When emusic.com approached Frank Black in 1997 about digitizing his music and selling it over the Web in the MP3 format, the ex-Pixies frontman and seminal alt-rocker never figured the deal would amount to much. "We thought the most we were going to get out of it was publicity," he says. But EMusic was offering a contract, including company stock, if Black would join up as the site's first exclusive artist. "We thought, 'What the hell?'" he says. "Nobody's ever given us stock before."
Since then, EMusic has added They Might Be Giants, Phish and Bush to its artist roster, but Black remains a top attraction. In May, "So. Bay," a track from Black's latest album, Pistolero, became the third most-downloaded song on the EMusic site. Even though Black says he's sold "a bunch" of MP3s of his last two albums, revenue from those sales has been negligible. But Black has experienced the upside of EMusic's $474 million market capitalization. "A year later the stock was worth a fair amount of money," he says.
Since 1997, EMusic has signed hundreds of labels representing thousands of recording artists to long- and short-term exclusive deals to sell their music on the Web. At the site, albums are $8.99, individual tracks are 99 cents.
EMusic added another 350 artists to its roster and eliminated its most serious competitor with the $38 million acquisition of Cductive.com in November.
But the question remains: When will enough people be willing to pay to download music to make EMusic profitable? Last quarter, EMusic reported $13 million in losses on $180,000 in revenue. Of that, only $40,000 came from sales of digital music. Most of EMusic's revenue was from advertising. "It's not a whole lot," concedes EMusic spokesman Steve Curry. "But a year ago no one was selling MP3s."
But whether and when the market EMusic is cornering will actually exist remains very much an open question. Even the most optimistic projections put the date that MP3 sales will reach critical mass as sometime in 2003.
In 1999, MP3 sales represented such a tiny percentage of the $327 million record industry that Jupiter Communications didn't bother to break it out.
Jupiter predicts that digital music sales could account for $147 million of a $2.6 billion record industry by 2003.
Jeff Price, president of indie label SpinArt and an EMusic consultant, says the market is waiting for widespread broadband Net access and a mass-market device.
He notes that cassette sales made up only 4 percent of the record industry until the Walkman propelled the number to 47 percent.
To hedge its bets, EMusic recently announced that it will acquire Tunes.com for $144 million in stock. That gives EMusic access to a powerful brand, Rollingstone.com, and makes it the third most-visited music site on the Web, with 1.5 million unique visitors per month. It also gives EMusic a boost in ad revenue to tide it over until consumer preferences evolve to validate its business model.
As for the artists, unless they own stock they benefit only from MP3 sales. For each 99-cent single downloaded, about 31 cents goes to the label and artist, 31 cents to EMusic, 25 cents to "marketing and referral costs," 7 cents to mechanical royalties and a nickel to the credit card company.
That's good enough for Bong Load Records of Los Angeles, a recent EMusic signee that represents Beck, Fu Manchu and Dieselhead. Label manager John Oreshnick says the deal was typical: Bong Load makes money after the MP3 sales recoup the signing bonus. "I can't venture a guess as to how much revenue it will generate for us," he says. "But I can only see it helping us out."