EMusic Changes Its Business Tune

SAN FRANCISCO (07/03/2000) - EMusic.com Inc. (EMUS) , one of the first and largest Web companies trying to gain its fortune selling MP3 downloads, has laid off 20 percent of its workforce and is now repositioning part of its business from the relatively small consumer-download market to business-to-business.

The company hasn't made this much news since it landed exclusive rights to Elvis Costello's back catalog.

The first b-to-b deal, announced Friday, will have Hewlett-Packard Co. (HWP) buying at least $3 million in downloads from EMusic over the next three quarters. Whenever HP sells a new rewriteable CD-ROM drive, it will throw in a free two-month subscription to EMusic's 100,000-song library. Those buying the drive will have access to unlimited MP3 downloads, for which HP will pick up the tab.

"I think this is going to be a big part of our revenues going forward," says EMusic CEO Gene Hoffman, who expects b-to-b deals like this to comprise a third of EMusic's future revenues.

In the past, EMusic has signed deals with makers of portable MP3 devices, such as Diamond Multimedia, to ship their products preloaded with about a dozen of EMusic's MP3s. They also have undertaken expensive marketing campaigns - such as offering free headphones, mini-stereo speakers and portable MP3 players to customers that order $15, $25 or $50 in downloads - to encourage paid MP3 downloading.

In the future, EMusic will allow HP and other device makers to offer free subscriptions to EMusic's content so that consumers can choose what songs they want and get accustomed to using EMusic's site. Through such deals, EMusic will transfer part of its onerous marketing costs to a third party. So while the HP deal guarantees EMusic $3 million in downloads, that figure could soar if HP's customers prove to be voracious downloaders between now and March 31, when the promotion ends.

The deal also gives HP an attractive incentive to lure buyers of CD-ROM hardware.

"HP research has shown that 80 percent of our customers use CD writers to burn MP3 files from the Web and create custom music CDs," Christy Tappy, HP marketing manager, said in a statement.

Hoffman says future offers could include a free month of EMusic in return for applying for a credit card or test-driving a car.

The change in strategy is meant to make EMusic less dependent on the consumer market for paid MP3 downloads, which has been crippled by the popularity of file-sharing software such as Napster. As EMusic learned the hard way, it's difficult - if not impossible - to compete with free downloads.

But as digital music has grown more popular, in part thanks to Napster, it has driven up the sales of CD writers, MP3 players and other hardware. And if hardware makers want to bundle MP3s and not incur the wrath of the recording industry at the same time, the newest incarnation of EMusic could be one of the few games in town.

Subscriptions could also prove to be a more palatable proposition for consumers who may only want to pay once for several downloads rather than conduct a separate transaction for each song.

"I don't think selling content piece by piece is working out that well because you are asking consumers to continually make buying decisions," says Eric Scheirer of Forrester Research Inc. (FORR) . "That adds up to a lot of friction and lost sales."

EMusic, which sells single tracks for 99 cents and entire albums for $8.99, sold its millionth track in March. The company's sales last quarter were $2.1 million on expenditures of $14.6 million.

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