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Andy Burgess

Fernando Morales/The Globe and Mail

Three years ago, aspiring musicians around the world began submitting their songs to a website known as American Idol Underground, an online version of the popular reality show, paying $25 (U.S.) in exchange for the possibility of reaching a wider audience.

Unbeknownst to them, their hopes of stardom ended up serving as the fuel for the impressive growth of Fluid Music Canada, a provider of in-store background music and advertising for 15,000 locations around North America.

The songs became part of a library of an estimated five million "low-royalty" or "no-royalty" tunes acquired, in part, through artists voluntarily surrendering their rights to the music.

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"It is a kind of brave new world," said Lorne Abony, chief executive officer of Fluid.

"Previously, if you submitted a video to somebody, there were all sorts of rights issues," he said. "Nowadays, when you upload your content to a social networking site, you effectively give away the worldwide rights."

Fluid added an estimated three million songs, also free of rights restrictions, by acquiring the library of MP3.com.

Mr. Abony referred to the low- or no-royalty model as "the secret sauce" that gives his business a strong advantage over that of Muzak and his other competitors who pay for content.

Now, Mr. Abony is spreading his special sauce on the direct-sale music space, yesterday announcing a proposed acquisition of Somerset Entertainment Income Fund.

If the deal goes through, some of Fluid's musicians may see their works being sold at major retailers such as Sears and Best Buy.

Fluid hopes to distribute its library in part through Somerset's network of 24,600 displays in 18,800 locations across 20 countries.

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Already, many of those artists are being heard in the retail and hospitality locations to which Fluid delivers its music and advertising service.

A song by an aspiring Celtic musician, Mr. Abony said by way of example, "might be playing now at J.C. Penney and tomorrow at Ace Hardware."

Somerset is valuable to Fluid because it has developed a profitable niche as one of the leading producers and distributors of specialty music, an estimated $8.5-billion (U.S.) business that includes relaxation CDs and seasonal albums created for large retailers such as Target.

While Fluid's online music sales are minuscule - it sold only an estimated $250,000 (Canadian) worth of downloads last year - in July the company boosted its online presence with the acquisition of the Pure Tracks music service. In 2008, it reported $15.1-million in EBITDA on $85.5-million of revenue.

Somerset is eyeing the possibility of moving the older consumers who make up the majority of its buyers online. "If we can figure out how to be the company that introduces the mature consumers to online music distribution, there's a lot of money to be made there," said Andy Burgess, the president and CEO of Somerset. Still, he noted, "Digital music distribution is a tough business if you're not iTunes. I can't think of a company out there that's out there actually making money doing that, and some would argue even Apple doesn't make money on the distribution side of the music. To get people to buy your music is tricky. So in the physical space, we've had a very specific strategy. We are going to focus on a particular demographic, work with certain distribution channels where we can get leverage, and sell a higher margin product and make money that way."

The deal isn't a foregone conclusion. Fluid and Somerset were engaged last year, only to see their union called off in September, 2008.

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FLUID MUSIC CANADA (FMN-T)

Close: $1.35, unchanged

SOMERSET ENT. (SOM.UN-T)

Close: $2.11, down 3¢

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