e.Digital Corporation (fka EDIG)

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DAILY BRIEFING -- AOL vs. Vivendi: The Battle of the Online Bands
By Ron Grover
http://biz.yahoo.com/bizwk/010611/axmtzopnzhpnl7tccxjfnq.html

Maybe I'm an old fogy. But I still can't figure out why anyone would get all excited about the June 6 announcement that onetime outlaw music site Napster had signed agreements with three large music companies to distribute music over the Internet. Forget for a moment that the agreement itself has more holes in it than Aerosmith star Steven Tyler's fishnet undershirt. Warner Music and EMI, both of which signed the agreement, say they don't intend to let Napster actually get its hands on their music until Napster can guarantee that the tunes won't be ripped off from the site. That's still a major concern.

No, the reason the Napster agreement is worth as little as a Sha Na Na reunion tour is far more simple: The two largest music camps are waging open warfare. One group is led by AOL, which also just happens to own the industry's third-largest music company, Warner Music. The other is led by industry leader Universal Music, a unit of Vivendi Universal. And if you guessed that the fight is all about who's going to be the gatekeeper between music and the consumer, you'd be right. Until this battle of the bands is settled, getting music over the Internet for a fee isn't going to be much of a business.

TWO CAMPS. Let's review the situation. In one camp, you've got the so-called MusicNet alliance, which includes the three labels -- Warner, EMI, and Bertelsmann. Together they control around 40% of U.S. music sales. In April, MusicNet, which is powered by technology from RealNetworks, signed a deal with Warner parent AOL Time Warner. Under that agreement, AOL will distribute the three labels' music under the brand name AOL Music. But it will be MusicNet that actually delivers the music to your computer.

Napster -- which, thanks to a $60 million loan from MusicNet partner Bertelsmann, more or less dances to the conglomerate's tune -- will also license music from these three labels, if and when Napster can solve its various security issues. That means when you log on to Napster, you're likely to be paying for MusicNet's service as well, so AOL gets a cut of the action along with the other three labels.

In the other camp is Universal, the world's largest music company, and Sony. Those two companies control 43% of the music sold in the U.S., according to recent numbers by tracking company SoundScan. Sometime this year, the two companies say they'll start offering their own service, called Duet, from which folks can stream music for a set subscription. Duet signed its own deal some weeks back with Yahoo! to distribute music for Universal and Sony.

OFF-LIMITS. Now, here's where the problem starts. As AOL's service is currently configured, you won't be able to get all of the most recent music from Universal or Sony artists through MusicNet or Napster. That's because Napster and MusicNet don't have deals yet with those two labels, which means half the stuff out there is off-limits to the two services.

On the other hand, Duet doesn't have any music from Warner, Bertelsmann, or EMI. So, let's say you're trying to get music by a Universal artist like Limp Bizkit or by Sony's new girl band 3LWl from AOL. Forget it.

I can't imagine my 17-year-old daughter logging on to AOL looking for just any old band. She's going to want Limp Bizkit, or whatever else strikes her fickle teenage fancy that day. And if AOL doesn't have it, she's going to go somewhere else. If you're AOL, you just lost a sale. And if there isn't enough of what my kid -- and the millions more like her -- are looking for, you're not going to get her to subscribe to your service.

ALL TALK. AOL knows this, of course. And it desperately wants the stuff Universal and Sony are putting out. So does Napster, which is tethered to AOL through its MusicNet deal. It should be fairly simple to work out a licensing arrangement, right? Doesn't AOL Time Warner show Universal movies on its cable systems?

Not so fast. For months now, AOL and Vivendi Universal have had ongoing negotiations over the financial terms under which AOL would distribute music over the Internet for Universal. So far, it has all been talk. No deals. Sony hasn't been heard from on the subject, other than to say it wants material avaiable from Napster to be protected before it signs on.

If you guessed the problem has something to do with AOL owning one of Universal's biggest competitors, there's probably a free pass to the next Eminem concert for you somewhere. The deal AOL is offering Universal -- the same one Bertelsmann and EMI signed on for -- makes the online giant the gatekeeper. The consumer pays AOL a subscription fee and then gets to download whatever music AOL has to offer. Sounds like a cable deal, right?

You bet. And just like your neighborhood cable company, AOL is the one that markets to you. If there's a hot promotion for a coming concert, or maybe some old music AOL wants to sell, it will do the peddling. Meanwhile, AOL is collecting all that crucial data on what consumers like and don't like.

NOT ALL RIGHT. That seems to be just fine with EMI, which has been signing up music sites all over the world. And it looks like it's also O.K. with Bertelsmann, which seems to be hoping AOL will help add some legitimacy to a new, reconstituted Napster. But this notion of letting AOL be the gatekeeper sure as heck isn't all right with Vivendi Universal.

You see, Vivendi is quietly building a distribution system to the consumer, much as AOL has so successfully done. Along with British telecom Vodaphone, Vivendi has created a wireless portal to send music and movies to folks. That's why Vivendi bought Universal Pictures and its music operation last year, and why it recently signed a $1.7 billion deal to purchase U.S. educational publisher Houghton Mifflin.

When it comes to music, Vivendi doesn't much like the notion of AOL being the gatekeeper. In Duet's deal with Yahoo!, the consumer goes straight to Duet, which charges the subscription fee. Yahoo! simply collects a small distribution payment for sending the customer on. As for the consumer information AOL is collecting from MusicNet, Universal -- not Yahoo! -- is gathering the same from Duet customers. Yahoo! is no more a gatekeeper than the phone service you have at home. Universal greets you on the other end of the service and is there to sell you all kinds of stuff you probably never knew you needed.

``ALL ABOUT THE CONSUMER.'' I talked with Vivendi Universal Co-Chairman Edgar Bronfman Jr. a few weeks ago. His company had just agreed to pay $372 million to buy MP3.com, a former Napster rival for digital music that has also gone legit. Universal needs MP3's technology to do battle with MusicNet and Napster. Bronfman wouldn't talk at all about the negotiations with AOL, other than to reiterate that he -- and just about every music executive today -- thinks that eventually any music company worth its salt will have to offer music from all five major labels, along with anyone else with a hot band to offer.

But Bronfman was just as clear that his company intends to be the one to talk directly to the consumer, gathering information on what music lovers want and figuring out ways to promote new services to them. ``It's all about the consumer and the relationship that we can build with the consumer,'' he says. ``We believe in that very strongly, as does Vivendi, which is why we were a perfect combination.''

You can see where Bronfman is coming from. Why would Universal want its top competitor to have access to its consumers? And why would AOL want to see the tons of information it has collected for years somehow find its way into the hands of the largest player in a business where it competes so strongly?

IT'S INEVITABLE. As the Goo Goo Dolls say in their latest album, it all boils down to What I Learned about Ego, Opinion, Art, and Commerce. In the music world, there's plenty of each to go around. And since online music sales are going to happen one day, with or without the major record labels, chances are these guys will work it all out.

I'm not so sure Napster will be around to see that day. Since losing its court battle against record labels, its traffic has dwindled to some 840,000 simultaneous users, according to measuring firm Webnoize, an 87% drop from just four months ago. Vivendi Universal and AOL aren't going anywhere, and eventually they'll find a way to license each other's music. They have to. Like spicy salsa music, the beat is getting just too hot not to dance.