Loudeye Corp. will acquire European online music service OD2 for roughly $38.6 million in cash and stock, the firms said on Tuesday, to help fend off well-capitalized rivals in the cutthroat downloads market.
In the past month, OD2’s long-held position as Europe’s primary digital download provider has evaporated with Sony Corp., Apple Computer and Roxio Inc.’s Napster all entering the market to much fanfare.
Bracing for a competitive onslaught, the privately held British-based OD2 earlier this year hired investment bank Broadview International to help it explore various funding options, including a potential sale.
Rather than compete with well-known brands such as iTunes and Napster, the newly combined company will become a back-end supplier to the big players, providing digitized music services to dozens of retail partners in Europe and North America.
It offers everything from 30-second song snippets on Amazon.com to music downloads for Coca-Cola’s UK Web site to anti-piracy measures for major music labels.
The companies said an initial guaranteed payment in cash and shares of $20.7 million would be paid for the Bristol-based OD2. Loudeye also agreed to pay about $17.5 million over the course of the next two years, the firms said.
Industry analysts said that, with so many big brands joining the digital download fray to help them sell everything from digital music players to soda cans, technology start-ups’ best chance for survival will be by selling their technical expertise to the big guns and letting them attract the consumers.
“They are not going to be Napster. They are not going to be iTunes. They are a different proposition. They were never going to compete will so many market entries that have a higher budget and higher brand recognition,” Jupiter Research analyst Mark Mulligan said of the newly combined entity.
The digital music market has become brutally competitive, with over 100 retailers of music downloads around the world.
The piracy-battered music industry is desperate to jump-start the download market to stop a slump in music sales. But with competition so fierce, many casualties are expected.
The combined firm, which will continue to carry the OD2 brand in Europe, is still loss-making, but the company said it expected “significant” quarterly gross profit growth following the merger.
“To create and market a retail download brand is very expensive. It’s something at OD2 we never sought out to do. Our job is to provide the picks and shovels,” said OD2 co-founder Charles Grimsdale, who will run the new company’s European operations.
The new venture will seek to branch into mobile phone download services and expand beyond audio into video services.
“By combining with OD2 we become the largest business-to-business digital media provider in the world with the largest licensed digital music catalogue in the industry,” said Loudeye President and Chief Executive Jeff Cavins.
Grimsdale said the deal meant OD2 could expand its catalogue of music downloads to 1.3 million songs in the next six months.
OD2 supplies music downloads to over three dozen retail partners in Europe including Microsoft Corp’s MSN, and ISP Tiscali.
OD2 was formed four years ago and counts rocker Peter Gabriel as an early founder. The newly combined firm will continue to be run out of Seattle.