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The heart of the online music world beats loudly

Industry Standard

(IDG) -- In downtown Seattle, not far from the futuristic curves of Paul Allen's Experience Music Project, computers in a small room at Loudeye Technologies hum as they process CDs into files that can be distributed over the Internet. Songs are encoded and formatted for use on a multitude of Web audio players, and bits of metadata -- cover art, band lineups and lyrics -- are attached to the files.

"In the door come CDs," says founder and CEO Martin Tobias, who also identifies himself as the company's minister of order and reason. "Out the door go encoded files."

A lot of files have gone out of Loudeye's doors since it was founded in 1997 as Encoding.com. It has processed 3.7 million songs and 840,000 minutes of video. It can turn 5,000 CDs, equivalent to roughly five months of nonstop playing time, into computer files in one day. It's unglamorous work; there are no parties when an album is finished.

Loudeye and its digital-media management competitors -- companies like Sonic Foundry and EndcodeThis -- as well as more established players like Liquid Audio, are a shadow presence at the heart of the online music world. If the sound is a little crisper, if the download a little easier, if there's more information associated with a file, the listener will never know it's the work of these companies.

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With the online music industry expected by 2003 to grow to $2.7 billion, or 15 percent of the entire U.S. music market, digital-media management companies are jockeying for position as one-stop shops for the big record labels that provide the content. Online music processing will grow into a $100 million industry over the next few years, according to Forrester Research.

The prospects for the industry haven't translated into great investment opportunities. Neither Loudeye nor Sonic Foundry is profitable. (EncodeThis is private and doesn't have to release its financial information to the public.) Not unsurprisingly, the stocks of both companies have performed terribly this year, swooning about 90 percent from their highs. Even with that drop, Loudeye remains expensive for investors. It trades at 36 times expected revenue, roughly twice the average for its category, according to analysts at Robertson Stephens.

Still, Loudeye is the early leader among this group. Tobias has been busy striking deals with the major labels. In mid-September it sealed a broad, though nonexclusive, agreement with Universal Music Group to encode the label's active U.S. catalog of 14,000 albums and 30,000 music videos.

It's a breakthrough deal -- the first time a major label has allowed another company to store and administer its catalog. Any Universal license holder -- a music site that has been given permission to post song samples, for example -- can go to Loudeye and get the music delivered in any digital format, including Windows Media or QuickTime. This week, Loudeye will extend its lead in this virtual warehousing business; it is expected to announce a similarly comprehensive agreement with Warner Music.

Universal says it turned to Loudeye, in part, because of its cost efficiency. Loudeye charges its clients about $20 per CD processed. EncodeThis charges from $1 to $3 a song, depending on the complexity of the request and the size of the order. (Sonic Foundry declines to reveal its pricing.) Neither has signed a deal close to the magnitude of Loudeye's with Universal.

While Loudeye has the lead, its competitors say the company's fortunes bode well for them, too. "The industry is recognizing the unavoidable move toward the digital world," says Caleb Baskin, VP of business development at EncodeThis. That may be so, but right now, EncodeThis and Sonic Foundry have some catching up to do.




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RELATED SITES:
Loudeye Technologies, Inc.
Sonic Foundry, Inc.
Liquid Audio
Universal Music Group

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