The Magic Behind the Music
By Michael V. Copeland

(Business 2.0) – No longer the preserve of bootleggers and file swappers, digital music has become a $670 million industry. That means the payday is arriving for startups that jumped on the digital bandwagon before the MP3 craze really got rolling. One of those well-positioned young veterans is Gracenote, based in Emeryville, Calif.

Founded in 1998, Gracenote is hardly a household name, even among serious digital-music fans. But anyone who has ripped a CD has probably used its core product, CDDB (short for "compact disc database"). CDDB compares the arrangement and length of tracks on a CD with an online database to automatically provide information about the titles of songs on the disc, the artist, the release date, and so on. Want to create a playlist for all your music by Coldplay, or every song recorded in 1981? It's easy to do, thanks to CDDB.

Business is booming. Gracenote makes money through royalties paid by companies that have embedded its technology in their music devices (Pioneer, Samsung, Sony, and others), audio software programs (RealNetworks), or online music stores (Apple Computer). While Gracenote declined to provide detailed figures, industry insiders believe that the company had revenue of about $10 million in 2003. Gracenote CEO Craig Palmer expects the firm to be cash-flow positive by the second half of the year, with revenue growth of 90 percent by year-end.

Gracenote's biggest asset is its 2.5 million CD-strong database of song information. The problem is that CDDB recognizes only complete CDs. So Gracenote recently unveiled a service that identifies individual songs by the unique "fingerprint" of a song's audio waveform. The new feature will soon appear in digital-music software like iTunes, and it's already embedded in several new MP3 players and car audio systems. The company has also developed a service called Mobile MusicID that allows cell-phone users to dial a number, hold their phone up to a music source, and get back a text message that lists information about the song they're hearing.

Gracenote's early arrival in digital music meant that the company was left alone to build up its CD database--potential competitors never saw the opportunity. They do now, however. Microsoft has created its own version of CDDB for its Windows Media Player. Still, Gracenote has a big head start, in both technology and goodwill. Consumer electronics companies don't want Bill Gates to dominate their world, and most still back Gracenote--for now. Gracenote could continue to compete independently, but in the long run, the company's CDDB and song-sniffing technologies are probably destined to become features in a digital-music software suite. While no one in Emeryville will comment, it won't come as a surprise if some PC maker turned consumer electronics manufacturer soon decides that Gracenote is just the sort of innovative company that belongs in its family. -- MICHAEL V. COPELAND