Yahoo! Gobbles Up Online Music's Launch - TheStreet

Yahoo! Gobbles Up Online Music's Launch

Launch Media CEO Dave Goldberg notes that online music is a threat to the advertising revenue of traditional radio stations.
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In the world of online music, the little guy can't win. But in a few years, some of the big guys are going to be losing, too.

So said

Launch Media

(LAUN)

CEO Dave Goldberg Thursday following the announcement that

Yahoo!

(YHOO)

is spending $12 million in cash to buy Launch, the 7-year-old music video and personalized Internet radio Web site.

The purchase price of 92 cents per share -- well below Launch's all-time closing high of $30, set the day after its April 1999 IPO -- reflects the precipitous decline in the public's percept of what small, online media companies are worth. "It is not necessarily a good idea to be a small, public media company," Goldberg says. The tender offer's price, which Goldberg says the company was "very happy" to get, drove Launch's shares up 31 cents, or 53%, to 89 cents a share.

But Goldberg insists that some of the big players in the media business -- specifically, the radio stations collectively reaping an estimated $15 billion per year in advertising revenues -- are threatened by the consolidating and growing online music business. "I think

online music is going to be a very big business," Goldberg says. "I think a large portion of that radio advertising is at risk, because this is where the consumer is going to go to listen to music."

The Bet

That, of course, is the bet that Yahoo! is placing in its acquisition of Launch Media, which follows Yahoo!'s announcement in early April that

it would be a distributor for the subscription online music service now known as

pressplay

, a joint venture of

Sony

(SNE) - Get Report

and

Vivendi Universal

(V) - Get Report

.

"The acquisition is a reflection of Yahoo!'s commitment to providing online music fans with the most compelling and comprehensive music experience," says Ellen Siminoff, Yahoo!'s senior vice president of entertainment and small business.

Siminoff says the company plans to retain the Launch brand, which encompasses its Launchcast service that enables Internet users to listen to online radio stations tailored to their musical tastes.

Along with a dwindling bank account -- amounting to $2.6 million in cash and marketable securities as of March 31 -- one of the clouds hanging over Launch has been a lawsuit filed by the

Recording Industry Association of America

alleging that the customized Launchcast radio service violates Launch's licenses from several of the major labels. Separate from the Yahoo! announcement, Launch said Thursday that it had settled with Vivendi's

Universal Music Group

, one of the parties to the suit. Goldberg says Launch hopes to settle with the other plaintiffs: "We're certainly going to have conversations with them in the next couple days," he says. He isn't sure whether the new Yahoo! affiliation will speed the process up.

The Expectation

Yahoo! and Launch expect they'll be able to get users of Launch's free services to sample forthcoming for-pay services from pressplay, but Goldberg, a veteran of the music business, says companies will have to give users a lot of value for them to pay for online music services. That added value, he says, includes ease of use, exhaustive access to music, minimal security hassles for users and a relatively low price. The quickest way to make that happen, he says, is to legislate compulsory licenses from music publishers and record companies -- a system that each group objects to on its own behalf. If companies have to get licenses from publishers and labels individually, says Goldberg, "that's going to be really painful. ... Not to say it can't be done, but I think it's going to be very difficult to do on a voluntary license basis." He adds, "I'm not saying we're going to get a law soon. I just think that would be the quickest way to do it."

Phil Leigh, digital media analyst at

Raymond James

, says Goldberg is right about the need for compulsory licenses to accelerate online music development. But if the music industry starts seeing a steady decline in CD sales, "all these guys are going to line up pretty quickly if they see their interests are at stake here and they've got no choice," he says. "Once our pocketbook is threatened, we get over our petty disagreements pretty quickly."

Leigh says the Launch acquisition "makes all the sense in the world from Yahoo!'s point of view. Particularly because it's cheap." (Leigh has no rating on Yahoo! or Launch, and his firm hasn't done banking for either company.) Leigh says the deal, which comes a month after Vivendi announced a deal to acquire

MP3.com

(MPPP)

, is another indicator that the online music business is consolidating. "The stakes are big, and the big players are going to take the lion's share of what's there. ... Launch didn't have a big choice."

The Awareness

Goldberg, for his part, seems aware of that. It was wonderful that for a brief moment, technology investors were willing to invest in small media companies, he says, enabling his company to complete its 1999 IPO. But, he says, "The issue is how to stay a public company when the markets don't want to support you with capital."

After Launch became a public company, he says, the company wasn't able to do the things it had been hoping it could do as a public company, such as raise more money in an additional offering or use its stock as a currency for acquisitions, because tech investors lost enthusiasm and traditional media investors weren't interested in small-cap firms like his. "I can't tell you how many fund managers told me, 'When you get to a billion and a half of market cap, call me,'" Goldberg says. "There's just not an investor base for a small media company in the public marketplace."