Good Deal: Michael Robertson's Purchase of the Domain Name MP3.com (1997)

Though the vagaries of the after-market for Internet stocks have not been kind to Michael Robertson, his vision put him in the right place at the right time.

What went right:
Although the vagaries of the aftermarket for Internet stocks have not been kind to Michael Robertson, his vision put him in the right place at the right time. Without any technological expertise or music-industry background, foresight alone put him at the center of a storm of controversy with a fortune valued in 2000 at $200 million.

In 1997, Michael Robertson was an enterprising, but unsuccessful, businessman. He had tried to start three companies, two of which failed and a third that was failing. He was 31 years old and looking to hook up with something big.

Robertson was looking to Internet traffic sources and noticed the term MP3 was being searched a lot. He knew nothing of the technology, but learned that MP3 was a free technology developed in 1991 for digitally compressing music. Robertson decided to buy the domain name "MP3.com."

The owner was a fellow named Martin Paul, who wanted a domain name with his initials. Paul sold Robertson the rights to the address for $1,000. This, obviously, gave Robertson no rights in connection with the technology. it just have him the right to call his as-yet nonexistent web site by that name.

Robertson's approach to production was simple: Anyone could upload music on the site, provided they owned it an would offer one song for free. Robertson would make money on homemade CDs ordered by visitors on the site (offering a more favorable royalty split than the big labels) and from on-site advertising.

The first day the site was open, it got 10,000 visitors. By October 1999, MP3.com was getting 350,000 hits per day, and had 35,000. contributors on the site.

Very little cash was necessary to get the site up and running. The relationships with 35,000 individuals and bands have virtually nothing in common with the usual artist-recording company relationship. Robertson's company did not scout or audition these acts, pay them to join the site, cover any of their expenses, advance them any money, or even pay the costs of recording their music. The artists just log onto the site and upload their music.

Still, running a busy Web site requires some money, and Robertson wanted to market MP3.com aggressively, so he raised $11 million from Sequoia Capital, which had a role in the founding of such companies as Apple, Oracle, and Cisco Systems. He struck a favorable deal, keeping two and a half times as much stock as Sequoia, despite not bringing anything to the relationship other than the idea that owning the MP3.com domain name would be valuable.

Arguably, the odds of success for this company are long. It owned no technology, had no rights to its artists' work, and gave away its product. Even with 35,000 artists, MP3.com was selling only 320 CDs per day during the fall of 1999. The company did not engage in the promotional activities of the major labels. It had no clout in radio which, even with the growth of the Internet, should be a major force in defining or reflecting musical tastes for some time. There are competing technologies and competing websites.

Robertson's foresight, timing, and marketing aggressiveness, however, made his investment an initial success with investors. The initial public offering price tripled during the pre-offering process, and was finally set on July 21 at $28 per share, valuing the company as a whole at $1.86 billion. Initial investors treated the company even better. The stock briefly traded at more than $100 per share on the first day of trading, closing at $63 per share.

In one day as a public company, Robertson's stake - more than 24 million shares - was valued at more than 1.5 billion. MP3.com's stock has plummeted since then, dropping to $8 per share in August 2000. In addition, MP3.com has had legal problems in connection with some music available on the site. Finally. it is far from clear that MP3 will become an industry-standard format, and Napster has come the flavor of the month (with its own legal problems) in the area of online music transfer. Still, Robertson's stake is worth $200 million.

Michael Craig

3/7/07

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