Get Ready for the Vivaldi—Excuse Me—Vivendi String Quintet
By Larry Powers
MusicNet has made a deal for Napster to become its third major distribution network, along with America Online and Real Networks. The newspapers and Internet articles were filled with it last week. The quintet of the big Five Majors is on the way next, as they string along with Napster and MP3.com to obtain an established audience.
Distribution power is the key to their planned business on the Internet. Vivendi, as soon-to-be owner of MP3.com, isn’t waiting to be convinced, but just maneuvering for the right terms. Then it will link its two catalogs in Duet, Universal (29% market share) and Sony (9% share)—to the three catalogs already in MusicNet, BMG (18% market share), EMI (11%), and Warner (13% share). Vivendi’s decision to say yes, which will necessarily follow from its estimated $500 million investment in MP3.com (what good is the investment without being able to offer all the music?), may well give it a leadership role in the String Quintet. Now a few variations on the major themes, and an attempt to dispel the background noise of certain instruments.
Distribution Power
The last two weeks of deals—on top of discussions, on top of protests about stale lawsuits, etc.—all dissolve into one reality. The Majors have been trying to control the distribution of music over the Internet since 1998, and they have squelched many small usurpers in the early stages of the Internet. The Majors are acting as if they are in competition with each other. But they can’t really compete effectively because they each need the other’s catalogs to build a viable distribution system for the Internet. Meanwhile, two big defendants in last year’s lawsuits have held onto a meaningful pool of music buyers—Napster and MP3.com. Only these two entities provide a ready market for Internet music—with a claimed 6 million daily users still intact, there are probably still 40 million active Napster users waiting to consider a good subscription deal. Maybe half that number is left on the present/past customer database of MP3.com and its music locker MyMp3.com.
Both customer pools, totaling 60 million, matter to all five Majors, and both the 30 million clients of Internet portals AOL Time Warner and the estimated 10 million(?) who use Yahoo will also matter, although these are people of all ages and not defined as lovers of music. Vivendi (and its smaller distribution partner Sony) need access to all these millions of Napster, MP3.com and “portal” people quickly. The only way to get it is to grant access to their music catalogs to the other Majors and get their catalogs in return. It is Vivendi versus BMG/Warner, with the two smaller music companies going along. Warner has become enormously powerful in this horse-trade because of the long-term value of its additional 60 million cable customers as targets of music marketing over the Internet. But with a 29% market share of the top-selling music, Vivendi Universal remains powerful.
Technology Is Secondary
RealNetworks has excellent, secure technology for playing and streaming music over the Internet, and has retained the largest ownership share—40%—in MusicNet, the consortium of BMG/Warner/EMI, each with 20%, designed as their marketing vehicle over the Internet. But it has not been proven yet on the scale necessary to stream hundreds of thousands of songs at once from a few central servers.
MP3.com also has excellent technology but will face the same scaling-up problem when used on Duet. Vivendi paid a big price to buy this technology and catch up with MusicNet. But if the predicted overall deal on music licensing occurs, a little technology sharing should be in the cards as well, because all five Majors want to see both distribution vehicles succeed.
The leadership role here should fall to CEO Rob Glaser of RealNetworks (interim CEO of MusicNet as well). He has a proven track record of solving music streaming problems effectively, and against the embittered competition and power of his former employer, Microsoft. AOL also has top technology talent in its Nullsoft-Winamp division (one key executive also invented Gnutella), and with the brilliant team at MP3.com pitching in, the problems will be solved across the board. None of the Majors will want to lose sales because of technology flaws at any Internet music site to which they have licensed catalog on a royalty basis. When companies with virtually unlimited capital have to solve a technical problem, they get it solved. Young engineers with fresh ideas always come up with something new, but Glaser and the other pros here were all typical young engineers, and that’s how they made their business careers. While rushing to launch something by late summer, technical mistakes will be made, but so what? AOL weathered many technical problems for years and still came out on top, and music subscriptions and downloads over the Internet have become a kind of “public utility”—where else are the present 100 million fans waiting out there going to get it?
Furthermore, at this point antitrust concerns about five oligopolists sharing technology to get music they own out to the public at a fair price, are minimal. Cooperation may well be what an enlightened court would order, against the backdrop of consumer deprivation for two years, and the Bush administration won’t take them to court anyway. Rob Glaser with RealAudio, as the current leading supplier of streaming music technology to everyone on the Internet, is a natural for statesmanlike management of the technology problems ahead. If you want to get a streaming video feel for his approach, go to www.realnetworks.com, the section on “Company,” and play his testimony before Congress recently, explaining MusicNet. It is followed by a well-done audio press interview of Napster CEO Hank Barry and Glaser on the announcement of the Napster-MusicNet deal.
But wait, there are problems already. The Wall Street Journal carried a piece Thursday, 6/7/01, saying the Majors feel Glaser didn’t consult with them enough on the Napster license from MusicNet. Owners of 40% of MusicNet (not BMG) are restless, and pressure is building to appoint another and permanent CEO and get going with regular, formal board meetings for this strong startup, but startup nonetheless. “Privately, music executives said they don’t think Napster can meet the [security] conditions,” says the Journal article. Napster still raises the hackles of the Majors every time any of them, or their agents, deal with it. But I wonder if the “executives” quoted so often are just trying to raise the bar on Napster, and veto anything it tries to do by way of good faith compliance. Napster’s survival may have made a lot of second level executives and lawyers look bad, and they are spoiling to get even, perhaps.
Napster Redux
Napster is reborn now, trying to obey the court orders (reporting in court last Wednesday on compliance). Napster now is required to license the MusicNet (RealAudio) platform to gain access to licensed music from the three Majors therein. Using this intermediary should sanitize defendant Napster for the guys in MusicNet who still want to appear to be aggressive plaintiffs, but it won’t satisfy the diehards. But having MusicNet as the trading post is also a balm to Vivendi Universal, who professes undying dislike for Napster while it still needs to license product from MusicNet. So if MusicNet handles a sublicense deal for Napster to Vivendi Universal, the old enemies don’t need to deal with each other. “Remember the market shares”—Universal/Sony at 38% and the others at 42%. The MusicNet service, with day-to-day power temporarily residing in CEO Rob Glaser, is a useful vehicle to bring in Vivendi and Sony’s catalogs, and also make Napster’s marketing power available to Vivendi, Sony and MP3.com. Sometimes a good go-between can settle a war the parties can’t settle for themselves, and Glaser has made a productive start with the first deal with Napster.
We note that all of these music platforms are based upon central servers, made secure by RealAudio’s chosen technology or someone else’s acceptable to all music licensors, with subscriber members able to pass the music among themselves (with deductions from their subscription quotas per month). This leaves the Gnutella, Aimster, Freenet and other decentralized peer-to-peer projects hanging in the wind with no licensed music and lots of ongoing litigation. This is all the more reason for the five Majors to join a sales quintet and achieve marketing mass as soon as possible, after two years of selling time wasted in the distraction of litigation. I don’t mean to suggest the litigation was a waste—Napster was just plain wrong, and the copyrights had to be protected, as we have said in several articles.
Napster isn’t standing still either, having just licensed the Loudeye music preference technology, part of a varied group of preference engines that we wrote about some months ago, Making Music for An Audience of One. The Loudeye system for analyzing a user’s musical taste will enhance the subscription marketing system being put into effect with music from three Majors and ultimately five. Such technologies will undoubtedly pop up on MusicNet, Duet and MP3.com as well.
Armed with a conditional good-housekeeping seal of approval from three Majors, the next coup for Napster will be to make a good deal with the music publishers (National Music Publishers’ Association), settling their royalty rate for Internet subscriptions and sales. See our earlier article on this, Publishers Protest, Labels Balk. The publishers should reach out to make a sensible deal with Napster, knowing it will set a pattern for peace with the MusicNet, Duet and other Internet ventures involving the Majors. Napster has also just hired a former U.S. deputy attorney general to coordinate the solutions to its various legal controversies.
The Napster Litigation Is Just Talk From Now On
As the Napster alliance with MusicNet was announced, each Major went out of his way to say, we’re still suing, still keeping their “feet to the fire” in court, and we won’t let them get into business ahead of us. But in my respectful opinion, it’s all guff, and the heart has gone out of this case except in lawyers’ papers. The appeals court set the rules, and Napster is still here in diminished form, so why not face reality?
All five Majors need Napster’s distribution power, and, further, need a user-friendly central server model. The next battle is to fight off the Gnutella threats with central server security, controlled file transfers, and organized marketing techniques. Forget about someone really trying to assess damages against new partner Napster and its ultimate financial sponsor Bertelsmann. If Universal could recover a pitiful $53 million from MP3.com and turn around and commit an estimated $500 million investment to buy it, the others can grow up fast as well and quit personalizing a corporation as an “enemy” when most of the wrongdoing executives are not in power any more. Japan and Germany were enemies of the U.S. too, but their people and talents have had much to offer the U.S. since 1945. I could foresee the other Majors soon wanting a stock interest in Napster as well, whether held in their MusicNet and Duet vehicles or more directly. The peace we have been predicting, and predicting, since November 2000 (see Notice to All Napster Users) may finally be at hand.
AI
