estimates that only 7% of MP3's revenue next year will come from sales on its site, with the rest coming from advertising, both online and at the music tours that is sponsoring. That revenue split makes clear that despite its talk of revolutionizing the record business, isn't really selling music to consumers. It's selling eyeballs to advertisers. Unfortunately, without good music, eyeballs may soon be hard to come by.

Ace in the Hole

Still, MP3 does have one big ace up its sleeve: a rich agreement from

Groupe Arnault

, a private French investment company that controls the luxury conglomerate

LVMH Moet Hennessy Louis Vuitton


. Arnault will spend $150 million over the next three years on advertising, marketing and promotional services from

In addition, the agreement is set up so that will get $5 million this year, $40 million in 2000, $70 million in 2001 and $35 million in the first half of 2002. That structure means, which had only $6.5 million in revenue in the first nine months of this year, is guaranteed to see its revenue soar for the next two years. In fact, based on analyst estimates, it appears that the Arnault agreement will represent about half of's total revenue over the next two years.

Arnault, which has set up a $550 million investment fund called


to invest in the Internet, also agreed to buy about 3.3 million shares of MP3 stock at 28 when the stock went public in July, a $92 million investment that so far is solidly in the black. Tuesday the stock TKTK.

Groupe Arnault doesn't publicly discuss its investments or Internet strategy, but one person at the company says it views as "a unique marketing opportunity that could work not only for the companies under the LVMH umbrella but also for some of the companies that Groupe Arnault has invested in. ... We do believe in the concept and the overall approach that is taking."

They don't have much company. And long before the Arnault agreement expires in 2002, the music may stop for MP3.