RioPort Offers Shelter From Napster Storm

Proving that the venture capital community is willing to back digital music plays so long as they have legitimate revenue streams, a group of investors have turned to San Jose, Calif.-based RioPort Inc. as the industry?s newest savior.

And, unlike federal appeals court punching bag Napster Inc., RioPort has managed to not only navigate the record industry?s copyright minefields, but also consistently secure private equity financing from a variety of sources.

Thus far, the company has brought in more than $70 million in venture funding, nearly $40 million of which has trickled in during its multi-tranched Series B round. The offering?s most recent closing netted $10 million earlier this month, and counted publicly-traded digital rights management firm Macrovision Corp. and traditional VC investors JAFCO and Softbank Investment among its participants.

The deal?s initial tranche closed last July at $31.5 million, with first-round investors S3, Vulcan Ventures and Oak Investment Partners on board, along with newcomers EMC Corp., Quantum Technology Ventures and Mitsubishi Corp.

When asked if the second round was officially closed, RioPort Chief Executive Jim Long seemed non-committal. “Fund raising is a continuous process,” he said. “We?re still talking to a few stragglers, but we?re not sure yet if there will be additional closings.”

As part of the financing, RioPort announced that it had opened another subsidiary in Tokyo called KK Japan. “There are two reasons we opened [shop] in Japan,” Long said. “First, it?s the second-largest music market in the world and, thus, a strong market for our business. Second, we eventually want home stereos and car stereos and boom boxes to support digital music, and the major electronic manufacturers are located in Japan, so partnering with them is critical to RioPort?s success.”

RioPort is also keen on building a global network that will allow it to source digital music and audio content in one country and help others distribute it in other countries.

Like Napster? Not!

While Napster?s broad user community might be its greatest asset, Long said the company ? which still operates as a business-to-consumer play ? hasn?t figured out a way to monetize it. RioPort, on the other hand, delivers music to the very same user communities that Napster targets by providing the technology to power the Web sites where users go to download digital music, thus helping companies like sell legal content to the masses.

Perhaps the key to RioPort?s business model is that money actually exchanges hands somewhere along the line. Whereas Napster has previously allowed its approximately 65 million registered users to download tunes from each other?s computer hard drives for free, RioPort?s technology supports several types of e-commerce models, from impulse buys to subscription services and rate-sheet or advertising supported vehicles. Thus, it enables its e-tailer network ? which includes music industry powerhouses such as MTVi Group, Ministry of Sound and iCAST ? to release popular content without fear of piracy or loss of compensation.

Presumably, Napster may soon follow in RioPort?s footsteps, if it can keep its doors open, and if it follows through on a deal it has inked with Bertelsmann AG to introduce a new paid subscription service this summer.

Lack Of Legal Content

One of the greatest challenges that both RioPort and Napster face going forward, however, is the lack of legal content out there right now, Long noted.

“There?s not much available, maybe a few thousand titles,” he said. “That [number] needs to get into the 100,000-plus range to be a credible way for people to buy music.”Digital music is also a new format, so labels are being overly cautious when determining exactly how to deliver it, Long added.

On the upside, he said he?s seeing more major labels getting content online every week. The next obstacle he plans to tackle is getting the digital version of a musical track or CD released at the same time the actual album comes out, a demon he hopes to slay by the end of the first quarter.

Having Macrovision?s Internet security prowess behind him certainly will further his cause. The Sunnyvale, Calif.-based company already uses technology to protect the intellectual property rights of major movie studios, software publishers and digital television corporations. It?s just getting started in the digital audio arena, which is why RioPort was such a perfect fit from an investment standpoint, according to Ian Halifax, chief financial officer with Macrovision.

“RioPort offers a secure Web way of supporting audio content, and it?s a field we?re very interested in,” he said.

Robyn Kurdek can be contacted at Story Feedback.