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THE DAY AHEAD: Liquid Audio may make big IPO splash

If Musicmaker.com (Nasdaq: HITS) can make a nice market debut with all of $20,000 in first quarter revenue, just imagine the reception Liquid Audio (Nasdaq: LQID) will get with $530,000 in first quarter sales and all the Internet music buzz.

The market's infatuation with stocks related to Internet music is likely to continue today. Liquid Audio, which is offering 3.6 million shares, priced at $15, well above its original range of $10 to $12. Lehman Brothers is the lead underwriter.

For 1998, Liquid Audio reported sales of $2.8 million and a loss of $8.5 million. For the first quarter, the company lost $4.1 million on sales of $530,000.



Liquid Audio: On to big things?



Liquid Audio uses its software to publish and encode music that can be downloaded. Liquid Audio also has some pretty big backers in the music industry because it can protect copyrights. The company's software has been used by record companies such as BMG North America, Capitol Records, Columbia House, Dreamworks Records, EMI Classics, and Rounder Records. Amazon.com Inc. (Nasdaq: AMZN) has also used Liquid Audio to offer free downloads.

On the technology side, Liquid Audio is partnered with Adaptec, Intel, RealNetworks, Texas Instruments, and Toshiba.

Those powerful partners will ensure Liquid Audio's IPO success. The company also seems to be ahead when it comes to "end-to-end solutions." Liquid Audio claims to have the software that can deliver music from the point where a musician prepares music for delivery over the Internet, through transmission, to the point where the consumer downloads and listens to it.

There isn't a standard for digital delivery of music, but Liquid Audio is the closest thing there is to one. The latest incarnation of Liquid's software supports the much-hyped MP3 format.

If record companies look to Liquid Audio as one of the few ways to deliver music digitally and guard against piracy, the company could have a nice future. The biggest question is whether the music industry can move fast enough to make Liquid Audio a company as powerful as a record label.

"We have increased the number of these syndicated music recordings for sale from approximately 5,000 at the beginning of 1999 to more than 60,000 committed as of June 30," the company said. The company notes that it has to ink more record labels and gain more distribution.

In the second half of the year, the company will begin offering the Liquid Music Network, which will offer syndicated music through music retailer websites.

Most of Liquid Audio's revenue derives from licensing fees for its software, but the company expects to boost revenue via downloads to consumers, e-commerce services for artists and advertising.

Sounds great in theory, but there are a few wild-cards in the long run:

  • Standards for digital delivery of music may change. Liquid Audio said its ready for various formats, but one standard could be picked and the company could be left out of the loop. "Numerous standards in the marketplace, however, could cause confusion as to whether our products and services are compatible. If a competitor were to establish the dominant industry standard, our business would be harmed," the company said.

  • Competition is fierce. Liquid Audio named Microsoft, RealNetworks, IBM, AT&T/a2b, Sonique and MusicMatch as format competitors. Other online music services such as mp3.com, RioPort.com, SonicNet and UBL are also viewed as competition.

  • Ten customers account for nearly all the revenue. In 1998, Liquid Audio's top 10 customers accounted for most of the revenue. If a customer is lost, Liquid Audio could take a sales hit.

    But those risks are the usual. Most analysts agree Liquid Audio will make a big IPO splash.

    Can Commtouch get a Paul Allen boost?

    Musicmaker.com couldn't get out the IPO door before EMI bought a stake in the company. Now Commtouch Software Ltd. (proposed ticker: CTCH) is hoping to get an IPO bang courtesy of a deal with Go2Net (Nasdaq: GNET) and Paul Allen's Vulcan Ventures.

    Go2Net and Vulcan Ventures said on Wednesday they plan to invest $20 million in Commtouch, which provides Web-based e-mail services.

    Although Web-based e-mail service companies haven't so great in the aftermarket (See Mail.com (Nasdaq: MAIL), the Go2Net-Vulcan investment might give Commtouch a little spark. Shares were scheduled to trade today.