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THE CUTTING EDGE: FOCUS ON TECHNOLOGY

It's No Napster; It's a Sleeper

Music Site Plays by the Rules, Slowly Builds Rich Collection

September 11, 2000|KAREN KAPLAN | TIMES STAFF WRITER

Can an Internet music company become a financial success without relying on pirated songs?

So far, the evidence isn't encouraging.

Napster Inc., whose song-swapping service has made it the poster child for music piracy, faces a crippling lawsuit from the recording industry. Earlier this month, multimedia search site operator Scour Inc. was forced to lay off most of its staff after lawsuits from the Motion Picture Assn. of America and the Recording Industry Assn. of America scared away potential investors. And just last week, a federal judge ruled that copyright violations by MP3.com Inc. would cost the company at least $117 million, a penalty that could put it out of business.

None of that has discouraged Launch Media Inc.

For 6 1/2 years, the Santa Monica company has used technology--first CD-ROMs and then the Internet--to introduce music fans to new artists. Slowly but methodically, Launch has built a music library with more than 120,000 songs and attracted a user base of 4.3 million. And it has done so without the flagrant copyright violations that have landed so many Internet music ventures in hot water.

"We believe artists should get compensated for their work," said Launch Media Chief Executive Dave Goldberg, a former management consultant and lifelong music enthusiast. "If they can't get compensated, then they'll stop making music, and that's bad for us."

Instead of offering digital versions of copyrighted songs--as MP3.com did--or writing software to locate pirated music on other people's computers--as Napster and Scour did--Launch obtained licenses for songs and videos from music publishers and record labels.

Launch also produced its own versions of songs and videos, which don't trigger any licensing fees. The company installed a studio in its sprawling office--as many radio stations do--to record artists ranging from Sarah McLachlan to Run DMC. Launch also sends crews on location to record performances at concerts and in other venues.

All that original content certainly wasn't free. Since its inception, Launch has spent "a couple million dollars" producing its own songs and videos, Goldberg said. It also spent about $100,000 in its most recent fiscal quarter on licenses.

But analysts expect increased advertising revenue will carry Launch to profitability. As new users continue to flock to the Web, Launch's audience will grow, and that will help the company rake in more advertising dollars, said Bill Lennan, an analyst with WR Hambrecht & Co. in San Francisco. What's more, the radio- and TV-style commercials that are possible with broadband Internet connections will command even higher prices, helping Launch to collect three out of every four revenue dollars from advertising, he said.

"We're still in the early days of Internet growth, and certainly in the very early days of broadband penetration," said Lennan, who considers himself one of the most conservative analysts following Launch. He expects the company to become profitable in early 2002. "They're going to make money someday, there's no doubt about it."

Launch has won plaudits from analysts, but the company isn't close to breaking even yet.

Last year, Launch Media posted a net loss of $37.5 million on revenue of $16.6 million. In the first half of 2000, Launch lost an additional $24.1 million on revenue of $14.3 million.

Though analysts agree the company will become profitable, investors are still wary. After closing at $6.50 on Friday, down 25 cents on Nasdaq, Launch shares are off about 70% from the $22 of its initial public offering in April 1999.

But Goldberg insists that Launch can make money, even if it plays by the copyright rules.

Launch has enough cash to fund the company until the end of 2001, when Goldberg hopes revenue will begin to outpace costs. As of June 30, the company had about $50 million in current assets, including $3.8 million in cash and cash equivalents.

"They have a very viable business model," said Chase H&Q analyst Paul Noglows. "Launch provides what we think is an excellent [online] marketing platform for all the major [record] labels."

Indeed, Launch has more in common with radio stations and MTV than with online music retailers. Although the company's Web site, http://www.launch.com, allows visitors to buy compact discs and cassettes through a partnership with Wherehouse Music and CheckOut.com, Launch isn't really competing in the $14-billion music retail industry, Goldberg said. Instead, Launch is helping consumers find new music they might like.

Although radio stations reach far more listeners than Launch, "the labels are better off having people listen to us," Goldberg said. "On Launch, they can see the title of the song they're listening to, they can click the 'Buy' button and buy it right there, and we're paying them royalties."

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