Keys to a musical revolution

0 Comments | Sunday Herald, The, May 20, 2001 | by Mark McSherry

NAME: Chris Montgomery

POSITION: Vice president, MP3.com

BORN: 1967

EDUCATION: Music degree at Western Ontario University, education degree from Toronto University, and an MBA from Edinburgh University After a spell as a teacher, Montgomery joined the music industry with BMG in 1994. In 1998, his MBA dissertation on internet music distribution led him towards a new online music industry career with Diamond Multimedia and then MP3.com

AS Chris Montgomery was finishing his MBA at Edinburgh University Management School three years ago, he sought inspiration for a dissertation topic.

Dr Andrew Burke, lecturer in entrepreneurship, encouraged Montgomery to put his background in the record industry to good use by investigating the potential of the then fledgling internet music distribution business.

Montgomery, a Canadian, flew to the United States to interview music industry moguls and not surprisingly they told him, with not a hint of vested interest, that internet music distribution - a huge threat to their profits - would take at least 10 years to get off the ground.

Undeterred, Montgomery produced his dissertation called "Electronic Distribution And Strategic Change In The Music Industry". It turned out to be his passport to a new, lucrative career.

Montgomery first joined Diamond Multi Media, makers of the first device that enabled consumers to download music from computers and listen to it elsewhere, and then moved to MP3.com, the controversial internet music firm, where he is now a vice president.

The mainstream music industry's worst fears about the threat of online distribution have been confirmed. In the three months to March 31 alone, the number of files downloaded from MP3.com rose 17 per cent on the same period last year to a staggering 174 million.

San Diego-based MP3.com reported first quarter revenues of $21.8 million and, despite a first quarter loss of $2.2m, said it is on track to achieve positive operating cash flow by the fourth quarter.

"The timing of Chris's dissertation was crucial," said Burke, himself an authority on the future of music industry. "To come on to the market at that time with that dissertation was the key thing. There were very few people who knew the way the market was moving."

When he came to leave Diamond, the now-famous dissertation again came up trumps. "Doing the research for the dissertation helped me evaluate which companies had the staying power," said Montgomery, who returned to the management school for a few days last week to teach entrepreneurship.

Montgomery was one of the first 50 or so employees at MP3.com and has experienced the highs and the lows of the dotcom phenomenon. So far, MP3.com has been one of the notable survivors of the dot.com shakeout, but how long its business model - where 85% of its income comes from advertising and promotion - can sustain more than 300 highly-paid employees remains to be seen.

Despite, or indeed because of, MP3.com's huge popularity, it has become a litigation magnet by disgruntled rock stars and major record companies claiming copyright infringement.

MP3.com has already shelled out $130m to the world's five biggest record labels after a US court ruled it violated copyright laws. MP3.com is now also being sued for $40m by Randy Newman, Tom Waits and rock band Heart, all of whom are claiming copyright infringement.

There is even a conspiracy theory among advocates of cheaper - or free - music distribution that the repeated lawsuits against MP3.com are all part of a bigger plan by the mainstream music industry to put the upstarts out of business once and for all. Montgomery dismissed such notions with the comment: "I don't want to go there." Wise man.

Despite the ups and downs at MP3.com - the shares floated at $28, rose as high as $105, before falling off the edge of the dotcom cliff to languish at their current level around $3 - Montgomery remains energised by the experience, citing the firm's low staff turnover of around 2% as evidence of a happy ship. "People stay at MP3.com because there is a vision involved in being part of something that will fundamentally change the way in which people experience music," he said. "For all the good and bad that has happened, MP3.com has really changed the music industry."

Burke agreed the industry will never be the same again due to firms like MP3.com. The lecturer said: "On-line music will become a significant market - probably the most important market.

"The music companies have a lot to lose by going on-line, because prices are lower. Through companies like MP3.com, artists can by- pass the record companies.

"It is a big competitive threat. That's why the record industry has not been that keen to embrace it. It will eventually hit a critical point though and when it's large enough and there is enough money to be made, the record industry will jump on it in a big way. That process has already started."

Burke said European and US competition regulators will have a huge influence on the future of online music. "The regulatory ideal is to have open standards and open access. That's the consumer's dream. The trouble is, that's a profit-killer."