Vivendi Faces the Music on the Web

Acquisitions have transformed it from laggard to online leader

With a roster of artists including hit makers such as Eminem and Blink-182, Vivendi Universal (V ) dominates the music business. Today, nearly one out of every four dollars spent in the U.S. on a CD or cassette goes to Interscope Records, Motown, or another of the labels Vivendi's Universal music unit distributes. But until recently, being the largest music company on the planet hadn't done much for its efforts to sell music over the Net. The home to Sting, Sisqo, and Mary J. Blige was largely a no-show as many of its smaller rivals signed on with Internet giant AOL Time Warner Inc.

That's now changing faster than a teenager's wardrobe. Over the last two months, Universal has spent roughly $400 million purchasing nearly half a dozen sites in an attempt to build what looks to be the industry's largest music portal. Most recently, on May 20, it bought music Web site for $372 million.

POTENTIAL. That's a lot of money and maneuvering to position itself in a medium with no guaranteed profits. But with analysts estimating that consumers may one day buy as much as 25% of their music online and rivals making their own online bets, Universal does not want to be left out. "No one knows what the consumer will pay for," says Edgar M. Bronfman Jr., Vivendi Universal's vice-chairman. "But the potential is just too large for us not to try to figure it out."

Given the uncertainties, Vivendi is hedging its bets by moving in several directions. Under the guidance of Bronfman and Chief Executive Jean-Marie Messier, it teamed up with Sony Corp., the second-largest music company, in February to create Duet, an online music service set to be launched later this summer. It also purchased EMusic, an outfit that operates sites for Rolling Stone and Downbeat magazines, and bought up, the second-largest music news and e-commerce site. With the purchase, Vivendi's sites now draw an estimated 40 million users.

For all its dealmaking, what (MPPP ) brings to the table is clearly key to the strategy: an industry-approved technology for storing and streaming songs to customers' computers. "These guys really have the technology down, and they've done it in a way that's both scalable and consumer-friendly," says Bronfman, adding that Vivendi intends to start using as its main music portal beginning this summer. It will also let folks stream music from Duet.

A major reason for Vivendi's sudden online interest is competition. Other music companies have been busy testing the online waters themselves. Last year, Bertelsmann invested in onetime pirate site Napster, which is struggling since being forced to find a way to legally sell copyrighted music. It may never again be the force it once was. A bigger threat may come from MusicNet, a group formed in April when Bertelsmann allied with EMI (EMIPY ), Warner Music, and AOL (AOL ). Those record labels now have access to AOL's 29 million subscribers, although AOL controls billing.

If nothing else, Vivendi's online audience gives it tremendous leverage in future deals. Whether other record companies distribute their music through its sites or Vivendi tries to strike its own deal with the likes of AOL, having so many customers gives it far more ability to call the shots.

Most industry observers figure the record companies will eventually have to strike deals with every credible Net outlet, much as they currently sell through Tower Records or Kmart. "People don't know what label is behind Aerosmith," says David Bench, an analyst with brokerage firm Arnhold & S. Bleichroeder Inc. "They want to go to a megasite that aggregates all the music." As it happens, Aerosmith is a Sony artist, part of the Duet family. Now, with one of the largest online music portals, Sony and Universal figure they may get you to pay to listen to them online.

By Arlene Weintraub and Ronald Grover in Los Angeles, with Carol Matlack in Paris

— With assistance by Carol Matlack

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