June 22, 2004

Music Download

Loudeye's OD2 Buy Creates Music-Download Giant

By Robin Arnfield
CIO Today
June 22, 2004 3:02PM

U.S. digital media company Loudeye has purchased On Demand Distribution (OD2), the leading European music download company, for $38.6 million. The acquisition creates an international music-download powerhouse

As competition heats up in the European legal music-downloading market, online-music service OD2 has been acquired by Loudeye, a U.S.-based digital-media company, for US$38.6 million.
The two companies said that an initial guaranteed payment in cash and shares of $20.7 million (11.4 million pounds) would be paid for Bristol, UK-based OD2. Loudeye also agreed to pay about $17.5 million over the course of the next two years.

"By combining with OD2, the leading digital-music service provider in Europe, we become the largest business-to-business digital media provider in the world with the largest licensed digital music catalog in the industry," Jeff Cavins, Loudeye's president and chief executive officer, told NewsFactor.

OD2's long-held position as Europe's main legal music-downloading services provider has come under attack in recent weeks as Apple Computer's iTunes and Roxio's Napster both entering the market. Sony is due to launch a European downloading service shortly.

Thinking Ahead

Digital-music sales in Europe will experience significant growth rates over the next three years, reaching approximately $1.6 billion by 2007, Forrester Research forecasts.

Earlier this year, OD2 hired U.S. investment bank Broadview International to help it explore various funding options, including a potential sale. Rather than compete head on with such well-known brands as iTunes and Napster, the newly combined company will become a back-end supplier to the big players, providing digitized music services to dozens of retail partners in Europe and North America.

OD2 already supplies music downloads for 35 European music Web sites operated by such firms as MSN, MTV, Tiscali and Coca-Cola, while Loudeye provides anti-piracy measures for major music labels.

The company claims to be the only company with digital-music distribution rights for all major European countries from all five leading recorded-music companies, as well as Europe's largest independent recorded-music companies.

Through its various distribution partners, OD2 has built a database of more than 750,000 registered customers. Last week, OD2 launched a digital-music "jukebox" offering consumers the opportunity to listen to songs for 1 UK penny and to make downloads for 75 UK pence (US$1.35) per track.

Going Global

Loudeye is looking beyond Europe as well. "We are definitely targeting the Asia-Pacific region as a result of our deal with OD2," said Cavins.

"Three months ago, I told our shareholders in an earnings report that we wanted to expand Loudeye globally. By buying OD2, we are able to expand into Australia, where OD2 supplies digital music content for NineMSN. OD2 is already a leader in Europe and we are strong in North America, but we want to be global," Cavins explained.

"OD2 in Europe is the main provider of Internet downloading services," Rebecca Jennings, an entertainment industry analyst at Forrester Research in London, told NewsFactor. "It has two thirds of the market for legitimate music downloading.

Asia-Pacific Market

"So, buying OD2 means a huge push into Europe for Loudeye. But the most significant aspect of the deal is the intention to enter new markets, such as the Asia-Pacific region, where there are big opportunities but not as much competition as in the U.S.," Jennings noted. "But I suspect that OD2 will need to negotiate with the record labels to obtain Asia-Pacific online rights to their catalogue," she added.

"To allow us to enter the Asian market, we need to negotiate licenses for Japan and China, the main markets in Asia," Cavins confirmed. "If the demand is there from consumers, the major labels will be very keen to sell music in Asia over the Web."

However, Cavins said that the company would not need to renegotiate digital music rights in Australia because of OD2's deal with NineMSN. The Australian Web site, which is a joint venture between MSN and Australian media firm Publishing and Broadcasting, launched its digital music service in April 2004.

White-Labeling Opportunity

A growing trend in the music-download business is for consumer-goods companies to offer online music stores as a way of selling their products, which range from digital-music players to Coke. Founded in 2000 by ex-Genesis singer and World Music pioneer Peter Gabriel, OD2 spotted a business opportunity to act as the back-end services provider for these Web sites, rather than selling music direct to the public under its own brand name.

Now, with the number of music-download retailers reaching 100 around the world, OD's original strategy -- to act as a white-labeling service provider rather than to create its own retail downloading brand -- makes even more sense. As competition accelerates, there undoubtedly will be casualties among the startups, and the capital required to stay in the market will grow.

Cavins added that OD2's current catalog of 350,000 tracks will be expanded to 1.3 million within the next few months, drawing on Loudeye's archive of 4.6 million songs.

The combined firm will continue to carry the OD2 brand in Europe and will have its headquarters in Seattle, Washington. According to press reports, it plans to move into mobile-phone download services and expand beyond audio into video services.

NewsFactor Network - Tech Trends - Loudeye's OD2 Buy Creates Music-Download Giant

Posted by Craig at June 22, 2004 09:59 PM