MP3.com Sounds Questionable; Pep Boys Stock Stuck in Low Gear

Mike: To me, MP3.com evokes the name of Joseph Schumpeter, the noted economist who embraced the notion of "creative destruction."

Jim: I'm familiar with him and his notion, but when it comes to what this has to do with MP3.com, I have no idea what you're talking about.

Mike: As you know, Jim, Schumpeter's doctrine is that as companies age they die off or get knocked off by being taken over. Either way, the idea is that stronger companies or better technologies succeed them.

Jim: Right, whenever there's a merger wave in corporate America, Mr. Schumpeter's tenets surface yet again.

Mike: So, MP3.com distributes music according to a new technology that seems destined to knock off the old business model. That's the model in which recording labels sell records or CDs through retailers and charge people an arm and a leg for the physical item.

Jim: I'm happy someone's trying to address that rip-off.

Mike: Part of that arm and leg actually makes it to the artist. Anyway, what Schumpeter may or may not have pointed out is that while the destruction is constantly taking place, the businesses being created can take a while to get profitable.

Jim: Hang on, I'm still catching up with you. Your point?

Mike: San Diego-based MP3.com is a harbinger of a new age, a new creation that will supplant what's been destroyed in recorded music. But that doesn't mean it's going to make any money from it.

Jim: Nor does it mean it's a good stock.

Mike: Exactly right. This stock went public in July at $28 a share, and recently it was trading for less than half that. Last week it got a big bump up because it settled some lawsuits filed by record labels, but it's still under $18.

Jim: Talk about destruction.

Mike: I still wouldn't buy the shares.

Jim: Me, neither. First, though, some of our readers no doubt have heard of the MP3 format in which you can download music from the Internet. But there's a difference between that and this company, right?

Mike: Yes. The MP3 format was not invented by MP3.com, it was set forth by the Moving Picture Experts Group of the International Standards Organization, an international body that sets technical standards in countless fields. Now even if you're distributing digitized music, you have to compress the data first so it doesn't take hours to download to your computer or hours to transmit. And the latest and most successful format for audio today is MP3.

Jim: Which is where MP3.com--the company--comes in.

Mike: Right, MP3.com distributes MP3 files. These are essentially recorded songs, in this case recorded by largely unknown bands, that are available largely for free for anyone who signs onto the MP3.com Web site with a computer and downloads them. Then they can play the songs over their computer sound system or even record them on a compact disc if they have a CD recorder.

Jim: Or on an MP3 player, some of which look like transistor radios, and some of which are as small as fountain pens. But here's the rub: MP3.com expects to make money long-term off the advertising on its Web site. But for now, the company isn't profitable, has several competitors and, as you said, is distributing mostly unknown bands. That's because the big record labels sued MP3.com and others for alleged copyright infringement.

Mike: For allegedly fomenting piracy.

Jim: A federal judge agreed with the labels, which prompted MP3.com and others to voluntarily stop carrying the big names of music.

Mike: But MP3.com still has the latest offerings from those great bands Tri-State Killing Spree and L.A. Car Pool.

Jim: But last week MP3.com settled some of those suits--and agreed to pay some hefty licensing fees--in order to start carrying the big names of music again. That sent the stock soaring nearly 50% in one day alone.

Mike: Great. So it traded up to $19. That's still way under its IPO price. And by the way, on the day of its IPO, the stock actually soared above $100 before starting its long slide.

Jim: Well, afraid I'm going to side with singer Alanis Morissette on this one. She recently alerted securities regulators that she planned to sell a big chunk of her MP3.com holdings. Who can blame her? Talk about a jagged little pill to swallow.

Mike: Right. MP3.com is a great service if you're a college student, because college students have no life. But the moment they actually have to earn bread for a living or have families, they discover there are a lot of demands on their time besides wading through MP3.com's list of 67,000 artists.

Jim: So you don't like the stock, either?

Mike: I do not. And it's not only because of MP3.com's financial situation, but because it's totally unclear how the recorded-music industry is going to figure out what digital technology and distribution to embrace, how it will adapt to it so that the record labels still make money, and whether MP3.com will still be around when all that is settled.

Pep Boys--Manny, Moe & Jack (PBY)

Jim: Don't buy

Mike: Don't buy

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