Major Investor Calls for Liquid Audio Sale

Citing increasing competition from stronger companies and online music ventures about to debut from major record labels, an investment group has taken the drastic step of calling for the sale of Liquid Audio.

The Redwood City, CA–based online music service has seen its market valuation slide steadily from a peak of about $1 billion in November of 1999, which was also the peak of the dot-com hysteria. In early September of this year, the company was valued at about $53 million. Its revenue has dropped quarter by quarter with no indication that anything would change the trend. Revenue has declined from approximately $3.5 million in the first quarter of 2000, to $1 million for the second quarter of 2001, according to figures released August 9. Net loss for the second quarter was $14 million, almost twice as much as for the same period the previous year.

A major backer, Steel Partners II, LLP, believes that the slide is irreversible in the face of new competition from Yahoo! Inc., which recently acquired Launch Media, and in the wake of announcements by major record labels that they will soon begin joint-venture online music services.

Steel Partners wants Liquid Audio's board and other stockholders to acknowledge that the potential of start-ups isn't what it was three years ago. On September 10, the New York–based investment partnership issued a press release calling for the immediate sale of Liquid Audio to prevent further losses.

"We are deeply disappointed that the Board has adopted a business strategy doomed to failure and has not implemented a plan to maximize stockholder value. It is Steel's belief that the Company should be put up for sale to the highest bidder and that immediate measures should be undertaken to substantially reduce the cash 'burnrate,'" stated the letter to Liquid Audio's board of directors, signed by the partnership's Warren G. Lichtenstein. "As stockholders, we believe that in today's competitive business environment, companies are valued based on performance and not potential." Steel Partners owns approximately 7.8% of Liquid Audio's stock, or 1.7 million shares.

Steel Partners believes that spinning off Liquid Audio while it still has some value is the most prudent move for all concerned. "We believe that in order to fully maximize stockholder value, the Board should take action that would give stockholders the greatest return on their investment in the short term," Lichtenstein continued. "We do not have confidence in the ability of the Company to capitalize on the technology it has developed and to attract record distributors and a large enough consumer base." The partnership believes that because Liquid Audio's board of directors does not own a large block of the company's stock, it has been reluctant to take the necessary steps to prevent further losses.

Steel Partners hopes to attract a buyout offer for Liquid Audio, and all its technology, from either MusicNet or pressplay. MusicNet is a joint venture by AOL Time Warner Inc. (parent company of Warner Music Group), Bertelsmann AG (BMG Entertainment), EMI Group PLC, and RealNetworks, maker of the popular RealPlayer audio/video software. Pressplay is a joint venture by Sony Corporation and Vivendi Universal SA, parent company of Universal Music.