Aei Music Network Inc. Business Information, Profile, and History

Company Perspectives:

The pioneering spirit that was born twenty-nine years ago has now come full circle in 2000 to a new era of progress and innovation on the AEI horizon. Fusing the arts of music and video with technology, our ProFusion Digital Delivery System sets a new standard for business entertainment. By combining the best features from current platforms, it promises to revolutionize the industry. And just as we've seen our horizons expand, the world suddenly seems smaller. With travel between nations and a mobility of people and cultures like never before, our concept of borders and limits has been redefined. Our global programming studios are now being linked digitally across oceans and time zones to share and exchange content, creativity and resources--bringing the world closer still.

History of Aei Music Network Inc.

AEI Music Network Inc. brings consumers and retailers together through music. Using original artists' music to convey specific moods, AEI pioneered the use of 'foreground music' to engage customers. Red Lobster, Gap, Starbucks, and Hyatt Hotels are among the well-known corporate chains that have used AEI's programming to harmonize with the lifestyle of their patrons. AEI provides in-flight entertainment for 30 commercial airlines; the company also programs video content and sells sound systems. With 260 affiliates serving 130,000 businesses in 50 countries, AEI is the world's largest music service business.

Origins

Mike Malone was a 26-year-old securities analyst at US Investment Services when he started Audio Environments, Inc. (AEI). According to Fortune magazine, the stereo at the Hindquarter Leschi, Malone's main hangout, kept breaking. Malone, something of an audiophile, suggested the restaurant install a reel-to-reel tape player. He also offered to record tapes for the club himself.

Malone convinced hairstylist Gene Juarez to be his first customer to the tune of $32 a month. (Juarez subsequently started a successful salon chain, remaining a loyal customer.) Emboldened by this success, Malone quit his job and set up shop in a cramped Seattle office in 1971. Unable to find adequate financing for his novel idea, he went through $100,000 of his own savings in the first year and a half.

At the time, Muzak dominated the use of music in commercial environments. According to Forbes, however, Malone noticed that while doctors' offices and the like were constantly awash in 'elevator music'&mdashøned down, instrumental versions of popular songs and standards--more progressive restaurant and shop owners were playing rock'n'roll the way it was recorded. They got customers' attention by playing the music they liked, rather than simply masking silence with background music. Malone later told CNNfn that this concept of 'foreground music' was simply an offshoot of the popular music explosion of the late 1960s.

Airborne in the 1980s

Prices began at $40 to $75 a month for a four-hour-long tape (in a proprietary format) of customized programming. AEI paid fees and royalties to the music publishers and performing rights societies (ASCAP and BMI) for permission to use the songs. In its early years, AEI targeted fast-growing chains such as The Limited clothing stores and TGI Friday's restaurants. The company established an in-flight division to bring programming to commercial airlines in 1982.

AEI's established rival, Muzak, changed hands in 1972 and 1981; Malone himself tried to buy it in 1986 but was leery of taking on debt to do so. It instead went to Marshall Field V, who later relocated it from New York to Seattle after buying Yesco, Inc. Yesco, another commercial music supplier, had been founded by a former AEI associate.

AEI's headquarters moved to a restored Chrysler showroom a few blocks from its original location in 1987. The company also opened several other offices across the United States as national retail chains drove its growth.

In the fall of 1988, Malone bought the Seeburg Music Satellite Network, acquiring an important new technology. The Raleigh, North Carolina company, previously a jukebox manufacturer, had developed the capacity to broadcast high-fidelity music programming directly to subscribers via satellite. Most of AEI's programming was delivered via tapes, although it also used a hybrid FM radio/satellite system in some cases. Satellite transmissions were not limited to music. AEI also beamed trailers to show on televisions in the lobbies of United Artists theaters. Voice and fax transmissions were also possible.

In 1989, Forbes recounted this impressive list of AEI clients: Wolfgang Puck's Spago restaurant in Los Angeles, Victoria's Secret stores, Gap clothing stores, Wendy's Hamburgers, Bennigan's restaurants, more than a dozen airlines, and the U.S. Navy, which piped in music to its submarines. Air Force One was also a client, subcontracting through United Airlines. The service had more than 55,000 subscribers in all; its programming reached 24 million people a day. Revenues were about $35 million a year.

By the late 1980s, Muzak also was playing contemporary music by the original artists. It had 200 franchisees around the world (most in the United States). Roughly three times the size of AEI, Muzak reached 80 million people a day. For its part, AEI had begun offering elevator-style background music.

Malone owned about three-quarters of AEI. Its success allowed him to build an impressive antique car collection and buy a majority share in the restored Sorrento Hotel in Seattle. He was also a partner in a restaurant in La Jolla, California (George's at the Cove). His 'corporate art collection' included early guitars from Bill Haley, Elvis, and John Lennon.

New Frontiers in the 1990s

AEI Music Network Inc. was formed in 1992. A National Service Center was established the same year. By this time, the Systems Division, which installed audio systems in businesses, had become the largest contractor of its kind in the United States. In 1993, AEI paid £18 million ($25 million) for Rediffusion Music, the British market leader in business music. The German subsidiary Reditune Thorsen also was included. Rediffusion had annual revenues of about £160 million. The transaction made AEI the world's largest music service company, operating in about 40 countries.

AEI's sales were about $90 million in 1994; its daily listenership of 35 million was second only to MTV. Still, only between five and ten percent of American businesses used commercial music in the mid-1990s, leaving the market open. While AEI and Muzak (with 70,000 and 200,000 subscribers, respectively) had shared the field with the much smaller 3M Sound Products for years, in 1994 the industry saw its first new entrant in two decades. Digital Music Express (DMX), a service operated by Los Angeles-based International Cablecasting Technologies Inc. (later known as Liberty Digital), offered both CD-quality sound and the capability for clients to change stations from their own sites. The cable-based system offered 60 channels, although a Muzak representative quipped that their programming was not designed specifically for businesses, most of which were not wired for cable anyway. Another new entrant, PlayNetwork, was launched in Redmond, Washington in 1996.

AEI estimated the international music programming industry to be worth $1 billion; it continued to grow by acquisition overseas. The company bought the 6,000 accounts of Philips Media Systems B.V. in April 1997. AEI had entered European joint ventures with Strengholt B.V. (AEI Reditune Music) and Sony Music and Warner Music Group (Music Choice Europe). Its Australian joint venture with Sontec Group bought Soundcom Australia from East Coast Television in October 1997.

AEI was averaging nearly 20 percent growth a year. In July 1998, WavePhore Networks announced that it would be supplying 10,000 satellite receivers to AEI and its affiliates in the next two years. It had already sold AEI 30,000 units in the decade.

The Wall Street Journal noted that at the trendiest restaurants it was not uncommon for loud funk to be playing while patrons dined on très chic gourmet fare. While it was long known that faster, louder music turned tables, the programmer's art was becoming increasingly sophisticated. The advent of direct broadcast satellites led to a proliferation of programming concepts as stores and restaurants fine-tuned their environments to suit their respective niches. This 'lifestyle programming' targeted specific emotional responses through the music rather than merely following genre categories. Programmers visited stores and analyzed demographics, traffic, and style to come up with distinctive sounds to help differentiate one location from another. The Limited required signature sounds for each of its more than a dozen different divisions.

In the late-1990s, many retailers were packaging their own CDs of their in-store music for shoppers to take home. Victoria's Secret pioneered this in 1988; in fact, five of the best-selling classical albums in U.S. history were collections assembled by the lingerie shop. Old Navy, Pottery Barn, and Starbucks were others hopping on the trend, each featuring its own genre of music. Many hired AEI to package the collections, which fostered brand awareness and were usually profitable in their own right.

AEI Music Markets was created in 1999 to help clients bolster their brands with their own CD compilations, licensed music for advertising campaigns, and multimedia content for

1971:Audiophile/financial analyst Michael Malone starts compiling music for local businesses.

1982:AEI establishes a division for in-flight entertainment on commercial airlines.

1988:AEI acquires direct satellite transmission technology.

1993:Purchase of Rediffusion Music makes AEI world's largest music service company.

1999:Purchase of Sight & Sound Entertainment bolsters AEI's video imaging business.

AEI bought Sight & Sound Entertainment, based in Redmond, Washington, in September 1999. The deal made AEI the world's largest provider of video imaging content for businesses. Sight & Sound was servicing more than 6,000 retail locations in the United States at the time of the acquisition.

AEI Music Network announced a joint venture, AEI Music Latin America, with Cisneros Television Group in October 1999. Cisneros was the leading pay television content provider in Latin America. The new enterprise was to focus on regional programming; it soon debuted 20 channels of music on the DIRECTV direct-to-home satellite television service.

In 2000, AEI was pushing its ProFusion Digital Delivery System, which could store either 160 hours of music or eight hours of MPEG 2 video. Clients received updates either through CD-ROMs or on-line and could broadcast it to hundreds of locations.

Principal Divisions: AEI Music Network; AEI Music Markets-Worldwide; AEI Music Inflight.

Principal Competitors: Liberty Digital; Muzak, Inc.; PlayNetwork.