IT Capital's US stake changes tune

IT Capital's stake in the US music portal Tunes.com is about to turn into a holding in EMusic.com with the announcement that EMusic.com will buy Tunes.com for $US144 million in stock.

IT Capital's stake in the US music portal Tunes.com is about to turn into a holding in EMusic.com with the announcement that EMusic.com will buy Tunes.com for $US144 million in stock.

The New Zealand-based "venture catalyst" firm, formerly known as Iddison Vietnam, took a $US500,000 stake in Tunes.com when the Chicago-based company staged its $US46 million IPO in June.

Now the two US companies have confirmed that the Tunes.com brand will eventually be dissolved, as will that of EMusic's biggest competitor in the digital download business, CDuctive, which EMusic bought on November 15.

Tunes.com's most popular URL is Rolling Stone's Web site, which it operates through a licensing agreement with Rolling Stone's publisher and owner, Straight Arrow Publishers. In a similar fashion, Tunes.com also operates a Web site for Down Beat magazine. Tunes.com's agreements with these offline brands made it an attractive target for EMusic, which sells MP3s from indie labels online.

"We intend to take the largest catalog of downloadable music, and extend this into the branding success and authority of Rolling Stone and Down Beat Jazz brands," said Gene Hoffman, CEO of EMusic, in a conference call.

EMusic will be able to promote its catalog through the high-traffic Rolling Stone site, which supplies 60% of Tunes.com's total 28 million pageviews, but the agreement will not last forever. Tunes.com's partnership with Straight Arrow lasts until 2005, with an option to renew for an additional five years. Tunes.com's partnership with Down Beat Jazz lasts only until February 2001. That may sound like a long time, until you consider that Tunes.com had a similar relationship with hip-hop magazine The Source, which was supposed to last until 2003, but has been scheduled by both companies to terminate by year's end. Any reasons why?

"Not really," answered Tunes.com CEO Howard Tullman in this morning's call.

Tunes.com's tenuous relationship with one of its chief partners isn't the only stumbling block the company has encountered recently. After filing to go public last summer and scoring a highly publicised $14.3 million investment from giant radio conglomerate Clear Channel Communications in August, Tunes pulled its IPO. Then Clear Channel pulled out its investment.

Like its competitors, Tunes.com had hoped to use some $36 million in expected IPO proceeds in part to cover its swelling costs: The company accrued $2.1 million in revenue against $13.8 million in losses for the quarter ended Sept. 30, 1999. The high-profile relationships with offline media aren't cheap. Tunes.com pays Rolling Stone $1 million annually, plus 10 percent of all ad revenues from the Rolling Stone site, and it is required to buy $1.1 million in advertising in Rolling Stone magazine each year. Less taxing is Tunes.com's relationship with Down Beat Jazz, which takes half of the ad revenue from its site.

EMusic, by comparison, posted a $13.5 million loss for the same period, but made just $180,000 in revenue, mostly from advertising. (Only $42,000 came from the sale of downloadable music.)

The combined company will retain most of Tunes.com's 90-plus employees and office in Chicago, said EMusic's Hoffman, who will remain CEO. Tunes.com's Tullman will assume a seat on the board.

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