ArtistDirect Sold Amid Sour Notes

0

ArtistDirect Inc. once seemed poised to become a major music label and a force on the Internet music scene with Interscope Records co-founder Ted Field at its helm. Now, it appears headed for a dirt-cheap sale.

Saddled with $45 million in debt as revenues evaporated, ArtistDirect is selling itself to Chicago-based Coghill Capital Management LLC for the fire-sale price of $2.8 million, according to documents filed recently with the Securities and Exchange Commission. The deal will close “on the earliest practicable date,” according to the letter of intent.

Under the terms of the deal, Coghill would acquire most of the assets of the Santa Monica-based company, including a network of music-oriented Web sites like ArtistDirect.com, UBL.com and Loserkids.com.

Coghill will not acquire the anti-piracy software company MediaDefender, which ArtistDirect purchased in 2005. That transaction loaded ArtistDirect with debt and MediaDefender failed to perform.

It’s unclear what Coghill will do with the assets it is to buy. A representative from Coghill said the company would not comment.

Dimitri Villard, ArtistDirect’s interim chief executive, also declined to comment.

ArtistDirect executives claimed its Internet music network, where users can track the activities of their favorite bands, download music and stream videos, was the third most popular media Web site, behind Yahoo and AOL, with 45 million unique visitors a month.

But the traffic didn’t translate into profits. In the quarter that ended in June, ArtistDirect reported its net revenues dropped to $2.7 million from $6.6 million a year ago, and it had a quarterly loss of almost $30 million. Its share price has languished at around 2 cents since September, a spectacular fall from its high of $37.50 in the dot.com days.

ArtistDirect may have caught on with music fans, but it never became a mainstream phenomenon like MySpace Music. Plus, studies show that the demographic that might love the site hasn’t grown.

“People who are dedicated music fans, they spend a lot of money on music, they like to know what’s going on. Those are the people who go to sites like ArtistDirect,” said Sonal Gandhi, a Jupiter Research analyst specializing in music and media. “But the overall percentage of people who say they do that hasn’t increased in the last four years.”

Since it was founded in 1994, the company tried its hand at several fields but failed at almost every turn. ArtistDirect was first a music-streaming and download site, then started a talent agency. When Field joined, he turned it into a music label, its highest-profile endeavor.

Field kicked off ArtistDirect Recordings with much fanfare in 2001 and ambitions to compete with the majors. But by the time ArtistDirect sold its stake in the record label in 2005, it had become a $200 million sinkhole that struggled to turn a profit.

Heir to the Marshall Field retail fortune, Field is a movie producer whose wealth the Business Journal estimated at $995 million in May, which put him at No. 40 on the list of Wealthiest Angelenos. He did not return a phone call seeking comment.


Promising Start

Analysts initially hoped that Field could conjure up some of the magic he worked at Interscope, which he and his partner Jimmy Iovine sold to Universal Music Group for $330 million after developing the careers of hip-hop megastars Snoop Dogg and Dr. Dre.

At first, he seemed on the right track. Shortly after taking over ArtistDirect, Field cut back its Internet operations and shed its talent agency to focus on the label. The moves sent ArtistDirect’s stock to around $15, well below the $37.50 high it hit in 2000 but a respectable gain over earlier levels.

But ArtistDirect lacked the marketing punch of the larger music labels. Meanwhile, its management lavished multimillion-dollar advances and, in the case of rapper Poverty, a Cadillac Escalade on artists like hip-hop duo Smilez & Southstar and Orange County rock band Mad at Gravity, whose albums ultimately underperformed.

The label’s failure to turn a profit wore on its finances. In 2003, its accounting firm warned that losses raised substantial doubt about the company’s viability. ArtistDirect was advancing its label tens of millions of dollars to stay afloat, and Field chipped in $250,000 of his own money.

After the record label soaked up more than $200 million in expenses, ArtistDirect decided to cut its losses. In 2005, it sold its interest in ArtistDirect Records to Radar Records, where Field was also chief executive, and then borrowed $45 million to acquire software maker MediaDefender.

But the debt proved too much for ArtistDirect. It defaulted on its loans in 2006 and in its most recent quarterly report acknowledged that it doesn’t have the money to “cure the existing events of default, or to repay indebtedness or redemption or penalty amounts.”


Tough space

Meanwhile, MediaDefender failed to reverse ArtistDirect’s fortunes. The software company’s revenue in the most recent quarter fell to $1.5 million, down from $4 million a year ago.

Also, a key customer that accounted for 18 percent of MediaDefender’s business said it would stop using the company’s software at the end of June.

The problems with MediaDefender forced ArtistDirect to take a charge of $25.6 million, and the hit to its balance sheet opened the door to the Coghill deal.

What happens next to ArtistDirect, which still counts Field as a member of its board of director, remains to be seen.

In the spring, the company launched a revamped version of its flagship Web site. Viewers can watch video interviews with movie directors and singers, buy concert tickets and purchase DVDs of feature films.

But the site never caught on with the mainstream. Russ Crupnick, vice president and senior industry analyst with NPD Group, pointed out that given the Internet is peppered with music Web sites and blogs, and more sites are likely to fail than succeed.

Santa Monica-based Napster Inc., for example, has a huge music library and strong brand recognition, yet it also never turned a profit and its share price has plummeted. Napster recently sold itself to Best Buy Inc. for $121 million.

“There’s so many of these sites,” Crupnick said. “It’s a really tough space to be in.”

No posts to display