The Tycoon Report

The Sounds of Profits

I’ve talked to you a lot about Web 2.0 – I’ve talked a lot about the impact this new set of technologies and services will have on the Internet and how business is done there.

I’ve even given you several examples of publicly traded companies that are making a lot of headway in this sector.

Well, let me take a step back for a minute.

Let me talk to you a bit about an old technology that’s merging with a new one and generating a lot of profits for companies in the process.

What I’m referring to is Online Music.

Just last week we had 2 major announcements from the technology industry’s “big boys” – Apple (Nadaq: AAPL) and Microsoft (Nasdaq: MSFT).

We’ve also seen a slew of announcements from other companies looking to move into the online music space – some of them must have Apple (the number 1 provider of downloadable music) shaking in its boots ... or at least getting a little nervous.

So what I want to do today is to go over some of the major players in this space – as well as some of the “potentially” major players based on recent product and partnership announcements. 

So here we go:

Apple Computer (Nasdaq: AAPL)

Even in this infant industry, Apple is considered the Grand Daddy – here’s the first company that was able to successfully implement a pay-per-download model for the online music space. Others had tried but nobody was able to succeed the way Apple has with its iTunes music service.

In the last operating quarter, Apple sold almost $500 million worth of music from its iTunes store – making it the market leader (with an 85% share according to NDP) in legally downloaded music. 

The success can be attributed to the ubiquity of the company’s mp3 player – the iPod.

Apple really has the entire supply chain on lockdown ... but that could end up being the company’s downfall if it isn’t careful.

I always default to the famous Competitive Strategist, Michael Porter, who said the worst thing a company could do is be “stuck in the middle.”

With Apple competing on both the software end (iTunes) and the hardware end (iPod) it won’t be able to compete as effectively on both as it would if it just focused on a single front.

We’ve seen it before with the Macintosh and Apple’s proprietary Operating System. We all know what happened when Microsoft stepped in, sold its Operating System to everybody and completely took over the personal computer market.

And speaking of Microsoft ...

Microsoft (Nasdaq: MSFT)

Microsoft – taking a page from its old playbook of waiting for a competitor to blaze the trail that Microsoft then marches down – announced its own MP3 player last week, the Zune.

The company also plans to launch a music service similar to iTunes.  Unlike Microsoft’s previous efforts in the online music space – the company originally provided Rights Management for music companies – the Zune service won’t be compatible with other players.

So I’m not sure what the company really hopes to do differently here.

Plus, it’s still too early to tell whether or not the Microsoft venture will be one that’s won on the hardware front or the software front.  The Zune player has some cool features such as wireless music sharing and social networking ... but is it enough to topple an entrenched competitor that has 75% market share?

Even a minor share in a fast growing market could be enough to poke some holes in Apple’s defenses.   

And you can never really write off Microsoft too quickly – billons of dollars in cash, a proven track record in penetrating new markets ... we’ll just have to wait and see.

The company is hoping to have its player and service out in time for the holiday shopping season and is taking an approach similar to that taken with the Xbox — a completely independent operating division is in charge of running and marketing the new product and service.

This strategy helped the Xbox become the Number 2 game console in the world.

Napster (Nasdaq: NAPS)

Now, most of us know this company by name.  Napster was the original peer-to-peer (and illegal) music download service that truly spawned a revolution in online music downloads.

After losing a mammoth court battle, the company shut down and its assets (brand name) were auctioned off, and it was eventually acquired by Roxio. 

Roxio originally produced an MP3 player that never gained much traction but used the Napster brand to launch a subscription based Music service.  The company now sells music on a pay-per-download basis but makes its bread and butter on subscriptions.

Interestingly enough, some of Napster’s biggest clients are colleges and universities who pay a per-seat license for their students.  This way, instead of using Napster like college students originally did (to download songs illegally,) they now use it in a legal manner to download songs for free (the school picks up the tab.)

Although the company isn’t profitable, it’s done approximately $100 million in revenue for 2006.

News Corp/MySpace.com (NYSE: NWS) 

Now this is where it gets interesting.

MySpace.com – the premiere social networking site that grew by allowing independent musicians to promote themselves and upload/share their own songs – is now stepping into the pay-per-download music business.

Being one of the top ten sites on the Internet doesn’t hurt its chances of success, either.

Still walking tall from its recent $900 million advertising deal with Google, the company recently announced a partnership with Snocap - a digital music solutions provider that was coincidentally founded by the creator of Napster, Shawn Fanning.

Unlike Apple and Microsoft, MySpace doesn’t have a cool MP3 player to accompany its service.

MySpace is basically relying on its brand as one of the most powerful promotional tools for artists on the planet to help sell music.  In the process, it’s also helping its members get paid too.  Here’s how ...

MySpace isn’t out to cut deals with the big record labels and resell their stuff for them.

No, no, no ... MySpace is using Snocap’s technology to allow MySpace members (who may or may not be part of larger labels) to upload and sell their music (for which they’ll be paid along with MySpace.)

This is one of the first times in history that an independent artist can market and sell his or her own music and get access to millions of buyers without “selling out” to a larger label.

It’s too soon to tell how this will pan out, but with millions and millions of members out there, MySpace could create a dramatic shift in the balance of power in the music business.

What Does this All Mean? 

Well, I’m not here trying to make bold predictions about the future of the online music business.

And I know many people have written in and asked me to provide clear examples of how they can profit with the information I provide in my Tycoon Report articles. 

I do try to give you some good trading ideas sometimes — Shorting SalesForce.com (NYSE: CRM) would’ve netted you a quick 50% on your money, same for VeriSign (Nasdaq: VRSN).

But that’s not what I’m mainly here to do.  No offense guys, but I have to save most of my profitable ideas for Tech Stock Insider members.

What I will say, however, is that there are a number of ways this Online Music battle could play out. 

Apple could maintain its dominant position in the space.  With its announcement last week of a movie download service that integrates with your home television, Apple may still have a lot of juice left in it (no pun intended.)

The stock isn’t trading at an astronomical price, either – it might be worth taking a look at down here.

Apple could also make the same mistakes it made in the past and begin giving up market share to new entrants.   

If Microsoft can make a big enough dent in Apple’s iPod line, or begin taking market share away from iTunes, it might be enough to shake Apple off the top of the mountain.

If that were to happen, ALL of the players in the space would be able to steal market share on the hardware and software end.

In order to figure out how to profit from this scenario, you’ll need to keep a careful eye on how the launch of the Zune player goes.

Microsoft could completely fumble (as it did with its MSN portal,) in which case Apple will likely continue to reign supreme.

But if Microsoft picks up the ball and runs with it the right way, there could be some serious profit opportunities in Microsoft stock as well as competing online music companies. 

And don’t write off MySpace too quickly either – being one of the most popular online destinations for the 20 – 30 somethings market, this company could make a serious dent in the entire music industry.

As always, I'd love to hear any thoughts you might have about the articles I write.  So click on the link below to leave some feedback.

Until next week ...