Sonic Foundry Finds a Friend in Microsoft

The music-editing software company is looking for a boost in revenues from its alliance with Microsoft.
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SAN FRANCISCO -- Sonic Foundry (SFO) is choosing sides in the streaming-audio arena. In an effort to boost its presence and revenues, the company is looking for placement of its music-editing software. However, it's eschewing the market leader in this case. But perhaps that's not so surprising considering the company's allying itself with Microsoft (MSFT) - Get Report instead.

Tuesday Sonic Foundry will announce an alliance with Microsoft during a blues party with

Buddy Guy

at the L.A. conference

Internet World

, according to a high-ranking executive at Sonic Foundry. The deal is expected to add substantially to Sonic Foundry's revenues, the executive said.

The Madison, Wis., company makes software that allows people to edit music on their PCs and is compatible with formats from Microsoft and

RealNetworks

(RNWK) - Get Report

. RealNetworks is the undeniable leader, controlling more than 80% of the streaming-audio software market and estimated by some analysts that its market will grow as much as 400% a year. But Sonic Foundry is allying itself with Microsoft because it believes Bill's monolith will be the winner in distributing music via the Internet. All of Sonic Foundry's products are based on Microsoft technology.

Under the deal, Sonic Foundry's

Stream Anywhere

product will use Microsoft's anti-piracy and compression technology. Microsoft's technology stores music in half the space that the popular

MP3

requires and cuts download time, the Sonic Foundry source said. Microsoft didn't return calls.

Sonic Foundry will also go further in linking its success to Microsoft, upgrading other products to use Microsoft's MS Audio 4.0, which Microsoft is expected to unveil at the conference Tuesday. Another initiative, called Project Boulder, will allow users to upload and edit music and burn CDs using Micrsoft's audio compression technology, says the source. The software is expected to be ready this quarter via the Web. The source declined to estimate how much Project Boulder would contribute to revenues but says he expects it to also "be significant."

The deal could finally put Sonic Foundry on the radar of many investors. "This is a great little company that no one's noticed and hasn't been hyped at all," says Will Hickey, portfolio manager at

Anchor Capital

, who has owned the shares since the company's initial public offering and has been adding to his holdings for the past year. "The partnerships with Microsoft are really the key." If all these smaller links with Microsoft eventually lead to Microsoft bundling Sonic Foundry with its operating systems, that would be the real coup.

Free beta versions of Stream Anywhere will be available for download on the Web starting Wednesday, with the official launch expected in July.

"I think it

Stream Anywhere could add a million-plus dollars to revenue per quarter starting in the third," the source says. By using Microsoft's technology, he believes, the product will win against any other similar software.

Sonic's revenues totaled $7.5 million in the fiscal year ended Sept. 30 and $2.7 million in the quarter ended Dec. 31. While the company's revenues in the most recent quarter showed a 296% growth from the year-ago quarter, it posted a loss of 52 cents a share in the quarter. Sonic Foundry, which went public in April 1998 at 7 1/2, now trades at more than double that level.

Sonic Foundry's stock closed up 3/4, or 5%, at 16 1/2 after hitting an all-time high of 17 7/8 earlier in the session. "I think the stock can easily go higher, into the 20s in the next few weeks," Hickey says. "None of this has been hyped yet."

This alliance comes at the same time Sonic Foundry is making other friends as well. The company will also announce a partnership allowing music site

UBL.com

to market a version of its basic music and video editing program codeveloped and cobranded with Microsoft called

Windows Media On-Demand

. The deal with UBL.com will allow a wider distribution for Media On-Demand.

Two other announcements this week:

Diamond Multimedia's

(DIMD)

Rioport Web site will use its music-creation software, and

Imation

(IMN)

will bundle its audio media editing system with its Super Recorder 8x20.