Digital Nation: From Upstart To Major Player In Year And A Half expands beyond unknowns to likes of Bush, Beck and Rolling Stone.

(This is another in a continuing series of reports about music on the Internet.)

Staff Writer Chris Nelson reports:

When Gene Hoffman, the now 24-year-old president of, cut a

deal in July 1998 to sell the MP3 version of a Frank Black album, he had

no idea that 17 months later he would own the online version of one of

the music industry's hottest properties: Rolling Stone magazine.

The Black deal was the first to make people take notice of Hoffman's

Redwood City, Calif., company, then called GoodNoise.

There have been many others between it and last week's $130 million

acquisition of, which operates has

been steadily building alliances to sell MP3 versions of songs from the

catalogs of such indie labels as Rykodisc, Epitaph and Trauma, and pacts

to sell work directly from bands including Phish and They Might Be Giants.

However, selling music by download isn't a profitable business yet. sells MP3s for 99 cents per song; $8.99 for a full album.

"When GoodNoise started, we were amazed on the days we sold $100 worth

of downloadable music," Hoffman said last week.

Today, even with cuts by Bush, Beck and the Goo Goo Dolls in the

library, the company's daily music sales are still just $2,000 to $3,000

a day, Hoffman said. By contrast, a single Tower Records store on Chicago's

Clark Street sells between 2,000 and 5,000 albums each day,

according to manager Joe Kvidera.

The company's typical customer is 18 to 29 years old, Hoffman said. About

95 percent of's clientele are male.

But the statistic that most interests Hoffman — and should interest

other folks in the generally conservative music industry — is that

at least 60 percent of buyers have been using MP3s for more

than a year.

MP3 retailers have been around only for about a year. Before then, most

MP3 users were trading copies of music without authorization from the

artist or record company. That means more than half of the folks now

shelling out cash to probably were at one time MP3 pirates.

"We are actually taking people who did it illegitimately and turning them

into paying customers," Hoffman said (RealAudio

excerpt of interview).

Although's early offerings were often from unknown bands or

groups past their prime, the site has boosted the cachet of its catalog

in recent months. Fans can now buy MP3s of Bush's current "The Chemicals

Between Us" (RealAudio

excerpt) or the early, out-of-print Beck single "Steve Threw Up"


excerpt). Other additions include new albums from the Supersuckers

and Smithereens.

Last month also acquired Cductive, a custom-CD and download

company specializing in indie bands such as Sleater-Kinney and the Donnas.

The custom-CD operations eventually will be phased out, as will the Cductive

name, Hoffman said.

Still, one recent day's bestsellers at included songs by musty

classic-rockers Kansas and Foghat.

"A lot of the older stuff that we have in the catalog are things that

people would like to own, but wouldn't necessarily go to the effort to

make a trip to the record store to find," Hoffman said. "Making it available

in a download format just makes the consumption of it so much easier that

people are willing to check out an old Kansas album."

The addition of editorial content from is likely to

attract an older audience as well.

While it might seem odd to outside observers that the venerable Rolling

Stone name is now licensed for at least 15 years to an upstart company

that was incorporated only last year, industry insiders said it's just

another example of the Internet redefining the rules of business.

"Brands can be created online very quickly, disproportionate to their

history," Dan O'Brien, who studies the Internet and entertainment industries

for Forrester Research, said.

"It's smart for Rolling Stone to figure out how it's going to

embrace this new medium," said Ted Hooban, director of digital products

for retailer CDNow, which recently went into competition with

for downloadable sales.

Analysts and competitors will keep their eyes on, not only in

the days immediately ahead, but three to five years from now. That's when

many of the company's licensing deals with labels will expire.

Hoffman predicted that most will renew their contracts with his company

rather than assume the hassle of handling credit-card transactions and

dealing one-on-one with customers.

"That's something I don't think labels are going to want to do massively, independently," he said.

* * *

James Brown is the latest recruit in the stable. The

Godfather of Soul's new album, James Brown Christmas for the Millennium

& Forever, which includes "Funky Christmas Millennium" and "Reindeer on

the Rooftop," will be sold exclusively as an MP3 collection from ...

I-Jam is making three new models of its portable MP3 player. The IJ-200

($279) comes with a 64-megabyte removable memory card and will support

IBM's 340-MB microdrive. The IJ-100 ($179) comes with a single 32-MB

removable memory card, while the introductory model IJ-50 ($129) will

include two 16-MB cards. In general, one minute of music in the MP3 format

uses 1 MB of space. ...

A Norwegian hacker has delayed the introduction of audio DVDs by Panasonic's

parent company, Matsushita, according to a report in the Wall Street

Journal. In October, the unidentified hacker posted online a method

for breaking the copy-protection properties of DVD video disks. When word

of the hack spread, major music companies asked Matsushita to postpone

the introduction of audio DVDs until a new method of preventing copying

could be devised, according to the Journal. Matsushita has touted

the new audio DVDs as having better sound quality than traditional CDs.


Internet music retailer CDNow began selling downloadable music in the

Liquid Audio format this week. While several hundred tracks by mostly

unknown artists were available on Tuesday, the company aims to have 50,000

cuts, including songs from Beck, Ani DiFranco and Mudhoney,

online later this month. The songs are part of a recent partnership between

CDNow and digital distributors Liquid Audio and