The House That Music Fans Built

Gracenote has quietly become one of the most powerful companies in digital music -- but many of its users have probably never heard of it.

Its music-identification technology powers media players like AOL and the ever-popular iPod. For recording labels, Gracenote's technology is a key part of making the digital music business hassle-free and fan-friendly.

"They are an intimate part of the digital music infrastructure," said Cary Sherman, head of the Recording Industry Association of America. "They've managed to embed themselves in lots of consumer electronics devices and other equipment and really just penetrate the market in a steady and consistent way."

But Gracenote's position today as a dominant player in music recognition is a far cry from its beginnings. Launched as a public effort to catalog the content of compact discs, Gracenote has morphed over the past several years into a venture-backed company with ties to most of the biggest players in the music business.

Gracenote's rise resembles a pattern seen in many industries, in which one company evolves into an information clearinghouse that holds extraordinary power over its rivals. In the airline industry it was American Airlines' Sabre reservation system, and on Wall Street it was Bloomberg, the purveyor of powerful financial data terminals. In the same vein, Gracenote is emerging as the information gatekeeper of the burgeoning digital media industry. AOL, Apple, Philips and Sony depend on the company to make their music players and gadgets easier to use.

Founded in 1998, Gracenote, a privately held Emeryville, California, startup, declined to disclose details of its finances, save that revenues are growing sharply. Between 2002 and 2003, the company said its revenue increased 90 percent. It projects another 90 percent jump in revenue this year.

At the heart of Gracenote's technology is its CDDB (compact disc database) music-recognition service. Anyone who pops a CD into a computer to play music or rip MP3s has likely benefited from Gracenote's technology. Instead of typing in artists' names and song titles in a media player, the networked CDDB automatically pulls the information from its server. AOL, Apple and Napster are among the companies that license Gracenote's technology so music fans can spend time listening to tunes instead of monkeying with the player screen.

"If every user of an iPod had to take their CD collection and hand-type everything in, how many iPods would really get sold?" said Gracenote CEO Craig Palmer. "If they couldn't do that, then how big would this market actually be?"

As the digital entertainment industry grows, Gracenote has built new products on top of its music-recognition foundation. In addition to its networked CDDB database, the company embeds a version of the CDDB into consumer electronics devices. Its services are included in PCs, software, digital stores, car navigation units, portable media products, home media servers and cell phones.

Last year, the company launched its MusicID product, a file-recognition technology that analyzes the audio characteristics of a digital file like an MP3 or Windows Media Audio file. The service uses audio waveform technology to match music without any identifiable tags to Gracenote's database.

New this year, Gracenote's Mobile MusicID can identify snippets of songs through a cell phone. Music fans can dial a number and hold up their mobile phone near a radio, for instance, and Gracenote's service will send a message to the phone, identifying the tune being played. Listeners then have the option to buy it as a ring tone or digital download. Mobile MusicID has launched with carriers in Europe; the company has also closed deals in Asia and the United States that will be announced later this year. Gracenote also sells an automatic playlisting technology and provides a DVD-recognition service that will ship in some products this year.

"Gracenote, in my opinion, is the leader for metadata," said Daniel Graf, a senior director of new business for Philips Consumer Electronics, which has been working with the company for several years. "It's truly added value. You don't have to go look at the CD and say, which song was Track 5 again?"

Graf said all of the Philips broadband-connected devices that support CDs use Gracenote technology.

Gracenote's CDDB stems from a project initially undertaken by two engineers, Ti Kan and Steve Scherf, as a hobby. The two developed a way for CDs to be played and matched with files on Unix computers. Eventually, they linked the database to the Internet and opened it up to allow anyone to contribute information to the database.

Around the same time, Ty Roberts, founder of a music technology startup called ION, was working on a way to combine CDs with multimedia content. The two ventures attracted the attention of Escient, a company that built home media servers. Its owner, Scott Jones, purchased CDDB and Roberts' intellectual property and put them together to form Gracenote.

Jones and Sequoia Capital are the two principal investors in the company, each owning between 20 percent and 25 percent of Gracenote. Bessemer Ventures owns about 10 percent of the company. Scherf and Roberts are still with the company; Kan is an occasional Gracenote consultant.

By the end of this year, Gracenote will most likely be profitable, CEO Palmer said. He said the company has no immediate plans to go public.

"It wouldn't be a 2004 event for us, but we're keeping an eye on the market and building the company in that fashion," Palmer said. "Although we're not looking for this by any stretch of the imagination, I think we'd also be a great acquisition for somebody because if somebody got us, they'd certainly put a hurt on their competitors."

From its inception, the service has relied on music fans around the world to keep its database robust. If music enthusiasts play a CD for which there is no track information, they can submit the details to the database, which is then reviewed by Gracenote editors. The company collects 10,000 submissions daily from 160 countries in 65 languages. Music labels and publishers also submit their songs to the database.

But Gracenote's transition from an open, public database to a profit-minded, private venture has irked some critics.

"They're the bad kid on the block," said Robert Kaye, who runs MusicBrainz, an open-source music-identification service, similar to some of Gracenote's offerings.

Kaye's beef with the company is that it took a database that had been built by music fans and turned it into a private company.

"Everything that they did by taking the resource private was perfectly legal," said Kaye, "but it certainly wasn't a very community-minded decision."

Gracenote also drew flak from open-source supporters three years ago after the firm filed suit against Roxio, a maker of CD-burning software. The suit alleged that Roxio breached its contract with Gracenote when it decided to use a rival open-source service, freedb.

Roxio later agreed to settle the suit for an undisclosed sum and currently is a customer of Gracenote.

Kan, one of the creators of CDDB, said that such criticism about Gracenote's proprietary business model is unfounded.

"That fact is, at the time, we had to do what we did," Kan wrote in an e-mail. "CDDB was generating so much commercial interest, the original principals were ill-prepared to handle it. Were it not for what we did, CDDB would probably stagnate and die."

Rather than stagnate, the company is flourishing. Gracenote provides an invaluable service to digital media fans, one analyst said.

"You don't have to expend energy on managing the little details of your music after you've ripped it and moved it around, because the Gracenote database does that for you," said Susan Kevorkian, an analyst with IDC. "There's potentially a lot of time involved in managing those little details, when what consumers are really interested in is getting their music onto those high-capacity devices and being able to use it."

A lot of Gracenote's success and credibility is based on the CDDB product, Kevorkian said, which would be difficult to replicate because it was built by millions of people.

"I think they are very well-positioned to continue to expand their reach going forward," she said. "They are becoming more and more relevant as services and devices that are launched use those technologies."

And Gracenote is stealthily moving into another market. Palmer hinted that Gracenote's next frontier is tackling the problem of copyright infringement on peer-to-peer networks.

"There are some things that we're doing that could help a number of companies striving to be more legitimate in this space," he said. "We've got a partnership in that world, but I can't really say much more about that at this point."