EMusic spins giveaway deal with HP

Under the deal, customers who buy HP's CD-Writer recordable drives will get two months of free, unlimited downloads from EMusic. The "all-you-can-eat" model is new for the music retailer, which has been making most of its money on a pay-per-song basis.

"I think it's an evolving model," EMusic vice president Steve Grady said in an interview.

Earlier this month, EMusic said it would lay off 20 percent of its work force as part of cost-saving moves aimed at cutting $15 million in expenses in the coming year.

In the first quarter of this year, the company reported revenues of $2.1 million, up from $423,000 in the prior quarter. However, its net loss--excluding acquisition charges but including the results of the companies it acquired--widened to $14.6 million from $8.4 million in the prior quarter.

Grady said partnering with HP and potentially other companies to reach new customers is more cost effective than mass advertising, something it did in its early days.

Gomez analyst Liz Leonard agreed that the deal gives EMusic a much-needed revenue stream in the short term, while it potentially opens a door for the company to attract a broader lineup of musicians as its audience grows.

"What it effectively does is make EMusic more competitive," Leonard said. A subscription model also puts the company in closer alignment with competitors such as MP3.com and Launch.com.

EMusic's artists include Willie Nelson and Liza Minnelli, along with more contemporary artists such as Bush and They Might Be Giants. Such names are better-known than those featured on most other legal download sites, which typically offer unsigned and independent-label acts. But it still can't match the array of hits available from free file-swapping services such as Napster.

International Data Corp. media and e-commerce analyst Malcolm Maclachlan said he doubts EMusic will attract the top acts, but he said it could have a profitable niche of popular musicians that are past their prime.

"If the market for music downloads grows, I think EMusic could be fine," Maclachlan said. "There's plenty of indie labels that make it (today)."

In its deals with artists and record companies, EMusic splits the proceeds, after costs, with the artists. In today's deal, it will divide the revenues from HP among the artists and labels whose songs are downloaded by HP customers.

Although the subscription model has yet to take off, Leonard said, people who have been using Napster have said they would be willing to pay a fee of $10 to $20 a month to get the music they want.

"I think it's a better approach than 99 cents-a-download from a consumer perspective," Leonard said.

EMusic's Grady noted that pay-per-download could be more attractive once you can use the song easily in your home, car stereo and portable player.

"You can't draw conclusions about what will or won't work until there is an infrastructure," Grady said. "It's still really early in the game to decide what will and won't work."

However, Grady acknowledged that EMusic has to make it until that stage and said the deal with HP, and perhaps others, should help the company stay afloat.

"You want to make sure you have enough fuel to get where you want to go," Grady said. "We know this market is going to be huge."

For HP, the deal is similar to bundling software with its computers, something the company has done for years. The deal helps it reinforce its lead in the consumer PC market among people who want to record music using their PCs. HP said 80 percent of people who buy the company's CD-Writers use the drives to record MP3 files downloaded from the Internet.

"Through this alliance with EMusic, we can offer our customers access to thousands of legal MP3 music tracks from established artists across a broad range of music styles," HP marketing manager Christy Tappy said in a statement.