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Online Extra: Private Investors Hear Music's Call


Private-equity firms have started to snap up music assets with the intention of changing the economics of the recording business. New York-based Dimensional Associates, the private-equity arm of hedge fund JDS Capital Management, bought the remaining stake of a subscription service for independent music called eMusic Live (formerly Digital Club Network) for an undisclosed price on May 12.

From Dimensional's new digs on Park Avenue, CEO Danny Stein recently spoke with BusinessWeek Investment Banking Editor Emily Thornton about his vision for how his company and other private-equity players will revolutionize the independent music industry. Following are edited excerpts from their conversation:

Q: What is Dimensional Associates?

A: We buy businesses in media, technology, and direct-marketing disciplines. We're the management teams of businesses we buy and concentrate on sub-$100 million transactions. We own two companies. One is eMusic, which owns eMusic Live, which captures live music from 25 independent music venues across the country for subscribers. It's the world's largest digital retailer of music from international territories and all music that is nonmajor labels. We focus on that music because our model is a monthly subscription business for people who like independent music.

The other company we own is The Orchard, which is a digital distributor. We take independent labels in America and music from around the world, in countries such as India and Indonesia, music that has not had the opportunity to have a retail platform here. We take all of that music in and convert it to whatever file-format platform is required at iTunes, eMusic, or Musicmatch. We have 200,000 tracks, and it should reach 500,000 in 2004. An artist comes to us to distribute a band, and we get it up in iTunes and the other 39 services that will distribute it.

Q: How big a market is there for digital music at this point?

A: There are about 40 retailers, of which eMusic is one customer. A year from now, there will probably be 300, if you include situations like Coca Cola (KO) -- it sells music in the U.K. and in Israel. You can buy music from its site. Remember, 14 months ago, iTunes had not even launched yet. The services will ultimately be split into two buckets -- those that are major digital-music businesses, and those that use music to drive other products.

Q: Recently, private-equity firms have been swarming over music assets. Why?

A: In three years, you'll look at the Warner Music deal and say that was the absolute trough of the music industry. Valuations were depressed, and all of a sudden there was competition for that asset. Buyers were knocking on the door. There are a bunch of assets in play right now.

History suggests that all of these assets will get consolidated into the next generation of media behemoths. We think that will start to happen in 2005 and really pick up speed. In the digital-music-service side, you'll split up into subscription and à la carte services.

Q: What are the new rules that you expect private-equity firms will impose on the music industry?

A: Their capital catalyzes the marketplace. The capital is allowing disruptive technologies to flourish. The first piece careening down the slope right now is audio, and with it comes all of the device makers that will allow ubiquitous playback, easy storage of data, high fidelity, good value, and uniform portability. We don't like restrictions as a consumer class.

On the heels of that success, will be [changes in] video. There will be new applications spawned in its delivery. Larger file formats. Compression technologies. Different viewing devices. That will be a huge battle because now you have cable companies with a bunch of guys driving around with tool boxes. What if you could go to eVideo.com and download a Sony movie on your 52-inch plasma screen. That raises the specter of confusion in the delivery landscape.

Q: Is eVideo your next move?

A: We own the URL. It would be the next iteration. But we don't want to be too far in front of the marketplace. Could we build a subscription service around eVideos today? We don't fight market forces.

Q: At present, where do you fit into this picture?

A: We want to be the highest-quality, best-value retailer for nonmajor-label music. We're a direct-marketing company. We're not a music company. We're not a technology company. Our customers come to us because they want to discover new music, and they want to do this at a very fair price with no playability restrictions. That's our mission: to acquire those customers and retain them. About 25 cents of every dollar is spent on nonmajor-label artists.

The executives at the major labels are saddled with legacy problems regarding digital retail. We've identified the area of the marketplace that will allow all stakeholders to make money. Most independent labels are willing to experiment with price elasticity. It's a subscription business. You pay $10, and you get 40 downloads. People subscribe to eMusic because they want MP3s that are unrestricted.


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