e.Digital Corporation (fka EDIG)

[Tinroad]

The Serious Game: Fully Audacious
By Jennifer Lewis, Red Herring
August 8, 2001
http://www.redherring.com/index.asp?layout=story&channel=10000001&doc_id=1480019948&rh_s...

Every time the Beatles' song "Yesterday" is played on the radio, a complicated process ensures that the appropriate people get paid for it. Every song has at least two sets of rights. In the case of "Yesterday," Sony/ATV owns the publishing rights (the lyrics and melody), and EMI Recorded Music owns the performance rights.

In the U.S., these precious rights are divided among only five major music labels and four major music publishers. And as of today, only one company, a Chicago startup named FullAudio, has a deal with both the publishers and the labels to use their content for its online subscription service.

Back in June 2000, we selected FullAudio as one of our Red Herring 100 "Ten to Watch" because of its active interest in working with the record labels. Fast-forward to July 2001: the company has secured licensing agreements with EMI Recorded Music, EMI Publishing, and BMG Music Publishing. Three down, six to go.

RIGHTS HERE, RIGHTS NOW
Assuming that FullAudio's technology works, it is the only company that can launch a legal subscription service. This gives FullAudio an advantage over two high-profile subscription ventures backed by major record labels: MusicNet and Pressplay.

Pressplay, which is backed by Sony Music Entertainment and the Universal Music Group, a unit of Vivendi Universal (NYSE: V), and MusicNet, which is backed by BMG, EMI, and AOL Time Warner (NYSE: AOL), are still in the process of negotiating composition rights. In addition, the U.S. Justice Department has launched an antitrust investigation into the two label-backed ventures, reports The Wall Street Journal; a European antitrust investigation has been ongoing since June. Meanwhile, FullAudio, which employs 40 people, hopes to launch its subscription service in the fourth quarter.

To illustrate the complexity of this service, the company has secured recording rights for 40,000 songs from EMI Recorded Music. However, EMI Publishing owns the composition rights to only half of those songs. Therefore, FullAudio can only sell about 20,000 of those songs until it establishes licenses from other publishing houses.

FIRST AND LAST AND ALWAYS?
When FullAudio was founded in April 1999, it planned to make a hardware device to go along with its service. But instead of building the device in-house, it now plans on licensing its design platform to major consumer electronic companies, including makers of set-top boxes, digital home stereos, and PCs. FullAudio also hopes to attract the likes of Yahoo, MSN, AOL, and Excite, all of which are eyeing the digital music industry.

Unlike pay-per-download, the model both Liquid Audio (Nasdaq: LQID) and RioPort use, FullAudio's customers will pay a monthly fee. Like cable television, customers will have access to music only as long as their account is in good standing. Once they end the service, they will no longer own the music. Instead of streaming music, the company uses caching technology that allows consumers to play tracks when they're not connected to the Internet.

Although FullAudio's deal with the publishers and labels is not exclusive, it is not in the record businesses' best interest to maintain multiple relationships with numerous companies. Ultimately, there are going to be three to five players in this subscription services space. The important thing for FullAudio is that it is the first company to secure this kind of an agreement; so as long as it executes appropriately, FullAudio is clearly in it for the long haul.