Liquid Audio: The Next MP3?

By Eric de Fontenay (Founder & Publisher) (more articles from this author) 1999-11-04

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It is a nearly universally accepted point of agreement that the mp3 format was the catalyst to the emergence of digital music distribution (as opposed to digital broadcasting which was pioneered by Real), and continues to be the primary driver behind the continually growing demand for music over the Net. But, on a darker note, the mp3 format lacks key ingredients to mold this consumer enthusiasm into a commercially viable market.

In the past months, Liquid Audio has been following a strategy meant to secure its position as the preferred distribution format for copyright holders, and consequently take mp3's place in taking the online industry to the next level. The company has partnered with a broad array of industry stakeholders including the major labels, indie music distributors, brand name artists and content distributors. The company reports that its secure solution is used by over 4,700 artists, 750 labels, and licensed to 300 retail music sites. As a result, their catalogue of syndicated music recordings for sale has increased from 5,000 at the beginning of the year to more than 60,000 committed as of June 30, 1999.

First, behind all the hype, the strategy is having an impact on the company's bottom line: third quarter net revenues increased 140% to $1.8 million, accompanied by a net loss of $5.8 million, down from $6.1 million in the 2nd quarter. The major share of the company's revenue is accounted by software licensing fees which accounted for $476,000 in revenue, up 21% from the 2nd quarter. But the company is shifting its focus from a software company to a full service distribution provider, by placing greater emphasis on providing a complete backend hosting solution and music sale revenues. This would allow the company to derive subscription fees from artists for encoding and storing music files, e-commerce services and transaction reporting. Liquid Audio generated $177,000 in maintenance and hosting related revenues, up 75% sequentially from $101,000 in the second quarter and 70% from $104,000 a year ago.

In an October 18th statement, Gerry Kearby, President and CEO of Liquid Audio said, "We believe that the rapid music industry adoption of the Liquid Audio platform has positioned us at the forefront of the digital music distribution market. In order to meet the demand created by our industry alliances, we have increased our investments in product development, Internet services and music marketing."

At present, music sales represent less than 1% of total net revenue. In an effort to boost this aspect of their business, the company launched the Liquid Music Network in the second quarter, a syndicated network that thus far links over 200 affiliated music-related and music retailer websites.

But what is particularly notable about Liquid Audio is the strategic partnerships it has entered and how they have impacted perception of the company in the marketplace. The company has signed up three of the five major record labels, including Warner Music, EMI Group, and BMG, providing it with an edge over its competitors in issuing new releases through its proprietary format. It has also forged agreements with independent labels such as Rykodisc, Twin/Tone Records, and most notably, Navarre which not only serves as a distributor for US and Canadian indie labels but also provides alternative retail distribution channels to major labels. Perhaps most important from a PR perspective are agreements reached with big name artists such as Tori Amos, David Bowie, the Dave Matthews Band and Alanis Morissette. This led to Liquid Audio being chosen by Entertainment Weekly as one of the 14 rising players in the entertainment field.

But there are still significant hurdles to the company dominating the secure distribution market. For one thing, the company expects to continue to rack up significant losses up to at least 2002. As was recently demonstrated by reaction to Amazon's latest financial results, investors tolerance for back-to-back losses is being severely tested. The proprietary nature of their solution also limits its market adoption among consumers, especially to the extent that third party players do not support the format. This is exacerbated by the lack of consumer brand marketing. In addition, while Liquid Audio no longer seems to have to worry about a2b music, Microsoft is aggresively pushing its Windows Media Technologies 4.0 and partnering with key players in the industry.

Linkography

Liquid Audio - http://www.liquidaudio.com
RealNetworks - http://www.real.com
Warner Music Group - http://www.music.warner.com/
EMI - http://www.emigroup.com
BMG - http://www.bmg.com
Rykodisc - http://www.rykodisc.com
Navarre - http://www.navarre.com
Amazon - http://www.amazon.com
a2b music - http://www.a2bmusic.com
Microsoft - http://www.microsoft.com

Related MusicDish e-Journal Articles:
» Windows Media Technologies 4.0 Goes Live: All the Good and Bad News. (1999-08-25)
» Liquid Audio Doubles Share Price (1999-07-13)
» SDMI: Boom or Bust For The Music Industry - Introduction (1999-07-13)
» EMI Chooses Liquid Audio to Distribute Music Online (1999-06-30)

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