Well, I leave off blogging about eMusic for a month and look what happens: I happen to check Hypebot this evening and find that Amazon is rumored to be buying eMusic. eMusic’s CEO David Pakman recently denied rumors of eMusic being sold, so this may or may not prove to be just a rumor and nothing more. In the meantime that hasn’t stopped some people on the EMusic message boards and elsewhere from being concerned that this might be The End of eMusic As We Know It. However I think if it does occur such an acquisition could make good sense for both companies and might be to the ultimate benefit of eMusic subscribers, Amazon customers, and the music industry in general.

Some time ago I wrote about the competitive advantages Amazon could bring to the digital music store market, especially in comparison to eMusic. As it happens I think that the combination of Amazon’s advantages and eMusic’s might make for a formidable pairing (the dreaded “s-word”), especially if other major labels follow the example of EMI:

  • Unlike present-day eMusic, Amazon/eMusic would be able to offer an unparalled selection of independent and major-label music. (This assumes that EMI would offer a similar deal to Amazon as it offered to Apple—a good assumption I think.)
  • Unlike the iTunes Store, Amazon/eMusic would be able to offer music in both physical form (CD) and digital form (MP3), with both formats universally playable on all relevant devices, including the iPod and its competitors. There would also be many opportunities for cross-selling the formats—for example, buy the CD and get the digital version at a low incremental cost or even no cost. (See my next post for more on this point.)
  • Amazon/eMusic would offer industry-leading facilities for music discovery, combining Amazon’s recommendation engine, Amazon’s and eMusic’s user reviews and lists, and eMusic’s editorial content.
  • Unlike the iTunes Store, Amazon/eMusic would have a large base of people committed to paying on a continuing basis for new music offerings. If David Pakman’s estimate (quoted in a recent article) is correct and the potential eMusic subscriber base is 3-5 million people, this could produce a relatively stable revenue stream for Amazon/eMusic of several hundred million dollars per year.
  • Finally, Amazon/eMusic could (but might not) offer more of a “community” experience than the present Amazon service, by carrying over the eMusic message boards, blogs, and related features and integrating them into other Amazon services.

A remaining Amazon/eMusic disadvantage vis-a-vis Apple would be that Apple would continue to control the iTunes music player and its tight integration with both the iTunes Store and the iPod. Amazon/eMusic could offset this to some extent by promoting its own alternative music player, perhaps based on the new eMusic download software or the (currently) independent Songbird player (which already has a third-party extension for iPod support). Both of these approaches could address the limited problem of replacing iTunes as a way of getting music on an iPod; however they would not address Apple’s grander plans for iTunes as a master synchronization mechanism for more general-purpose devices like the iPhone and Apple TV.

A final note about valuation: In an earlier article Hypebot claims that the asking price for eMusic might be as high as $100 million and notes that “the figure seems high” given the likely competitive landscape. As I noted in a recent “Pakman speaks” update, per David Pakman eMusic is currently making an average of $14 per customer per month on a subscriber base “well north of 250,000.” This translates into an annual revenue run rate of at least $42 million and likely more. An asking price of near $100 million would thus represent just over two times annual revenue. Given that Amazon would be acquiring a paying customer base (many of whom are locked into 1-year or 2-year contracts) this seems a realistic figure and certainly a far cry from the speculative nature of a YouTube deal.

bklynd (ds1@davesmey.com) - 2007-04-03 13:01

Emusic making $14 per month per customer? Maybe that’s what they gross, but it can’t be what they net. Last we heard they weren’t turning a profit.

Frank Hecker - 2007-04-03 14:28

I took Pakman to mean that the $14 per customer referred to eMusic’s monthly revenue per customer, not profit. I agree that eMusic’s not making any significant money in terms of profit. But then no one else in the digital music business is making large profits, including Apple. I think the significance for digital music (and a possible eMusic acquisition) in the case of Amazon is more in the opportunities for up-selling and cross-selling.

mrshl - 2007-04-03 14:32

So much good info, here. Nice. But 100 million is cheap to buy annual revenues of 42 million. Really cheap. I’d expect that either that there is nil profit there, or that the actual sale price will be considerably higher. Had no idea they had a new download manager. I need to keep up.