2HRS2GO: End of lawsuits doesn''t end doubts about MP3.com

COMMENTARY -- A question for free music services suddenly discovering paid subscriptions: why would I pay for music online when I can get higher quality sound on a CD?

MP3.com (Nasdaq: MPPP) settled the last lawsuit against it yesterday. The company will pay $53.4 million -- or 22 percent of its outstanding cash and marketable securities at the end of September -- to Universal and said MP3.com would convert much of its website to a pay service in the future. MPPP shares rose at least 60 percent on the news.

At its current level, MP3.com carries a market cap of more than $440 million. Peanuts in today's market, but nevertheless a valuation that suggests a company with real prospects.

You can easily see why people drove up MPPP today. Its Sword of Damocles has been removed. The bad news is gone.

That doesn't mean great news is around the corner.

My question about CDs would be answered with something along these lines: Online services offer choice of songs, downloading is convenient, MPEG sound is getting better, yadda blah etc.

All of that may be true, but that doesn't mean it's a robust, profitable business model.

Advertising has generated a large chunk of MP3.com's revenue until now. Will subscription fees make up for lower ad rates resulting from a traffic decrease?

MP3.com will still offer a limited service free of charage, but the larger download catalog will cost money. MP3.com CEO Michael Robertson says his new service's fees will be low enough to entice people. On the other hand, given that the company has agreed to work with music publishers, it doesn't seem likely the fee will be low enough to dent the music industry's CD cash cow.

And no matter how the subscription fee turns out, Internet users have repeatedly demonstrated they don't want to pay for songs online, and don't have to. Forget Napster, which is also going start charging; a plethora of alternative programs remain available for sharing music files.

Actually, Internet users don't want to pay for any online content, music or otherwise. In the six or seven years since the Internet became a commercial medium, not one independent, publicly-traded, fee-based online content or retail company has reported sustained profits.

Lawsuits or not, there's no reason to believe MP3.com will break that trend.

Other issues:

3dfx (Nasdaq: TDFX)

admitted the decision to follow the ATI Technologies (Nasdaq: ATYT) model of building its own cards was a mistake. I shouldn't be too critical, because at the time 3dfx bought STB, I also had high hopes for the move.

The strategy failed. But at this juncture I wonder how much appeal 3dfx will have for board makers already using chipsets from Nvidia, whose products over the past year have outperformed their Voodoo counterparts and come to market faster, besides. Unless the entire Voodoo line is repositioned as a value proposition, it's hard to see why a graphics board company would bother with 3dfx.

Keep in mind that 3dfx is also targeting new markets outside the traditional desktop realm. Unfortunately, it doesn't get any easier there. ATI already leads in mobile 3D graphics, Nvidia won the next high profile game console -- the Xbox of Microsoft (Nasdaq: MSFT) -- and Hauppage Digital (Nasdaq: HAUP) and others have a sizable presence in PC television.

Not that those competitors are all that great; only Nvidia stands out from a financial perspective. But the others could easily run each other into the dirt.

It would be bad if 3dfx completely disappears from the 3D graphics that it revolutionized a few years ago. But a sentimental loss would surely be preferable to a financial one for would-be 3D graphics investors. 22GO>