Consumer electronics big boy Thomson Multimedia will invest in MP3, marking the latest stamp of approval on the digital audio format's business potential.
Thomson will take a 20 percent stake in MusicMatch, maker of MP3 encoding and player software. Thomson -- co-owner of patents for MP3 compression technology -- will also work with MusicMatch on improvements to its MP3 software package.
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"We�re getting a lot of cash and help from Thomson ... the technology and manpower to improve MP3 as a format," said Dennis Mudd, co-founder and chief executive of MusicMatch.
Neither party revealed how much money changed hands.
MP3 (Motion Picture Experts Group, audio layer 3) is a format that lets users easily compress and send near-CD quality audio files over the Internet. The format has its tradeoffs: While computer users love MP3 for its convenience and ready availability, the music industry worries about music piracy.
Headquartered in Paris, Thomson (which also makes RCA-brand products) is one of the world's biggest consumer electronics makers. The company co-developed patented MP3 technology with the Fraunhofer Institute and acts as the license administrator for the patents.
MP3 "is a technology we're keenly interested in," said Dave Arland, spokesman for Thomson. "We helped develop it, and promoting it is something we want to do."
Thomson representatives would not elaborate on the possibility of future hardware products, such as portable MP3 players, and neither would MusicMatch's Mudd.
But Arland said that MusicMatch "has an early lead in this technology. They build a pretty good mousetrap. They make a good fit for announcements to come."
The Recording Industry Association of America, the lobbying group for the five major record labels, has not embraced the MP3 format. The association's Secure Digital Music Initiative is pursuing a new format specification that would have more security. A specification for portable-player products is due in June and a broader specification is expected by year's end.
Thomson is a member of the SDMI. "I think once there is a secure ... standard, there will continue to be an open MP3 offering," said Arland. "We think there's going to be a market for both."
MusicMatch said that it will remain committed to MP3. "The market will want to have backwards compatibility for what is clearly a de facto standard," said Mudd.
MusicMatch software is bundled into Diamond Multimedia's portable MP3 player, the Rio, and in Creative Labs' Nomad MP3 player. MusicMatch has made another player that uses Microsoft's competing MSAudio format.
Mudd said that San Diego-based MusicMatch makes US$1 million a month in revenues from its MP3 software, which has been downloaded by about 2 million users. Users can download a free package or pay $29.99 for an enhanced version.
Investors are collectively drooling over the potential revenues from digital downloads and the big MP3 user base.
In January, high-profile venture capital firm Sequoia Capital dropped $11 million into MP3.com, a hub site for MP3 users.
Also this month, RealNetworks bought Xing Technologies, an MP3 software developer that licenses its compression technology to companies such as MusicMatch, Creative, and Diamond.
Software maker Audiosoft is another potential competitor.
"Our biggest potential competitor is Real [Networks], given rumors of them coming out with an MP3 device," Mudd said. But Mudd said he wasn't worried about Xing ending their licensing agreement with MusicMatch.
MusicMatch's original focus was on streaming technology. The company made software that encoded CDs into streaming music files. "It was not a successful product," said Joeli Yaguda, vice president of marketing. "When we introduced the first MP3 [supporting] product, product sales took off."
Mudd said that he saw the digital-music revolution coming long ago. While a student at the prestigious Wharton Business School, he wrote a business plan for a company called "National Digital Audio Distribution," in which the company would sell music files digitally downloaded over cable lines.
That was in 1987, Mudd said, and "I got a 'High pass.'"
