Loudeye is currently the leading digital infrastructure arms dealer for media companies worldwide. So why has Wall St. not seemed to notice?
Good question. Loudeye Technologies founder and CEO Martin Tobias still seems to be struggling for the right answer. As the legal warfare surrounding Napster and MP3.com continues, Tobias continues to keep his digital encoding factories humming.
Today, Loudeye provides outsourced video and audio encoding services to over 350 companies worldwide including offline media giants like Sony , Universal Music and Time Warner
. In essence, Loudeye currently has a near monopoly on this unglamorous side of the emerging digital media business.
However, even after recently reporting record quarterly sales of $3.4 million, a 345% annual increase, the company has watched its stock drift to a near all time low of around $4 a share. With over $99 million in cash on hand, nearly two-thirds of Loudeye’s current market valuation is accounted for in cash.
Obviously, Wall St. must believe then that there is something else wrong with this company. One obvious stumbling block is that with a pro forma loss of $6.4 million last quarter, Loudeye still appears to be well over a year away from reaching profitability. On top of this, some skeptics are convinced that streaming audio and video encoding will quickly turn into a commodity business.
Thus, we recently sat down with Loudeye Technologies CEO and founder Martin Tobias to help set the record straight and to explain his company’s long term plans for growth in the digital media infrastructure sector.
ISR: What exactly does Loudeye Technologies do?
Tobias: Loudeye is a leading Internet media infrastructure company. I started the company three years ago back when people didn’t even know if the Internet could play audio or video yet. My general idea was that there was going to be a need for a new category of technology companies that enabled traditional media companies to access digital media users. We are the leader in the outsourced encoding space. We produced in the last twelve months 6.1 million music files for the Internet and over 1 million minutes of video. That’s equal to the length of over 10,000 feature length films.
ISR: Okay. So encoding is one portion of your business, but I know that you’ve been moving into other areas as well.
Tobias: Yes, we are building a new category of software applications that are in addition to the standard streaming servers from Microsoft and RealNetworks
that do “business rules” around streaming media. This allows the media companies to make a return on their investment in technology. We have a product in that area called the Loudeye Media Syndication Server, which let’s media companies do syndication of streaming media on the Net. So we identified very early on that there was going to be an additional set of software that needed to be written to turn streaming media into a real business.
ISR: Let’s switch topics to your business model. You’ve done lots of encoding work so far, but is the real sweet spot to your business the additional applications that you’re developing?
Tobias: That’s certainly the higher margin part of the business. We honestly got into the applications business because we’d been knocking on doors for three years asking people if they had anything that they wanted to put on the Internet. We heard all of the reasons why the media companies were not adopting the Internet as a distribution platform. Our software business is really a response, then, to writing technology that solves their business problems. So if you can do that, these media companies will give you more encoding business. You can then sell them more software as well.
ISR: What does the future hold for companies like Loudeye once all of the traditional media c
ompanies’ audio and video content has been encoded for the Internet?
Tobias: Well, there are a couple of things going on. When I started the company, I thought- how much audio and video has been created in the history of the world? That’s a big number! I could be working on that for years. Sony has estimated that there are 75 million hours of video in its corporate and entertainment archives. So the first answer to your question is it’s not like we’re going to be done anytime soon! One has to also remember that this is a new set of software technologies that are themselves still evolving. We’ve been in business for three years and already re-encoded files two or three times for some of our content owners to keep up with the latest technologies.
ISR: I see encoding shops popping up all over the place. What are the real barriers to entry for your business?
Tobias: Yes. Anyone who can buy a computer and a copy of Sonic Foundry’s Stream Anywhere thinks that they can be in the encoding business. They can if they’re only doing a few thirty-second commercials or a couple of CDs. The challenge comes when you try to do this business with scale. We have 350 people. I’ve spent over $30 million on infrastructure. I have seven patents on how we do encoding and how we’ve scaled it. I’ve just done the largest streaming media projects that have ever been done. That’s one of the reasons that we report how many files we have done each quarter, because if you ask anyone else, they haven’t even done 1/10th of the same amount! We crush everyone else.
ISR: Do you see any of the large Web hosting and managed services companies moving into your business?
Tobias: Some of them are motivated to come into the business. But most of the Web hosters are coming into the business from a live event-type encoding angle. That’s a whole different process from when a company is trying to encode 100,000 CDs. Something like ten times the traffic is generated by on-demand streaming files as opposed to live events. The Internet is really about listening and watching to what you want, when you want. It’s a time-shifter. So we really think that creating a company that optimizes the process for creating on-demand files is a much larger opportunity than the live event business.
