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Can Vorbis Gain Volume in the Digital Audio Market?
A CMGI unit has introduced an alternative to MP3 that could shake up the digital-audio market.

Will CMGI pull a digital-audio rabbit out of its hat? ICast, one of the 60-plus CMGI operating companies, last week introduced Vorbis, a free, open-source alternative to the MP3 downloadable music format that could fragment the market for digital audio.

When tiny companies like Google can come along and dethrone Inktomi as the preferred search engine at Yahoo!, these kinds of "open source" moves demand careful scrutiny by investors wanting to play the leading edge of digital competition.

With such a large portfolio of companies, Vorbis isn't likely to boost up CMGI shares, which are near their post-correction bottom. The best way to play this may be to listen to the music first before taking an investment decision.

What All the Noise Is About
I know, you're thinking, "MP3 is free -- why are all the record companies upset if MP3 isn't free?" While the files delivered in the MP3 format are often free, there is a German company collecting royalties on the technology from hardware and software makers, and early in 2001 they will start suing for payment from the companies that send MP3-encoded songs to your hard drive.

The Ogg Vorbis, or just plain "Vorbis" music format, was developed after Fraunhofer-Gesellshaft, creator of MP3 technology, began charging a minimum of $15,000 for MP3 technology licenses. Hardware manufacturers that use MP3 technology in portable music players, for example, must pay 50 cents per unit to Fraunhofer-Gesellschaft. Downloadable music distributors have to fork over 1% of revenue to the makers of the MP3 technology.

The Ogg project is a loosely organized effort by open-source programmers to create a comprehensive multimedia platform that is patent- and royalty-free.

As of last week, beta versions of the Vorbis format has been available for use with the popular WinAmp, Sonique and XMMS digital music players. The quality of music encoded in Vorbis is comparable to MP3 today and the technology includes the foundations for substantially improved sound. As the developer told open source site Advogato.org in April, "I have to be free and clearly better."

But there is much more to winning the market than providing better sound quality, as any Sony Betamax veteran will tell you.

MP3: Sitting Pretty or Set for Fall?
MP3 is no shoe-in, either. So far, it hasn't solved the problem of unauthorized copying from a legal digital copy; a shortage of memory cards has limited availability of players; and there are many competing music formats, according to Forward Concepts, a Tempe, Ariz.-based research firm.

Nevertheless, Forward Concepts expects shipments of portable digital-audio players -- mostly using the MP3 format -- to skyrocket from approximately 750,000 units in 1999 to more than 30 million units in 2002. Forrester Research predicts that cheaper devices, broadband and IP-enabled car radios will push digital audio adoption to 91 million users by 2004.

Many music and content producers are betting MP3 will be the predominant format. These companies are investing heavily to have their libraries converted to MP3 format. This conversion by large music distributors, including many radio stations that are converting their libraries wholesale from CD audio to MP3 and streaming formats, are the largest obstacle to a Vorbis onslaught.

A typical mass conversion of a small library of CDs used by a radio station can run a minimum of $300,000 and, as the size of the collection grows, can easily end up costing millions of dollars. It's the foundation of encoding service-providers' businesses.

But, of course, there's plenty of time for a contending standard to unseat MP3, because the ease and small expense of replacing one digital-music player with another one makes user migration a relatively feeble barrier to entry.

The Vorbis encoder, too, will convert MP3 files into its format. This means that a consumer buying a device could install an application that worked overnight to transfer an existing MP3 library into Vorbis files. So, adoption of MP3 formats on the desktop, which by some estimates exceed 50 million seats today, is not a necessarily a significant challenge for Vorbis.

ICast's Role
So, what's iCast doing in this business? The company, which has gone through several iterations of a business model since being launched as a new interactive media producer, is apparently betting the rise of Vorbis will help drive use of its own programming.

ICast sponsored development of the Vorbis format, although the company claims the project was "spearheaded by developers from iCast." Meanwhile, the developer of the technology, Christopher Montgomery, said in April, "iCAST is a sponsor but they didn't buy us."

Now, this is a problem, if you ask me. ICast does not have control of the technology, since there are no patents on the code and anyone can come along and fiddle with it to make improvements. The company could easily lose the horses it has reared as interest in the technology grows.

ICast needs to ensure that its own use of Vorbis is exemplary, in order to attract content partners and other developers to its side.

Pooling Streams
CMGI, in typical fashion, has collected the pieces of a consolidated digital-audio play. In January, it acquired Green Witch LLC, an open-source streaming company that was the first to successfully stream MP3 files. Its Icecast streaming server is a royalty-free alternative to Real Networks, Windows Media Player and others.

With such a large portfolio of companies, CMGI isn't likely to see any immediate uptick in profitability from Vorbis, if in fact it succeeds.

I would expect to see CMGI combining pieces of its streaming portfolio, including iCast (as the branded content vehicle) and Activate (as a streaming-services company that supports Vorbis) with elements of Green Witch, DiamondBack Vision, and future investments -- the holding company has looked at many streaming companies, but invested in few.

Splitting the market for downloadable and, eventually, streaming audio, is risky proposition if Vorbis flops. It will require these companies to reposition quickly and at a high cost.

At Monday's close of 45 1/4, CMGI is near its post-correction bottom and investors remain skeptical about the portfolio. There's plenty of time to buy this stock to benefit from a potential Vorbis win -- but only after you've taken time to measure the technology's success. Vorbis does not make CMGI a buy today.

The pieces remain unplaced in the puzzle. As they come together, Vorbis could solve the riddle of music distribution or, as MP3 garners more recording industry support (see my recent columns, "Napster Knocking Nabobs of Negativism" and "MP3.com Playing for Keeps" for more about the legitimization of MP3), Vorbis could evolve into a second-tier format used by artists and small music producers to save on the cost of MP3 royalties.

Ratcliffe is vice president and editor-in-chief of the ON24 Network (www.on24.com), a personalized financial broadcast network for individual investors. He is also longtime executive and investor in the technology industry. Ratcliffe's insights and analysis of the high-tech industry will appear twice each week. He does not hold positions in any of the stocks mentioned. Positions can change at any time.




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