E-commerce company offers downloadable audio books

WAYNE, N.J.

On the surface, it looks like a rare recipe for e-commerce success. Audible Inc., an Internet graybeard at age 7, sells books you cannot read. Thousands of them.

The small company offers downloadable audio versions of books, magazines, radio shows and newspaper summaries that can be listened to at a computer, burned onto a CD or stored on a portable device for playing later.

Audible has won acclaim, attracted topflight partners and is backed by Microsoft Corp. and other big investors. It has shown steady sales growth, and its chief executive, Donald Katz, says he even expects to make a profit next year.

But the company lost $4.5 million in its most recent quarter and finds its future as a stand-alone service in question.

With its shares well under a dollar, Audible recently got a delisting notice from the Nasdaq Small Cap Market.

Katz nevertheless exudes optimism, believing the essence of his business is healthy.

No longer a big deal

Audio books provide balm to the time-strapped and digital audio is easier to manage than cassettes or CDs. A portable digital player can store several books, the equivalent of more than 12 cassettes or six CDs.

"Being read to is a very pleasurable experience, almost harkening back to bedtime stories," Katz said. And, he added, "No longer is downloading something to your computer a big deal."

Katz, 50, is a one-time Rolling Stone writer and the author of four books, including "The Big Store: Inside the Crisis and Revolution at Sears" and "Just Do It: The Nike Spirit in the Corporate World."

He started Audible in 1995 while seeking a change from the writer's life, and its first sale was in 1997.

Audible avoids the copyright lawsuits that crushed Napster, which allowed users to share music for free over the Internet because it has deals with about 150 audio book publishers, broadcasters and periodicals, which get royalties when Audible sells one of their products.

"We just create another channel for a professional creator to sell their wares," he said recently in the former brokerage offices his company occupies in a building behind a movie theater in Wayne. The company's 65 employees work two shifts in dimly lit cubicles, down from a peak of 90 in July 2001.

Tiny slice of the pie

Among Audible's 5,900 titles are many of the most popular books, with 12 of the 20 hardcover titles and 17 of the 30 paperbacks on The New York Times' best seller list.

Audible's third-quarter sales of content were $3 million, more than double the figure in the same period a year ago. That's a tiny slice of the U.S. audio book market, which Audible estimates at $400 million, nearly all of it in tapes.

Michael McGuire, research director for Gartner G2, a division of the Stamford, Conn.-based Gartner Inc. business research firm, praised how Katz's company serves literature lovers with little time for reading.

"What he's tapping into is an increasing feeling of time poverty among people," McGuire said. "That kind of time compression spans age groups and is growing."

Audible can survive "as long as they continue to develop products that solve certain problems," McGuire said, but noted success could make them a takeover target.

"They will either find themselves purchased or find themselves competing with a much larger corporation."

Audible was funded with $83 million from investors, and the remainder through a $20 million barter deal with Amazon and Microsoft.

Microsoft owns one-third of Audible. Amazon.com and Bertelsmann AG each have stakes of about 5 percent.

Those investors watched Audible go public in 1999 with a $9 initial offering that quickly rose to about $25 before the stock steadily fell through 2000 and up to now.

Amazon spokesman Bill Curry refused to discuss Audible's prospects. Microsoft had no immediate comment.

Few competitors

One thing in Audible's favor is that it has few competitors in the downloadable arena. One is MediaBay Inc., whose brands include the Audio Book Club. But its main business is mail order tapes.

Audible also has signed on big-name partners such as Random House, the first publishing imprint to produce titles specifically for digital distribution.

AT&T Wireless and Audible are developing technology so customers can download books into wireless devices.

Audible content can be played on PCs or handheld devices. The company sells its own player, the Otis, which it offers for free with a 12-month subscription that allows two books for $19.95 a month.

Pirating is discouraged by a "lock up" system that only allows downloads to be burned 1.5 times onto CDs. The extra half is in case an attempt goes awry and the customer has to try again.

In addition to the Web, Audible content is available at 41 library systems around the nation.

The first was the Kalamazoo Public Library in Michigan, which has purchased 185 titles, director Saul Amdursky said. The reaction has been positive, he said, because if borrowers want something not already in the collection, the library logs on and downloads it while they wait.

"From the library's point of view, it's never out, it's never lost, it's never damaged, and I have no storage," Amdursky said. "For the customer, it's never out and it's compact."