While online music pirate Napster counts the minutes before its showdown with the recording industry Wednesday, Rioport is cranking up the volume about its new CEO and fresh round of venture capital, both of which it says are a direct result of its "legal" approach to online music.

After nine months of trying to find itself, Rioport is getting back to basics with the help of a $31.5 million infusion from S3, Vulcan Ventures, Oak Investment Partners, Quantum Technology Ventures, and Mitsubishi (OTC: MSBHY).

Since the San Jose-based Web music applications service provider (ASP) spun off from the Diamond Multimedia unit of S3, its strategy has veered all over the charts, according to Jupiter Communications analyst Aram Sinnreich. "At first, the company was focused on being a media site, specifically one that offered music downloads and leveraged the branding of S3's Rioplayers [devices that look like Walkmans]," he says. "When they made a deal with MTVi, Rioport started to segue into offering digital music services."

MUSICAL INFLUENCES

Now, CEO James Long, who came out of retirement to run the company three months ago, says he has been able to bring Rioport back to its original roots as an audio service provider. "If you look at the space, there are way too many companies that don't have a focused business model that makes sense," he says. Rioport is betting on the traditional model of consumers going to e-tailers and favorite artists, which means it must maintain good relationships with record labels and e-tailers.

Through its Pulse One Music Service, Rioport allows record labels to deliver their content to consumers via its network of e-tailers, including MTV's MTVi Group, House of Blues, and Ministry of Sound. Consumers can download and purchase digital audio files from the e-tailers' sites. In collaboration with music device manufacturers, such as Diamond Multimedia, Rioport ensures that music applications and devices can recognize and talk to one another across various file formats and PC applications.

Mr. Long believes Rioport now has the right model, but it's very similar to those being pursued by other online music sites. Rioport's competitors include Emusic.com, Epitonic.com, Liquid Audio, Amplified Holdings, Supertracks, Napster, Scour.com, MP3 music format sites such as MP3.com, and many others.

If Napster loses the suit filed against it by the Recording Industry Association of America (RIAA), "legal" music providers such as Rioport, Emusic.com, and others will get a boost. But there is still a question about the best way to make money in this space.

CD OR NOT CD

Rioport makes the bulk of its money by hosting online music for e-tailers and consumer electronics makers. In contrast, Emusic.com will allow consumers to download music for a monthly fee, the company plans to announce at this week's Plug.In music conference in New York. It appears that each of the players in the space is experimenting with different revenue models. Rioport also makes money from taking a cut from the sale of music CDs. Whether it will pursue a subscription model similar to Emusic.com's is still up for debate, Mr. Long says.

Since it is focused on helping private record labels deliver secure content to consumers, Rioport has a good relationship with the RIAA, unlike other companies such as Napster and Scour.com, which are on the association's blacklist. "[Scour.com primary investor] Michael Ovitz is involved in a political battle I bet he doesn't want to be in," says Mr. Long. Although he says file-sharing software such as Napster's is popular, the challenge lies in turning file sharing into a legitimate revenue model that is secure for consumers. "For example, do you charge per song or per CD, or via a subscription service?" he asks.

One of Rioport's lead investors noted that it was important the company took a legal approach. Fred Harman, a partner at Oak Investment Partners, says he wouldn't have invested in a "rip-off site." But the main reason Oak reinvested and took the lead on this second round is that it believes in the size of the market for online digital music distribution. "This market has a greater chance of being adopted by the Internet than any other, since the consumer is looking for immediate gratification," Mr. Harman says.

Market researcher Jupiter Communications predicts that online music sales will leap from just $327 million in 1999 to more than $2.5 billion in 2003, and $5.4 billion in 2005. The researcher says that "the majority" of digital music sales will come through online subscriptions.

IT'S GOT ITS MTV

Jupiter's Mr. Sinnreich believes it's a good sign for Rioport that it managed to raise new capital from strategic investors in such a cynical investment climate. Its partnership with MTV Interative (MTVi), a music network that includes MTV.com, VH1.com, Nick.com, and SonicNet, could also put the startup high on the digital music playlist.

The company's biggest challenge, the analyst says, is to keep finding commerce and media partners who will use Rioport's service on their sites. In this arena, he says, "few players will succeed."

Mr. Long believes the company's new partnerships with strategic investors will give it an edge over competitors. Rioport will now have access to storage capabilities from EMC, an information storage company, as well as disc drive technology from Quantum Corporation, which makes drives for digital audio devices. Mitsubishi will give Rioport access to its payment clearinghouse services for digital audio transactions, as well as an inlet into Japan, an important market for Rioport because of its huge music enthusiast community.

Outside of its strategic investors, Rioport has been busy inking other deals as well. The company just signed a partnership with one of the largest Internet service providers in Japan, Nifty.com, which will start selling music with Rioport as the service provider. And Rioport has recently added two new consumer Generation Y sites to its e-tailer network -- Bolt.com and iTurf.

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