MMW-121 -- Thoughts on Sony's Acquisition of Gracenote

J@pan Inc Magazine Presents:
Commentary on Japan's music technology news

Issue No. 121



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++ FEATURE: Thoughts on Sony's Acquisition of Gracenote


** Japanese government looks at 'iPod Tax' again
** Fair Trade Commission investigates JASRAC
** Hatsune Miku mobile content site launched
** KDDI announces chaku-uta full downloads hit 200 million
** Label Mobile sells mastertone bundles

++ FEATURE: Thoughts on Sony's Acquisition of Gracenote

On April 22, Sony America announced that it was buying Gracenote
for US$260 million. While the move generated some interesting
discussions on the tech blogs, the mainstream business media for
the most part simply reported what was in the press release and
left it at that. For anyone with an interest in digital music,
though, Sony's purchase raises some interesting questions, and
marks a new chapter in the somewhat controversial history of
Gracenote and its widely-used CDDB system.

CDDB (Compact Disc Database) is an online database system that
allows software applications to look up information about audio
CDs. Anyone who has ever ripped a CD and seen the title/artist
information for each track appear automatically knows just how
useful this service can be. It began as a small open-source
project in 1993, building its database of disc/track information
through user submissions. All of the submitted data was publicly
available, in a manner that presaged the Web 2.0 user-generated
media of today. By 1998, the database had grown large, and the
three-person company managing the project decided to sell it to
a device manufacturer called Escient.

In 2000, the company was renamed Gracenote. Patents were
obtained, license terms were quietly changed, and while user
data was still accepted, new submissions were no longer made
available to the public. These moves upset and alienated many of
the initial contributors and developers, who thought they had
been participating in an open project where the evolving
database would always be available to everyone. Gracenote then
embarked upon a course of patent litigation and other legal
maneuvers against its competitors and their customers, picking
up a reputation for anti-competitive and heavy-handed behavior
in the process.

Along the way, Gracenote raised more capital from various VC
firms, including Sequoia Partners, and secured key licensing
deals for use in Winamp, iTunes and other applications and
devices. For a while, Gracenote appeared to be working toward
an IPO, but these plans were apparently shelved. About a year
ago, rumors began swirling that the company was on the block,
looking for an interested buyer, and that was the about the last
anyone had heard of the situation until the Sony announcement.

So why would Sony pay a quarter of a billion dollars for a music
recognition company? In addition to CDDB, Gracenote also owns a
database of audio 'fingerprints' which can be used to identify
individual tracks using just a short audio sample. While this
system and other Gracenote assets no doubt have some value, it
is not nearly enough to justify a US$260 million price tag.
Rather, the general consensus is that Sony simply overpaid by a
surprisingly large amount. Gracenote investors, on the other
hand, appear to have made out very well in this deal,
particularly majority shareholder Scott Jones. As CEO of
Escient, Jones was responsible for the purchase of the original
CDDB back in 1998, and still serves as chairman of the board for

An even bigger question centers around Gracenote's current
licensees - particularly Apple - and their reaction to the sale.
At present, Gracenote's CDDB is used not only in iTunes (when
CDs are played or ripped) but also in consumer electronics
devices made by Panasonic, Samsung and other companies that
compete directly with Sony in major markets. It seems unlikely
that these Gracenote customers will continue to use an online
music recognition system that is now in the hands of a direct
competitor who could potentially monitor and store all of their
database queries.

Kevin Meyerson, CEO of Tokyo-based Rainbow Partners, has a
unique perspective on the issue. As Gracenote's exclusive
representative in Japan from 2001 to 2003, Rainbow Partners
brought CDDB into millions of Japanese homes and cars, securing
licenses with all of the major consumer electronics and car-navi
manufacturers (check the MMW archives for the two-part interview
we did with Kevin back in July 2002). Rainbow Partners now
handles exclusive licensing in Asia for Gracenote's major
competitor AMG Lasso (now owned by Macrovision). Not
surprisingly, he says in the days since the sale Rainbow has
been inundated with calls from Gracenote customers who are wary
of Sony looking actively for an alternative to Gracenote/CDDB.

So it will be interesting to see how this all plays out. The
deal certainly looks like a bad one for Sony to begin with, and
can only get worse if major customers such as Apple migrate over
to AMG Lasso or some other competing system.

-- Steve Myers

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** Japanese government looks at 'iPod Tax' again
In brief: On May 8, the Cultural Affairs Agency in Japan met to
discuss the possibility of issuing a levy on portable digital
music players and hard disc recorders. Currently a 1% levy is
applied to the retail price of MD players, DAT players and DVD
recorders. A group of copyright organizations including JASRAC
has been lobbying the government to extend the levy to include
portable music players. A similar proposal was discussed within
the agency in 2005, but was eventually abandoned after various
consumer electronics groups voiced their opposition.

** Fair Trade Commission investigates JASRAC
In brief: On April 23, representatives from the Japanese Fair
Trade Commission entered the offices of JASRAC, Japan's dominant
copyright organization, and began a surprise audit and
investigation. The FTC says they are investigating possible
violations of the anti-monopoly law, particularly to see if
JASRAC has obstructed recent competitors such as e-license and

** Hatsune Miku mobile content site launched
In brief: Krypton Future Media, which makes the 'Hatsune Miku'
software package for the PC, announced it had launched an
official mobile site on KDDI where it will distribute Hatsune
Miku arrangements and Flash content for the mobile phone. The
PC software features an animated character singer named Hatsune
Miku, who 'sings' lyrics and melodies input by the user. The
software features Yamaha's Vocaloid 2 technology for
synthesizing vocals to match a given set of lyrics and melody.

** KDDI announces chaku-uta full downloads hit 200 million mark
In brief: On May 3, wireless carrier KDDI recorded the 200
millionth download from its chaku-uta full (full-track mobile
download) service. The announcement comes a little over a year
after KDDI announced it had reached 100 million downloads in
February 2007. KDDI was the first carrier in Japan to begin
offering full-track downloads in November 2004. There are now
148 sites on the chaku-uta full menu offering a total of 120,000

** Label Mobile sells mastertone bundles
In brief: Last week, Label Mobile began selling bundles of 2-5
songs in chaku-uta (mastertone) format through its popular site
on KDDI. Called 'uta-packs', the bundles sell for 315 to 525 yen

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