MP3.com Draws $11 Million in Venture Capital

MP3, the popular and controversial Internet music format, took a big step toward legitimacy last week. Z Company, which operates San Diego-based MP3.com, announced that it had attracted $11 million in venture capital from idealab! and Sequoia Capital. Z Company will change its name to MP3.com Inc. to reflect the company's core business interests, said president Michael Robertson.

An initial public offering is likely, observers noted. Robertson remarked that "Sequoia Capital likes to back companies that go public. We'll grow it in a way that makes sense." He didn't mention a projected date for the IPO. Apple Computer, Cisco Systems, and Yahoo! are among the successful enterprises that have been backed by Sequoia, one of Silicon Valley's most renowned venture capital firms.

MP3, an aggressively compressed audio file format that enables the up- and downloading of music over the Internet, has developed a large community of users in the past few years. Originally an underground phenomenon of mostly college students sharing their favorite songs and performers over the Net, MP3 has grown to the point where the music-industry establishment sees it as a threat. The Recording Industry Association of America has unsuccessfully battled Diamond Multimedia over the Rio MP3 player, a portable device for playing music lifted directly from the Net.

The RIAA has made the usual noises about copyright infringement, but the real issue is that its members fear losing their hegemony over the distribution of recorded music. Unsigned bands love the new format because it gives them direct access to their markets without the necessity of supporting an army of executives, salespeople, and distributors.

With a few exceptions, recording contracts for new bands put the financial burden for launch costs ("breaking a band," in music-industry parlance) on the performers rather than on the record label---a lesson the industry learned in the 1970s, after getting burned by indiscriminately signing every group with a trendy look and catchy hooks. Present-day unknowns who don't catch fire with the public can find themselves in deep debt as a result---a situation that has provoked lawsuits against several record labels by disgruntled performers.

Bands who sign on with MP3.com split the profits from sales of their work 50-50, and have no up-front costs to cover or fees to pay. MP3.com has a roster of over 4000 bands and an archive of more than 10,000 songs. Robertson said MP3 pulls in an average of 55 new bands every day, and that MP3.com gets approximately 165,000 visitors every day. Z Company has launched a new music label, Digital Automatic Music, to promote its artists. The explosion of MP3 should "send a shock wave through the music industry," he said.

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