Whistling a Happier Tune - MP3.COM - Company Operations

After a series of setbacks, online music upstart MP3.com looks as if it has turned the corner.

JUST A MONTH AGO, MP3.COM WAS on its knees.

The San Diego Net music firm had taken one body blow after another -- most aimed at the firm's My.MP3.com service. My.MP3.com was a great idea: It gave consumers access to a digitized music library, from which they could stream songs from any album they could prove they owned. But it also delivered a rabbit punch to the music industry, provoking a legal attack that eventually forced MP3.com to shutter its marquee service in April.

Come summer it settled a copyright lawsuit with four of the Big Five record conglomerates for an estimated $100 million. Even after it had dispatched those disputes, the startup still had to contend with Universal Music Group, which hung in with the copyright infringement case and won; that loss meant that MP3.com faced as much as $250 million in damages.

As if such a beating wasn't debilitating enough, a group of MP3.com investors delivered a jab of their own: They sued the company in November as its shares, which had traded above $40 early in the year, slipped into the low single digits. The suit is still pending.

At that point, most players would have hung up their gloves. But in the last month, MP3.com has pulled off a series of coups that position it to become one of the few survivors in its class. In mid-November it reached a negotiated settlement with Universal for $53.4 million -- a far cry from the quarter-billion-dollar worst-case scenario, which would have pushed MP3.com to the brink of insolvency.

And just last week, CEO Michael Robertson reintroduced the My.MP3 service, which the company can now run legitimately because this time it licensed rights to the music. The new version, which launches next month, will offer a limited free service and a broader subscription service.

Following that announcement, Robertson revealed later in the week that he had signed a deal with retail colossus Tower Records. Members of the My.MP3.com service will be able to get immediate access to streams from their TowerRecords.com purchases.

The service, which MP3.com is calling Instant Listening, overcomes the single biggest drawback of buying CDs online, namely the lag time between purchasing an album and getting it in the mail. The future of digital music is all about instant gratification, according to Robertson. "This is the direction the music industry is moving" he says.

Critics argue that the new My.MP3.com won't work. The premium service costs $49.95 a year and allows users to access up to 500 CDs, while the advertising-supported free version caps the number of discs at 25. "Who's going to pay to listen to music they've already bought?" says David Pakman, senior VP for business development at MP3.com competitor Myplay.

With Tower on board, however, it's reasonable to expect plenty of new users will sign up -- at least for the free service -- driving traffic and money to MP.3.com. In addition, Instant Listening will generate new revenue because the company gets a cut of each sale that comes to TowerRecords.com through the MP3.com site. (The commission rate is confidential, the companies say.)

The deal will also get more people to use My.MP3.com, allowing the company to harvest detailed data about how people listen to music over the Web. It can then sell that data to the labels so they can do better marketing.

Instant Listening, which Tower plans to expand to its brick-and-mortar shops, falls neatly into the suite of services MP3.com is now putting together. It already has established a successful Net muzak service and is licensing its proprietary technologies as an ASP. It is also building a promotions business and has already worked with big labels such as Elektra Entertainment, owned by Warner.

And let's not forget advertising. One client, French company Montaigne Participations et Gestion, formerly called Groupe Arnault, has committed to buying $52 million in advertising with MP3.com next year -- about 40 percent of what the company will spend to run its business. Even if My.MP3.com doesn't turn into a moneymaker, the company is on track to turn a profit by the end of next year, according to Sasa Zorovic, music analyst at Robertson Stephens, an investment bank. That's a claim few Net music plays can make.

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