Lunching on pastrami sandwiches and pickles in their midtown Manhattan office, Joseph D. Samberg and Daniel C. Stein could be tin pan alley music producers. They strategize with an employee on how to market songs after Stein spent much of the morning discussing how to develop artists shed by major labels. But Samberg and Stein aren't just music men. They run a private investment firm, JDS Capital Management Inc., that is quickly building a digital-music empire.
After a series of deals, Samberg, 34, and Stein, 35, have emerged as pioneers in online music -- the fastest-growing part of the business. In November their fund put up an estimated $50 million to buy the music-publishing arm of DreamWorks, giving it all rights to such evergreens as John Denver's Rocky Mountain High and Bob Marley's Get Up, Stand Up. Before that the fund bought eMusic.com Inc., an online music retailer, from Vivendi Universal (V) for about $15 million. Now the two are eyeing other digital-music companies and talking about branching into digital videos.
Suddenly, Samberg and Stein are getting plenty of buzz. For one, their songs have no built-in copyright protection, since downloads are in the MP3 format. So eMusic's tunes will play on Apple Computer Inc.'s (AAPL) iPod, unlike those for almost all for-pay music services such as Napster. Their businesses are formidable niche players in selling digital music, a $500 million market expected to quadruple by 2008. It's lucrative because the fixed costs of selling music online are low. And there's always the chance that one of their unknowns will make it big. "They're a meaningful player," says Phil Leigh, a senior analyst at market researcher Inside Digital Media Inc.
With a portfolio of music companies, JDS is not a typical hedge fund. Indeed, it's part of a trend of funds buying companies instead of just trading them. Samberg and Stein lock up their investors in a private equity part of their firm for years, keep their financials secret, and stick with investments for as long as five to seven years. And, says Stein: "We always buy controlling interests."
MY BOYFRIEND'S BACK
The duo didn't set out to become entertainment moguls. The two frat brothers were roommates at Cornell University before going their separate ways. In 1996, Samberg, a former portfolio manager at mutual-fund company Neuberger Berman LLC, started a hedge fund. Then he spotted big opportunities in music companies that were reeling because of rampant piracy.
He recruited Stein to run businesses as his fund snapped them up. Stein started playing piano at age 3 and performed in bands in college. He later founded and sold a company that provided cable-TV programs for college students, such as a late-night cooking show that once demonstrated how to make baked Alaska with a blowtorch. Before joining JDS in 2003, Stein ran an Internet wedding-gift registry that he later sold to Martha Stewart Living Omnimedia Inc. (MSO)
At JDS, Stein manages the firm's digital-music investments. Samberg sticks to trading. They sit at opposite ends of a 17th floor Park Avenue office adorned with records. Stein is surrounded by music veterans such as Richard Gottehrer, a producer for the 1980s girl group the Go Go's who also wrote the '60s hit My Boyfriend's Back.
The way JDS operates gives Samberg a trading edge. He says he spots potential investments -- such as music group EMI, which he traded for a 50% profit -- quicker than rivals. He says having a music company in the office gives him insights into valuations and industry trends.
It's too soon to tell if Samberg and Stein's strategy will go platinum. But so far they're rocking and rolling.
Corrections and Clarifications
"This hedge fund can boogie" (Finance, Feb. 21) about JDS Capital Management Inc. reported that Daniel C. Stein once ran an Internet wedding-gift registry that he later sold to Martha Stewart Living Omnimedia Inc.. In fact, the sale took place after Stein left the company.
By Emily Thornton in New York, with Peter Burrows in San Mateo