Six months after IPO, what is MP3.com's game plan?
With the dust finally clearing from MP3.com's stellar initial public offering, there is no doubt the company has fueled the digital music wave. The question is, how does it plan to compete?
MP3.com launched in March
1998, taking the name of the now prevalent music encoding format that allows online users to download and share digital audio tracks--without the hindrance of copyright protections--to play via PCs and portable devices.
The company has a catalog of more than 250,000 digital tracks, and has run joint-promotions with some well-known groups, such as TLC. Its collection is composed mainly of songs by independent artists, however, which MP3.com promotes through its free site and then gets a cut of any music sales. But the bulk of the site's revenues comes from advertising.
When the San Diego-based company went public in July, its shares closed up more than 126 percent--rising from 35.31 to 63.31--and at one point its market value touched $6.9 billion.
Today MP3.com is hovering around $32 per share, as it continues to release services such as online radio stations, e-greeting cards, and its so-called Music Service Provider initiative to give users access to their MP3 collections from any online device, which will likely evolve into a subscription-based revenue model.
Analysts say the company's stock price could be attributed in part to Net stocks' recent fluctuations. Just yesterday, Credit Suisse First Boston, the lead manager for the MP3.com offering, reiterated the stock a "buy."
Still, something has changed since MP3.com came out of the gate. Hopeful contenders have surfaced at a maddening rate. The "Big Five" record labels--Sony Music, Universal Music, BMG, Warner Music and EMI--which have a grip on the world's most popular artists, are making their own moves to digitally distribute music through the Net and retail partners.
"There is a lot going on in the music industry at this time," said Michael Goodman, an online entertainment analyst with the Yankee Group. "The record labels are becoming more proactive, they are beginning to deal with the reality that online music is moving forward--there is more competition for MP3.com."
MP3.com has a strong brand, healthy traffic, and is leading the pack of sites that want to shake up the music industry when it comes to discovering and promoting new artists, market analysts said. But as more consumers start to collect and store music digitally, MP3.com faces serious challenges in luring people to its site over such rivals as RioPort.com, which is forging deals with major labels, including Universal Music, to stock up on chart-topping hits, not just potential stars.
MP3.com chief executive Michael Robertson said that the company's music portal will attract the names Net users want to find.
"One of the exciting things that we're seeing is that big artists are coming to MP3.com, such as Alanis Morissette and the Goo Goo Dolls; there is a huge flock of top talent going to the Net and MP3.com," he said. "Content goes where the consumers are. If someone has a piece of music, we are the best place for them to put it."
Futhermore, Robertson contends there will always be a strong place for MP3.com because the format is supported by all portable and PC-based players. The site's unique user base has grown 10 percent per month, and its CD sales have grow 15 percent per month, he said.
Nonetheless, MP3.com could have a hard time partnering with major labels because it still doesn't support the industry's Secure Digital Music Initiative (SDMI) or encoding formats that prohibit digital music listeners from making unauthorized copies of songs.
For the most part, 
big industry players such as EMI Recorded Music are partnering with Liquid Audio to securely encode their music. Or the majors are backing in-store kiosks that also enforce security, such as the "Red Dot Network," which includes recordings by Sony artists such as Mariah Carey, Ricky Martin and Lauryn Hill.
"We want to make sure our artists get paid for their work, and we will only support secure formats," said Jay Samit, EMI senior vice president, adding that the company would not cut a distribution deal with MP3.com.
Retailers also might leave MP3.com out of their in-store kiosks because of security issues and its business model.
"We've talked with them a lot in the past, and the answer is that we wouldn't partner with them--their revenue base is not in music sales, it's in advertising," said Anthony Deen, vice president of retail design and development for Virgin Entertainment Group, which is forming an alliance with the Rio digital music family.
"Who has the time to sit and listen to all that music on MP3.com? It has to be promoted in some way," he added. "Ease of accessibility is very important for customers; we can give customers [the content] they want."
If the major labels and retailers shun MP3.com, it's unclear whether it can continue to hold on to its traffic as more popular music goes digital. After all, consumers are looking for artists. That is why people frequent stores and Web sites that offer the most extensive collections of CDs.
That said, the industry heavyweights' reluctance to align with MP3.com could simply be a battle strategy, analysts say.
"They are as much a potential partner to majors as a potential threat," said Aram Sinnreich, an analyst at Jupiter Communications, which held an online entertainment forum last week. "For the labels, MP3.com offers online promotional and distribution possibilities to act as a farm club of a sort for emerging talent and to be a gauge of customer trends. But they have been perceived as a threat because they are at the forefront of the consumer evolution toward online distribution of music."
MP3.com will eventually need the major labels, though.
"Change is the key to survival," Sinnreich added. "[MP3.com] as it is today won't exist in two years. The question is, will they adopt to changes in the marketplace, which means cozying up to the majors when they come online?"
Music is no different from any other Net category--content is king, as they say, and the biggest aggregator wins.
"The key for anybody that is distributing music is having the bands and music that people want to hear," the Yankee Group's Goodman added. "It would certainly hurt them if they didn't have popular content--if they ever want to be truly successful."