Taking Your Vitaminic - Company Business and Marketing

Industry Standard, The, July 23, 2001 by James Ledbetter, Kristi Essick

EUROPE'S LARGEST DIGITAL MUSIC COMPANY TESTS A NEW ACT -- THAT OF A RECORD LABEL.

There are few more puzzling stories in the world of digital music than the continued sunny fortunes of Italy's Vitaminic. Largely unknown in the United States, Vitaminic is Europe's largest digital music company. Unlike U.S. forerunners Launch and MP3.com, the firm seems to be employing a cunning strategy to avoid being squashed by the major music labels: It is starting to act like one.

That Vitaminic is still in business seems to confound conventional wisdom. When the Italian firm launched just over two years ago, the company aped U.S. digital music companies in trying to peddle music online directly to consumers. But by the time of the company's October 2000 IPO on Italy's Nuovo Mercato, that business model had been largely rejected in the States; yet Vitaminic's market debut was a chart-buster.

Today, Vitaminic's stock remains relatively healthy; it still sells at $23 to $29 a share, the same as its first day of trading, and nearly three times its 52-week low. This gives the company a remarkably high market capitalization of about $110 million, considering Vitaminic's first-quarter revenues were a tiny $1.1 million.

What's behind that investor confidence? In part, Vitaminic's ability to adapt to the constant flux of the digital music business.

Earlier this year, Vitaminic declared that the real money was to be made in providing "music services" to other online companies. Today, if you listen to music tracks or buy CDs on Wanadoo, France's most-trafficked Web site, or many similar European portals, you're using Vitaminic services.

Even its most consumer-oriented service, the Vitaminic Music Club, a paid subscription download service launched in March, is aimed more at businesses than at consumers. Consumer technology retailers -- PC makers, for example -- buy bulk subscriptions to Vitaminic Music Club and offer as them as part of an incentive package. A Vitaminic employee who asked not to be identified says if you take into account such indirect Music Club subscriptions, Vitaminic has sold more than 100,000 subscriptions -- fast work for three months. CEO Gianluca Dettori says businesses are buying thousands of subscriptions a week.

Vitaminic, bolstered by its stock price and a hefty pile of cash, has also been snapping up other online music properties like bargain-bin CD specials. In March, it bailed out longtime American music community site the Internet Underground Music Archive. That same month, it bought the parent company of FranceMP3.com. And in June it announced its biggest acquisition so far, U.K.'S Peoplesound, in a stock swap valued at $29 million.

With the Peoplesound merger, Vitaminic is underscoring its push to succeed as a record label. The two sites claim to represent some 60,000 artists who don't have publishers. Dettori believes that licensing these untapped stars -- to ad agencies and TV and film producers -- can be a viable revenue stream. Peoplesound, for example, represents songwriter Maryanne Morgan, who wrote two Top 10 U.K. hits for girl group Mis-teeq.

Peoplesound also specializes in demographic research. For a fee of a few thousand dollars, Peoplesound mines data from thousands of music fans and gives major labels a list of which bands and tracks will score points with certain types of fans.

But Vitaminic faces some hurdles. While all five major labels have flirted with this type of research, People-sound had been trying to turn a profit on its datamining project for months, but didn't bring in enough revenue to keep it independent. Vitaminic may also face some management nightmares as it integrates new properties across four countries. And then there are the major labels, which are getting aggressive about online. music. Warner Music Group is now a corporate sibling of America Online; Vivendi and Sony are betting on a service called Pressplay; and the music world anxiously awaits the debut of MusicNet, the joint venture of AOL, Bertelsmann, EMI and RealNetworks. Won't these services blow Vitaminic off the charts?

No, insists Dettori: Vitaminic has long-term contracts to help BMG, Sony and Universal peddle their music online. There's no reason to think those firms won't continue to use Vitaminic to boost their online sales. And Vitaminic still has about $20 million cash on hand, which, Dettori insists, will take it to breakeven by the end of 2002.

Still, it's difficult to see where Vitaminic will produce the $65 million in annual revenues that Dettori predicts it will hit in one year. "I don't think they've got a chance at that," scoffs Ray Nash, who analyzes media companies for Cap Gemini Ernst & Young. Nash argues that Vitaminic's business-to-business and licensing strategies are intelligent half-measures, but he doesn't believe the company can conquer a significant hurdle facing digital download companies: Internet connection speeds. "Until you've got a pipe to get the music to you quickly, businesses like that are not going to be viable," Nash says. "So we're all waiting on broadband."