SAN FRANCISCO -- Bob Kohn didn't waste any time searching for the next Amazon (AMZN) - Get Report. In the fall of 1997, Kohn was chief legal counsel for PGP, a hot encryption-software company about to be bought out by Network Associates (NETA) . Kohn saw an opportunity in the Internet's underground music scene and quickly threw together a business plan to sell music in downloadable files.
When PGP was acquired on Dec. 1, 1997, Kohn and PGP colleague Gene Hoffman lunched with Ralph Peer, who owned the world's largest privately held music-publishing company,
. Peer was intrigued by the makeshift plan. By the end of the meal, Kohn and Hoffman's Net venture,
, had found its first investor. Over spaghetti Bolognese, another .com was conceived.
"Since then, it's been moving at Internet speed," says Kohn, GoodNoise's 42-year-old chairman. "It's just been phenomenal."
It's hard to disagree. Since it was founded in January 1998, GoodNoise has established itself as a leader in the nascent market for downloadable music on the Internet. By acquiring the exclusive digital distribution rights of a wide range of music, GoodNoise is vying to become the leading online aggregator and merchant of music from independent labels. The company currently sells 1,200 titles and plans to sell at least 10 times as many by year-end.
More surprising, GoodNoise is the only public pure play in the burgeoning market for downloadable music. For an Internet start-up, the company took an unusual route to the capital markets. In May 1998, it merged with
, keeping Atlantis' listing on the OTC market but changing its ticker symbol. GoodNoise is planning to become a full-fledged
stock -- the company has applied for a Nasdaq listing and meets the exchange's requirements. Jason Noah Ader, an analyst with
who covers GoodNoise, says the new listing should happen in the coming weeks.
The stock has risen 154% so far in 1999, closing at 17 3/4 Wednesday. With a market cap of $250 million, GoodNoise isn't your typical bulletin board stock. It has brought on Gary Culpepper, a 20-year veteran of the music and film industries, as its executive VP of business affairs and, more recently, Peter Harter,
former VP of public affairs, to oversee governmental matters at GoodNoise. Harter turned down a post at
to take the job. "I was incredibly impressed by the management team and their business plan," says Ader, who gives the stock a strong buy/speculative rating. "This is a serious company."
After years of hype, the Internet is finally starting to deliver on its promise to transform the production, distribution and marketing of the $35 billion music industry. Driving this change is an audio- and video-compression format called MP3, which stands for "Motion Picture Experts Group-1 audio layer three." To the growing crowd of musicians and consumers who have embraced it, MP3 isn't just a format: It's a sort of brand representing a new more democratic future for the oligopolistic music business.
estimates that digital downloading will add $1.1 billion to the U.S. music industry by 2003.
, a market research firm, projects that digital distribution will account for 2.2% of prerecorded online music sales by 2002. Ader estimates sales of downloadable music from independent labels will reach $90 million to $140 million, or 10% to 15% of total online sales of indie labels, by 2002. GoodNoise, says Ader, could garner about 50% of that market. Currently, GoodNoise sells single songs for 99 cents and whole albums for $8.99.
But being among the first in a market isn't a guarantee of long-term success. That's why GoodNoise is aggressively signing up artists and labels. Already, GoodNoise has locked up the exclusive digital rights to
They Might Be Giants
, two high-profile alternative rock musicians. In fact, GoodNoise will soon be releasing They Might Be Giants' new album,
Long Tall Weekend
, marking the first time that an established artist releases an MP3-only album.
Last October, GoodNoise acquired
, which owned the largest catalog of downloadable music, including some of the works of
. And in February, GoodNoise achieved a coup by signing a distribution deal with
, the largest label yet to support MP3 files. Initially, GoodNoise will sell more than 175 songs from 50 Rykodisc artists, which include musicians like
. Most contracts are exclusive for 10 years.
"We've got record labels calling us from all over the world," crows Kohn, who co-authored a book on music licensing. "We've got 100 contracts out the door."
Another big change in the offing: GoodNoise is on the verge of relaunching the company with a much more powerful brand. By the end of the quarter, armed with $31 million in venture financing from
among other investors, the company will change its name to
and unveil a marketing campaign designed to promote this new catchier brand.
But investing in GoodNoise is far from a riskless proposition. To begin with, GoodNoise is a newborn company with paltry revenue and rapidly increasing costs. In its most recent quarter ended Dec. 31, 1998, GoodNoise reported a loss of $1.1 million, or 9 cents a share, on revenue of $8,000. And GoodNoise will keep burning through wads of cash to buy new content and market its site.
In the meantime, a lot could change in the developing industry as the major record labels grapple with the arrival of downloadable music. But unlike
, the most visible digital-music company in the press these days, GoodNoise has quietly built its site without antagonizing the record labels. And should a new format supplant MP3, GoodNoise says it will adapt easily.
"At bottom, we are agnostic when it comes to what platform to support," says Kohn. "If consumers choose a format, we'll provide that format. Right now, consumers have chosen MP3."