Long Struggle Pays Off for Emusic.com in $24M Buyout

During the past year, hardly a day has gone by without headlines announcing the latest twist in the fate of embattled free music service Napster.com. Lost in the hysteria was Napster's tiny rival Emusic.com, a three-year-old online music venture that always charged its subscribers for downloading tunes, and always paid the copyright holders. For news appeal, Emusic's paltry 10,000 subscribers and languishing stock price didn't compare to Napster's reported 75 million users and major league court battles.

As is too rarely the case, honesty proved to be the best policy. On April 5, French media conglomerate Vivendi SA's Universal Music Group agreed to pay approximately $24 million to buy Emusic.com. During the past year, the Redwood City, CA enterprise had seen its stock price drop as low as 16 cents per share and had narrowly avoided being de-listed from the NASDAQ stock exchange. While Napster flagrantly challenged copyright laws, Emusic quietly secured the exclusive online transmission rights to approximately 165,000 songs, representing more than 700 independent record labels. The company also runs the Rolling Stone and Downbeat websites.

Emusic charges its subscribers a minimum of $10 per month, but had still operated deep in the red, posting a loss of $8.7 million on revenues of $4.7 million for its second quarter, ended December 31. In January, the company cut its workforce by more than one third, firing 66 workers. Universal's reported purchase price was based on a per-share value of 57 cents, more than twice Emusic's closing price of 25 cents the previous day. "We believe that this transaction is in the best interests of our stockholders," said Emusic CEO Gene Hoffman, in something of an understatement. Napster, meanwhile, is facing a possible permanent shuttering for failure to block access to copyrighted recordings, despite a negotiated alliance with and financial support from former adversary Bertelsmann Music Group.

The acquisition of Emusic by Universal is an indication that the major labels are getting serious about online music, with likely outcomes to include more aggressive marketing of CDs and concert tickets over the Internet. "The music companies finally seem to have realized that the only way to stop the illegal players is to proffer a legal alternative," said Forrester Research analyst Rebecca Ulph.

Although consumers are known to be wildly and irrationally loyal to certain brands of soft drinks, denim pants, or athletic shoes, they seem to have no loyalty to record labels. A Universal-only downloadable music site would therefore have less appeal than one like Emusic.com, with access to artists and titles from many labels. Furthermore, Emusic has a ready-built system that Universal can plug its products into, rather than building one itself from the ground up at conceivably greater cost than the Emusic buyout. "Emusic has amassed a great catalog of independent product that otherwise we have no access to," said Universal's Larry Kesswil, president of the conglomerate's technology division. The deal, unanimously approved by Emusic's board of directors, is expected to be completed by June 25.