MP3.com spins unknown artists into Muzak

The company sets its sights on the ambient music sector, squaring off against Muzak, a giant 65-year-old company.

It seems like the ultimate clash between new and old media: MP3 vs. Muzak.

Wounded after doing major battle with record label titans over consumer music, MP3.com is pushing a new service to provide "ambient music" to businesses--the industry's term for what is known as elevator music to the rest of the world. Last week, the company signed on chain retailer Petco and its 530-plus outlets for the in-store music service.

The move fired a shot directly over the bow of 65-year-old stalwart Muzak, whose name has become largely synonymous with ambient music. But it could prove a tough market for MP3.com to break into.

Although Muzak's offerings are often mocked as a bland recycling of pop tunes in supermarkets, airports and elevators, the company is updating its image and services to reflect cultural and technological changes. Moreover, the ambient music business already comprises several competing players, including AEI Music and DMX Music.

And because it does not own licenses to broadcast top-label catalogs in stores, MP3.com's offerings consist of relatively unknown bands that post songs to its Web site. Perhaps most daunting are the technical challenges to MP3.com's digitally based service, which must efficiently deliver music over the regular phone lines that are used in most stores.

Yet all agree that it is a much-needed move for MP3.com, which must expand its revenue options in light of the recent court and business losses.

"There is no question at all that MP3.com has to diversify its revenue stream in order to remain a viable company," said Aram Sinnreich, an analyst at research firm Jupiter Media Metrix. "They have ridden their image as an outsider as far as it can go. At this point their only real hope for survival is to be a participating member of the commercial music community."

MP3.com also believes that the size of the potential market is a compelling attraction. Muzak itself reports that only 7 percent to 8 percent of all businesses that could use background music now employ some kind of programmed music service.

And if it can overcome the bandwidth hurdles, MP3.com believes that it can help a company cut costs and market more directly with such services as tailor-made advertising. It initially ships a device that holds the software and music to a retail location, a mechanism that dials in and updates the playlist with songs and advertising during off-peak hours.

Analysts added that the most enticing feature of MP3.com's service may be its low price. The company plans to charge around $25 per store per month to pipe in playlists that can be customized with ads. Muzak said it charges around $50 per store each month.

"The potential for cost savings is substantial, and that is what any business looks for," said Don Cowan, a spokesman for Petco. The potential savings "caused us to sit up and look at MP3.com's services more closely."

Petco plans to duplicate the advertisements in its monthly circulars on the audio in all its stores. As it adapts to its relationship with MP3.com, it will begin to promote products that are popular in specific regions.

Spin the business
Believing that more companies will see similar benefits, MP3.com said it will change the name of its retail music services unit to "business music services" in January to broaden its client list to include establishments ranging from office buildings and theaters to coffee houses and bowling alleys.

"My belief is that it can represent 15 to 20 percent of the company's total revenue in the future--not next year or the year after, but in about 36 months," said Bob Simril, vice president of MP3.com's retail music services.

That would provide much-needed revenue for the embattled company, which has had to shell out more than $150 million this year alone to end lawsuits filed by the leading recording labels: Universal Music Group, Sony Music Group, Bertelsmann's BMG Entertainment, Warner Music Group and EMI Recorded Music. Nor can MP3.com use any of songs by those major labels, though the company says it has been in discussion with the Big Five studios for its business service.

"The licenses we have with the labels is more for streaming for the Internet. It requires a different set of licenses for public performances," Simril said.

Play that funky music
Muzak, meanwhile, has an uphill battle to free itself from its image as a purveyor of blandness.

"That was 30, 40 years ago," Bill Boyd, chief executive of Muzak, said of the sleepy orchestral version of popular hits the company once arranged. "We have Puff Daddy and Frank Sinatra actually singing. We are current to yesterday."

The Web, however, is still untested terrain for Muzak. The company plans to continue delivering its services via satellite and frame relay until it believes the Web is efficiently able to handle music files for mass delivery.

"You need to have a way to send the music back and forth," Boyd said. "Most stores don't have broadband and don't want to tie up the phone lines."

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