VentureBeat

Amazon’s music store has only been in business for a month, and rumors are flying that it’s already the #3 online music seller.

It’s still far behind Apple iTunes, but that might change. One rumor even pegs Amazon passing the second largest download site, eMusic, in revenue by the end of this year.

That leaves companies that don’t have a large online presence in a difficult position. Napster, Wal-Mart, Rhapsody and eMusic are all looking vulnerable and likely to lose out if Amazon’s growth continues.

Besides not DRMing its music, Amazon’s early apparent success can be chalked up to a clean interface, lower prices and most of all, the ability to easily transfer music to the iPod. Arguably, Amazon’s MP3 store has pressured Apple to recently drop prices and increase selection for DRM-free music on iTunes, called iTunes Plus.

Until recently, iTunes was by far the easiest legal way to buy digital music, as users could both buy music through iTunes and sync it effortlessly with their iPods.

Besides Amazon, the major record labels have also begun to test-sell music without DRM this past year, because they’ve had trouble negotiating song prices with Apple. What’s more, the DRM software used by the labels does not play on the iPod directly and none of the labels wanted to switch to Apple’s own DRM software, called Fairplay.

EMI was the first label to sell their catalog without protection and the results from their first quarter experiment have tentatively proven a success. The largest music label, Universal Music Group, followed suit a couple months ago and began selling DRM-free music files in a six month trial.

These four services need to take advantage of the new no-DRM world, or risk elimination:

1. eMusic
As the self-described number two company in the download business, eMusic surpassed the 150 million download mark recently. The most popular alternative to iTunes as well as most other services, eMusic’s catalog is comprised strictly of independent labels catering to knowledgeable music fans. It’s also
DRM-free. There’s a pattern here. Offerings that are simple (ie. DRM-free) or that are cheap, or both, do well. eMusic’s success shows that when the price is right (at $9.95 for 70 songs per month) and the music iPod compatible, digital download services can even flourish without major labels. Another success of eMusic is how it couples an intuitive web-based interface with insightful editorial content to guide users.

Beside the lack of major labels, eMusic gets negative marks for letting labels periodically drop out of the collection (when they decide the compensation is insufficient) as well as the service being shoe-horned into a subscription-based format that’s increasingly losing out to the pay-as-you-go model. Despite these shortcomings, Emusic is currently head and shoulders above the other offerings. It’s future is harder to predict, given its unconventional model, but eMusic provides the most comprehensive and gratifying user experience for the serious music lover.

2. Rhapsody
By selling its resounding failure of a service, URGE, and merging with Rhapsody, MTV has finally positioned itself in the role it knows best – advertising. With Rhapsody, MTV may be able to take advantage of its brand with a service worth promoting. While the Rhapsody software allows nice music management (for PCs only), Rhapsody’s website is far more crucial to its success. It’s generally intuitive and wide-ranging but still requires users to download software to stream music from the site.

Rhapsody is also tentatively throwing itself into the DRM-free market with select offerings from Universal artists. Along with the push in publicity for the service, Rhapsody offers files compatible with iPods and is beginning to branch out into the cellphone music business with Verizon. These are all good signs for future success for the service, but currently the company is too busy trying to sell its niche Rhapsody-to-Go subscription service and undersells its compatibility with iPods.

3. Walmart
Walmart began advertising DRM-free downloads a couple months ago, also with the intention to undercut Apple’s standard prices - the same selling point as when the Walmart first entered the digital download industry. The first sell doesn’t to appear to have worked, but Walmart is nothing if not persistent, and really big. They do annoying things like only offering edited versions of their music, a practice that might as well render popular genres like hip-hop useless.

Although Walmart’s service has often been described as sterile, more noteworthy is that it forces users to shop with DRM-afflicted preview clips even for DRM-free music. If Walmart’s online store is expected to blossom in an iPod-dominant market, the service’s interface will need to be re-hauled from the ground up to reflect it. Currently the site is unhelpful at best and aggravating the rest of the time. Without serious changes, Walmart will maintain its dominance as a price leader, without leading anything else.

4. Napster
The web-based service allows streaming of music for even non-subscribers, but has few other positive aspects worth mentioning, so we’ll focus on the negative. The site is stripped-down and offers few editorial notes to help discover new music and nothing beyond mere lists of artists as “recommendations.” Napster is actually clunkier than Walmart’s bare interface and is nowhere near as cost effective, considering the DRM restrictions. Perhaps the most damning aspect of the service is the frequent note found when attempting to buy music – “Napster is not compatible with the iPod.” For a company that’s already been killed off once before, this zombie will most likely get sawed apart.

Ruckus, which provides college students free unlimited PC and laptop download access to more than two million songs, has raised $10 million in a second round of financing.

The service is apparently making headway on competitor Napster, which offers a similar service. Earlier this month, Penn State dropped a partnership with Napster, in favor of Ruckus — because Ruckus did not charge it for the contract.

However, there’s no sign the company is making headway on revenue. Students are unlikely to upgrade to its paid premium service, because students are frugal — and because it competes with Apples’ iTunes. The company isn’t saying anything about revenue.

Indeed, the new money will be used to find ways to push advertising to support the basic free access, it said. It has signed contracts with 40 new schools over the past school year, for a total of 120 schools in its network nationwide. The site is also pushing social network features. Any student owning a .edu address can access the service — even those from schools without a contract. The music includes songs from all the major labels and various independent labels. It has added access to full-length films to its offerings, too.

The company charges $19.95 a semester to students wanting to download music to portable devices, and $14.95 a semester to download movies, but concedes that revenue from this is “nominal.”

Investors are Anschutz Investment Company and Columbia Capital. Existing investors include Battery Ventures, Eastward Capital, Pinnacle Ventures and Shelter Capital, although Pinnacle did not invest in this round. The Herndon, Va. company has now raised more than $33 million.

Ruckus’ parent company is Ruckus Network.

The Founders Fund, the venture firm led by former PayPal chief executive Peter Thiel, has hired Sean Parker, the controversial entrepreneur, who has just turned 27, as a managing partner.

Parker somehow attracts attention wherever he goes. He has already launched three well-known companies. At 19, he co-founded Napster, and his cheekiness drew anger from the recording labels, which eventually shut down Napster with lawsuits. Parker told VentureBeat last week, in an interview, that his time at Napster was his biggest lesson — about who to hire to run companies and who to take money from. “I wasn’t sophisticated enough, I didn’t know any better.” But Parker’s past still has some investors in Thiel’s fund nervous. Thiel responds: “Sean has rubbed a lot of people the wrong way, in part because he’s been so successful.”

One person he rubbed is the big-gun himself, Michael Moritz of Sequoia — an early backer of Yahoo, Google and YouTube. After Napster, Parker co-founded Plaxo, a site that updates contacts. Soon, Parker was in peoples’ faces again. Some accused Plaxo of spamming, because of its constant update requests. During the post-bubble downturn, Parker got pushed out by Sequoia Capital and Ram Shriram, and there’s been silence over the real reasons ever since. There were reports of private investigators going after Parker. And things weren’t improved, Thiel says, when Parker wouldn’t let Sequoia invest in his next company, Facebook. “Sequoia had no chance to invest,” Thiel explains, “because of the way they mistreated him at Plaxo. He’s been treated worse than he deserved.” VentureBeat has contacted Sequoia for comment.

Without Parker, Plaxo has become more diplomatic — but almost too much. You never hear about it anymore.

Parker soon met Mark Zuckerberg in New York, after the young “Zuck,” as he is known, had launched Facebook. Parker helped Zuckerberg learn the ropes. He helped him raise money at great valuations — ticking off several VCs who’d wanted in on the deal. They first raised seed money from the Founders Funds’ Thiel, who Parker had met through Sequoia’s Michael Moritz — an irony. Facebook raised only $500,000, and it was profitable immediately. Facebook’s traffic rocketed, and the company went in red again after taking more venture capital from Accel Partners to expand.

While Zuckerberg has been widely acknowledged as Facebook’s leader, even by Parker himself, there’s little question Parker helped Zuck keep control and ownership. Zuck loves coding, so with Parker’s business sense the two were a great pair. Parker helped bring in Owen Van Natta as COO. Parker was one of four board members at Facebook (along with Zuck, Thiel and Accel’s Bryer). He hired former Napster employee Aaron Sittig to redesign the site as we know it. Parker obsessively negotiated with the owner of facebook.com to buy the domain. Parker also came up with much of what we see as the Facebook News Feed, and he believes that format is the future of communication on the Web. “The social graph,” he says, referring to the connection people have with others through multiple degrees, “is the critical ingredient.”

[Side note: See this link here for other details. It was written by Numair Faraz, a friend of Parker's who said Parker had tacitly agreed to the post. Numair forwarded it to us a couple of weeks ago. At the time, we ran Numair's blog post by Facebook's spokeswoman, who reviewed it, and declined comment. When we ran the facts by Parker, he clarified the following: Plaxo had two other co-founders, Tipping Point was not an inspiration for either Plaxo or Facebook, he met Facebook's Zuckerberg met in NYC and Zuckerberg had every intention of turning the site into a business; Parker just accelerated the process, he clarified. Finally, regarding Numair's comparison on Parker with Jim Clark (pictured above), the same comparison was made by Peter Thiel. In an interview, Thiel said Parker reminded him of Clark, who also founded three high-profile companies (SGI, Netscape, WebMD) but that Parker was twenty years younger: "He's just getting started," Thiel said. "The time horizon is really long."]

Parker’s self-acknowledged insecurity is what drives him to be edgy, but also to excel: “I’m still super insecure,” he said. Parker feels it in talks he’s having with entrepreneurs on behalf of the Founders Fund, he says: “I always feel like the underdog. I walk away from meetings asking myself ‘Did I add any value, or are they going to tell other people that shouldn’t talk with us?’”

Like many people at Facebook with ambition, Parker left Facebook quite early in the game. Facebook is firmly in Zuck’s grip, along with a few trusted “family” members, as his close-knit circle is referred to. Parker retains a sizeable chunk of Facebook shares. Others have left, impatient because Zuck won’t sell the company or give them more responsibility.

Parker says his three start-ups have also exhausted him, another reason for him to try out VC: There was “a lot of stress, a lot of conflict,” he said.

He said he joined Thiel because of Thiel’s maverick ways. Thiel is not a classic VC; he runs the firm with an entrepreneur’s bent, from his Clarium Capital hedge fund offices — swanky, we add, nicely perched atop the hills of the Presidio. Parker says too many VC firms are run by people who never launched and ran their own companies. At Founders Fund, Thiel is focused on investing in early-stage companies, and he’s given Parker a carte blanche to find the best companies he can, Thiel says. Founders Fund is investing a $50 million fund, and it is about to launch a second, larger fund.

Yahoo announced a partnership with a consortium of more than 150 newspapers, in an effort to let the struggling newspaper industry find greater distribution for things like their job ads.

Yahoo struck the deal several major newspaper companies, each of which own scores of newspapers, including MediaNews (publisher of Silicon Valley’s Mercury News), Hearst (publisher of the SF Chronicle), and Cox Newspapers.

The Mercury News summary of the deal is here. Note that CareerBuilder, the site the Mercury News and other former Knight Ridder newspapers used for their online advertising is not mentioned anywhere in the news today. That former relationship made sense, because Knight Ridder owned part of CareerBuilder — and so Knight Ridder publications were able to hold on to the customer relationship indirectly, even though the customer ended up at CareerBuilder.

However, when Knight Ridder sold this year, the Mercury News fell to MediaNews. The Yahoo deal means that Yahoo’s job site, HotJobs, has taken over the Merc’s online relationship for jobs. This is unfortunate because it just means more brand confusion. It does nothing to stop employers or prospective job searchers from leaving the Merc, and going to HotJobs, where there are inevitably going to be more jobs. (And we haven’t seen any agreement by HotJobs to not take job listings in the Merc’s territory). Also noteworthy is that Hilary Schneider, a Yahoo vice president helped negotiate the deal, just several months after she left a job where she oversaw these issues at Knight-Ridder.

It’s unclear how this really helps newspapers like the Mercury News, but it’s not clear what alternative they have either.