Off the Record: Universal's Day in the Internet Sun

The Seagram unit launches an Internet music venture that spurs a pullback among Internet music stocks.
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At first glance,

Seagram's

(VO) - Get Report

promise that it would announce "a major Internet music venture" Tuesday looked like just more record industry hype.

The press conference to unveil the deal, held at a midtown Manhattan music studio, started late, with a crackly blast of bass from amplifiers cranked to the point of distortion. Dozens of marketing types from

Universal

, Seagram's music division, filled the room, offering free T-shirts and hats to any reporters foolish enough to come near them. And Universal's top execs, Doug Morris and Jimmy Iovine, did their best to live up to the cartoonish stereotype of the music biz, with Morris resplendent in a dark suit and black shirt and Iovine wearing a half-zipped sweatshirt over a white T-shirt.

But when the bass died down and Seagram Chairman Edgar Bronfman stood up to talk, it turned out the hype wasn't just hype after all. Because the plan Bronfman spun at the conference represents nothing less than the first real effort by a traditional media company to make the Internet work for it rather than against it -- as well as a full-on assault on new media competitors like

MP3.com

(MPPP)

, which on the heels of the announcement saw its stock drop 12%.

Down on the Farm

Universal's new venture,

Jimmy and Doug's Farm Club

, is nothing more, and nothing less, than an Internet record label. Bands will be able to send Farm Club demos and albums that will be posted on the Net at

farmclub.com

for fans to hear and discuss. In that sense, Farm Club is no different than other Web sites, notably MP3.com, which also offer bands the chance to put their music online.

But Farm Club offers bands advantages that MP3 doesn't match. The label will have its own A&R professionals, or talent scouts, to review music. Bands that prove popular will be offered the chance to play on a weekly show on

USA Network

(which not coincidentally is owned by

USA Networks

(USAI) - Get Report

, a Seagram partner). Finally, there's the biggest carrot of all -- a record deal from Farm Club and Universal, the world's biggest record company. The Farm Club slogan is as simple as it is alluring: "Someone's gonna get a record deal." One can almost hear the response of would-be divas from Buenos Aires to Boston:

Why not me?

"I think it has the potential to really be big, and the main reason is for the first time you have some major media outlets that can put some major eyeballs and earballs in front of the bands, and that's what's really been missing from this equation," says Steve Wonsiewicz, music editor at

R&R Online

, which covers the record industry.

Star Search

The new label also gives Universal an easier way to find new talent. With hundreds of thousands of bands worldwide competing for the attention of a relative handful of record executives in New York and Los Angeles, the industry has always had problems finding new acts efficiently, depending on word-of-mouth from a network of producers, promoters and hangers-on. Farm Club "finally eliminates the middleman. It allows talent to be mainlined to the record company," Iovine says.

To back Farm Club, Seagram has assembled some impressive partners, including

America Online

(AOL)

, which will promote the label on its service and Web site in return for exclusive content from Farm Club and a minority stake in the venture. In addition,

Viacom

(VIA) - Get Report

unit

MTV

will promote a link to farmclub.com from its Web sites and offer some coverage of bands signed by the label on its flagship cable channel.

Farm Club "is a defining new type of venture," MTV President Tom Freston said Tuesday. "We think it's terrific for the business, terrific for our business."

The Power of Scale

But not so terrific for MP3, at least in investors' eyes. Stock in the company, which provides free downloads of songs over the Internet, fell 7 3/8 Tuesday to close at 53 7/8. Still, with a market cap of almost $4 billion and revenue that totaled $6.5 million during 1999's first nine months, MP3 clearly isn't cheap, especially given the competitive threat that Seagram and Universal are posing.

"The kind of announcement that was made this morning demonstrates the power of scale, so Universal is able in one step to basically leapfrog and achieve a competitive position with some of the Net incumbents," says

PaineWebber

analyst Chris Dixon. (Dixon rates Seagram a buy, with a price target in the mid-50s; PaineWebber has underwritten recent Seagram offerings.) "They sent a very early warning signal to many of the

Internet incumbents and IPO wannabes that the world of music and the Internet is going to be highly competitive, and the big labels are gonna be there."

An MP3 spokesman didn't return calls seeking comment.

After running up more than 30% in the last three weeks, Seagram stock gave back some of its gains Tuesday, falling just over 4% to 46 5/16. It's unclear how Farm Club will affect Seagram's bottom line in the short term, since Bronfman refused to disclose how much the company planned to invest in the label, but he said that sponsorships from companies like

Coca-Cola

(KO) - Get Report

mean that the label will quickly start generating revenue.

Also unclear is whether bands that get popular on Farm Club will be contractually obligated to sign with the label, and what the terms will be. (Probably not particularly generous, if the history of the record business is any indication.) Bronfman dodged those questions at the conference, saying he didn't want to give his competitors any tips.