Major Labels Reacting to Each Other Instead of Customers' Desires
By Larry Powers
In this past week filled with announcements of digital distribution deals by the Majors with each other, with RealNetworks, with Yahoo! and with Emusic.com, several discordant themes emerge. These interrelated announcements of big and small digital distribution plans suffer from the same defects that alienate audiences from modern classical music--not much melody, and jarring, confusing structures, replete with tension instead of harmony. First the facts, then the analysis of an industry still at war with its customers, as each of the big Five Majors jockeys for position against four competitors.
Calendar of Events
1. Monday, RealNetworks and its RealAudio streaming audio/video player was adopted by BMG, its would-be satellite company EMI, and the giant AOL-TimeWarner, as the system and technology for selling subscriptions to streaming big time music over the Internet. Licensing by all three participants to each other, to be followed by offering their catalogs to Universal and Sony in exchange for licenses from them, and eventual licenses to a law-abiding Napster, were all a part of the "grand plan" adopted.
2. Tuesday and Wednesday, the Senate Judiciary Committee held hearings on the delays in making digital music distribution/subscriptions available to the public. Tower Records, the huge traditional retail chain, large indie record company TVT Records, Napster, and important artists like Don Henley and Alanis Morissette, criticized the Major labels, and demanded universal licensing with protection for copyrights. They received a temperate response from Senate leaders. While the attitudes of the Majors and the RIAA were criticized, it was clear that a compulsory licensing system was not on the Senate agenda yet. The flurry of licensing deals announced during the week was apparently designed, in part, to convince Congress to forebear considering a compulsory licensing system.
3. Also at midweek, Universal and Sony's new digital alliance "Duet" announced that the big, ailing portal Yahoo (with a new CEO), had been selected to distribute their music, streaming it on a subscription basis. The plan, obviously designed to compete with AOL's huge digital music customer base and its new partners BMG and EMI, was said to be non-exclusive, with hopes of catalog sharing among all the Majors for sale on Yahoo.
4. Then the smaller deals were announced. MTVi is joining with Rioport to sell downloads from all five Majors. Using MTV's huge popularity on cable television, 50% of the top artists will be available for downloads right off, and the balance within a year--at $1-2 per song and $11-19 per album download. The prices are no bargains, but the convenience of accessing the most popular music, for transfer to your handheld Rio player, is clear.
5. Next EMI made a deal with HitHive to allow EMI's music to be downloaded on all types of wireless devices, such as cell phones and PalmPilots, and share them with friends on a limited basis. Attempts to bring in the other Majors were implicit in the licensing deal.
6. Finally, the fast sinking Emusic.com was being sold to Universal, for $23 million. This group of decent people who raised and spent some $125 million to build a legitimate digital music distribution business, were leading a publicly held company on its last legs, because the Major labels would not license their popular content to the small Internet music sites. Despite long lists of earlier hitmakers, Emusic.com and similar companies here and in Europe had little current celebrity inventory to sell.
MP3.com's try with MyMp3 last year stemmed from the same problem, and the ultimate licenses bought in settlement of the court fight, cost $125 million too. Artistdirect.com, suffering from the same discrimination from the Majors, changed its commander last week. Founder Mark Geiger was put in charge of artist representative services, which could be quickly sold to the talent agencies, and seasoned record executive Ted Fields, founder of Interscope Records, came in as CEO, with three board seats and a five-year contract. Will Fields' contacts in the Majors get him licenses for his company, which is still outside the Majors' loop? Tower Records would not have gone on the attack in Congress the way it did last week, if it too did not believe that it was outside the Majors' loop on digital music licensing. Is the only solution for all these suffering entrepreneurs to get so sick and so cheap that a Major will buy them out, as per Universal and Emusic.com?
What's Goin' On?
To me, all these items of industry news are related--they are symptoms of past conduct, unresponsive to the public's appetite for digital music. Universal and Sony are still scared to death of Napster, with a nation of 65 million potential customers for subscriptions and download sales. AOL with another 25 million potential customers has allied with BMG and EMI, and therefore, Napster, to really get out there and market digital music. Universal/Vivendi doesn't hate Napster; it just wants to paddle its own canoe into the digital market, so it enlisted Sony in Duet because Sony has a big catalog and also knows technology development. Next Universal picks up sick little Emusic for virtually nothing, and will go stalking through the rest of the wounded companies looking for pieces it can meld into its grand plan to catch up with BMG's and AOL's leadership position.
Universal/Sony with 47% market share is in combat with three aggressive companies that have over 40% market share, and the distribution muscle--90 million potential customers, recognition in the digital space, and unlimited capital-- to expand there. Universal/Sony couldn't care less about Napster's copyright violations anymore. Those are peccadilloes for Hilary Rosen and the RIAA to worry about. Congress also seems sterilized by other big issues, and won't attack the Major labels for awhile, so why worry? And if the aggressive antitrust monitors in the European Union can be stimulated to stop the BMG and EMI purchase of control, so much the better to slow these two down. Political warfare is now in process between BMG and Universal/Vivendi across the globe, and BMG has the stronger allies for the moment.
We have said all this before in prior articles, but the last week of events reinforces these views. The pressure is building, however, on Universal to make peace because of three fundamental forces:
A. The public wants digital music distribution, is ready to pay for it, and will never be happy with any website or vendor who cannot deliver all the music in the catalogs of all five Major labels. Their monopoly power forces them into cross-licensing wherever big volumes of digital music are to be streamed or sold piecemeal. "Duet" is a very brief French/Japanese refrain, before the public clamors for the rousing Quintet in the second act of the digital distribution opera. The audience will boo the two singers off the stage, (i.e. not do business with them) if they don't supply the quintet of songs the public is waiting for.
B. Arguments about encryption, secure downloads, artist/publisher distributions have all become tiresome and superfluous, in light of all the joint ventures announced. No one really seems worried anymore about the security issues which have been an excuse for non-performance, and watching several emerging companies run out of funding, the past two years.
C. It will take years for Universal and Sony to reproduce a database of 90 million qualified customers for Internet music by subscription or download. This is a buy-into or build decision by management, and you can't build this many customers quickly enough to make a real dent in the market to which three Majors now have access. Universal's hailing the RealNetworks consortium and expressing a grudging desire to join won't be enough, because there is not much there near-term, if Napster isn't embraced as well.
So let the negotiations begin in earnest, if they are not already near a conclusion waiting to be announced shortly. Whenever an outside analyst perceives the obvious result, he has to assume the smart, experienced men on the inside are already there, and implementing the obvious.
Napster Doesn't Need "To Get Around Much Anymore"
Microsoft also weighed in last week for the great expansion of the music business just ahead with MSN Music, a free Internet service to help fans discover new artists and songs. The giant software company wants to sell music subscription services, and is offering a "recommendation engine" to help you find and personalize your tastes in song lists, developed by a recent acquiree, MongoMusic, Inc. The technology sounds similar to the earlier "Firefly" system, also bought-up by Microsoft a year ago, which has some gaps, we presume.
Napster has just purchased for nominal cash and stock another such "engine" from Gigabeat, Inc., and there are several personalized song selectors out there, which we will write about, from a technology perspective, later this week. The important point is that transaction monitoring and sorting/sifting of musical offerings, when five Major catalogs are readily available from several sources on the Web, is the next problem area, supplanting copyright infringement and over-generous copying terms, as the focus for marketers of digital music downloads and streams. Napster doesn't have to reach out for customers, and is preparing itself for big lawful business. A company getting ready for bankruptcy to stave off RIAA judgements for infringement, does not spend money on technology acquisitions. Moreover, Gigabeat, Inc., the recommendation engine bought for stock, was financed by the sophisticated, and respected Silicon Valley pros at Kleiner Perkins. They would not take Napster stock even for a losing venture like Gigabeat, unless they concluded that Napster had a future. Undoubtedly BMG had to pass on this deal, talk to the Kleiner Perkins people, and probably advance the funds necessary to do the deal, again reflecting that Napster is going to be there for awhile.
Describing the RealNetworks-AOL/BMG/EMI licensing deal being hailed as a positive step for Napster, the Wall Street Journal (last week) also said "one music executive said privately there was virtually no chance Napster would get music through the deal." I can't agree with that statement from this unknown executive, notwithstanding his assumed superior knowledge and music experience. The marketing heft of Napster is just too much to be abandoned by concerted refusals to deal by all the Majors, if Napster obeys the Court's orders. If Napster plays by the Court's rules, it just has to sit there and the deals will come to BMG/Napster and their partners.
You Can't Fight the Numbers
And thus we come to last week's final interesting item of news: Jupiter Media Metrix reports increased Napster usage, particularly in Europe and Canada. The countries surveyed have 85% of the world's online population, and in February, 2001, 14.3% of these wired households used Napster, i.e. 1 out of 7. In Canada, Napster had a 30% audience reach, in Argentina 25%, and a lesser percentage, but nearly 14 million users in the U.S. Media Metrix says Napster "is one of the few real-time global marketplaces of culture." The Napster community, with half as many songs still being downloaded free, is not really shrinking. I recommend that a license be sought to add to the Napster lists a song by Steven Sondheim, from "Follies" his musical just revived on Broadway ---"I'm Still Here."
