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THE DAY AHEAD: Musicmaker.com&#039s sales anything but a hit

Musicmaker.com (Nasdaq: HITS) will go public Wednesday with the following recipe for success: Take all the hype surrounding music on the Internet, cash in on a trendy ticker and pray no one notices you have less revenue than many Silicon Valley secretaries.

Cut through all the talk of potential and consider this: Musicmaker's 1998 revenue was $74,028. First quarter revenue was $20,160.

No, those sales figures are not typos. There are no more zeroes to be had. You are being duped.



Musicmaker.com: Hot future or all hot air?



Folks, Musicmaker is betting that investors don't read the filings with the Securities and Exchange Commission. Looks like Musicmaker won its bet. Musicmaker got its money, pricing its 8.4 million share offering at $14. The original range was $12 to $14. Ferris Baker Watts is the lead underwriter.

Musicmaker, which sells (or rather, plans to sell) personalized music CDs and downloadable tunes, reported a loss of $4.65 million. For the first quarter ending March 31, the company had a loss of $1.8 million. We're used to losses. We're not used to an Internet company taking six quarters to ring up sales of $100,000.

To make matters worse, Musicmaker's first quarter sales were down from the $22,400 in the same quarter year ago.

The scary part is that those laughable financials can easily be skimmed over because most financial reports are in thousands. Scroll carelessly through the regulatory filings and you mistakenly add a few zeroes and think Musicmaker is a real company.

About a year ago, it was generally understood that companies should have about $10 million in annual revenue before going public. That threshold was blown away by a bunch of fledgling Net companies such as theglobe.com Inc. (Nasdaq: TGLO).

Then that revenue bar fell even lower. Salon.com Inc. (Nasdaq: SALN) had annual revenue of $2.9 million and was ridiculed. But Salon is Microsoft compared to Musicmaker. And just last week, we questioned whether Ask Jeeves (Nasdaq: ASKJ) was too green because it had 1998 sales of $592,659. We take it all back. Compared to Musicmaker everybody looks like Microsoft.

As if the revenue figures weren't galling enough, there are a few other items that are screaming "stay away from this IPO!"

Here's a look at a few Musicmaker landmines:

  • One shareholder is cashing in some of its stake. Virgin Holdings is selling 3.4 million shares, but will still own 39 percent of the company after the offering. That's the price Musicmaker paid for exclusive access to the music catalog of Virgin's EMI music division. "In connection with our license agreement with EMI, we will amortize approximately $17.3 million in each of the next five years," the company said. Virgin also gets three board seats.

    EMI is viewed as the reason to be optimistic, but Musicmaker hasn't made a dime from the deal. EMI also hasn't provided any content yet.

  • Musicmaker's main distribution pacts hinge on one executive. Musicmaker's future hangs on the EMI partnership and a marketing deal with Columbia House, jointly owned by Sony Music Entertainment, Inc. and Time Warner Inc. The catch? Columbia House, which touts Musicmaker as its personalized CD vendor of choice, can nix the marketing pact if Devarajan S. Puthukarai ceases to be Musicmaker.com's president and chief operating officer and deems his replacement incompatible.

    Columbia House can also end the relationship if it doesn't make financial sense to them. Columbia House can also ink pacts with competitors if Musicmaker doesn't have the repertoire of music needed.

    If Columbia House bails on Musicmaker, it triggers EMI's exclusive agreement to become non-exclusive. Put simply, a lot is riding on Puthukarai, who used to be president of Warner Music Media, owned by Time Warner. It appears that Musicmaker's partners have much more faith in one executive than the company as a whole.

  • Competition is everywhere. Musicmaker's custom compilation competitors include CustomDisc.com, CDuctive, and amplified.com. The company also cites CDnow, Inc. (Nasdaq: CDNW), Amazon.com, Inc. (Nasdaq: AMZN), barnesandnoble.com inc. (Nasdaq: BNBN), Columbia House and BMG Music Service as threats. CDnow purchased SuperSonic Boom, a custom compilation provider, in June 1998. On the digital downloaded music side of things, Musicmaker competes with EMusic.com and the soon-to-be-public MP3.com. Cox Enterprises Inc. announced an investment in and joint venture with MP3.com in June.