Online Music Goes Legit
By Ronna Abramson
RealNetworks CEO Rob Glaser couldn't help sounding triumphant last week. Hosting a conference call at the Waldorf-Astoria in New York City, he was announcing the creation of a new music service backed by three of the five major labels. It was a breakthrough, he noted, that came a full six years after he began talking to the record companies.
The long-awaited day had arrived when the labels would finally break down and distribute their catalogs online. But Glaser's elation over the new venture, dubbed MusicNet, didn't last long. By the end of the week, nearly a dozen companies - from major record labels to Microsoft to MTV - had joined an onslaught of players announcing that they, too, would jump onto the Web.
On one level, there seemed to be more hype than substance to the competing press releases and dueling announcements. They came, after all, during the same week that Sen. Orrin Hatch was turning up the heat on the music industry during hearings on digital copyright. When one record company exec told the Senate Judiciary Committee about MusicNet, Hatch was not amused. "Do I have to hold a hearing every week?" the Utah Republican asked. What's more, the announcements were vague: Most of them were short on details such as launch dates and revenue models.
But all the horn-tooting threatened to drown out an important development: After years of resistance, the Big Five record labels finally appear ready to move into digital distribution. Three of them - BMG, EMI and Warner - have joined with Glaser's RealNetworks to create MusicNet. As early as this summer, MusicNet will begin supplying songs from the labels' catalogs to online outlets ranging from tiny music sites to mass-market destinations like AOL (which owns Warner Music) and even to an all-legal Napster (whose partner is BMG's parent company, Bertelsmann). The other two labels - Sony and Universal - are creating a competing service called Duet, which last week announced that it will offer the labels' combined catalog to Yahoo, also this summer. Until now, the labels have spent most of their energy suing digital music distributors such as the wildly popular Napster and MP3.com.
In addition to the two Big Five-backed services, two other ventures were announced last week. Microsoft launched a new streaming-music channel on its MSN portal and said it plans to add a subscription-download service. MTVi, meanwhile, unveiled an alternative music channel that lets listeners pay per download. The cost runs from 99 cents for a single to as much as $18.98 for an album.
While the labels have undoubtedly made progress, they're also creating confusion by splitting into two camps - MusicNet and Duet. That's hardly ideal. "From the consumers' perspective the best alternative is one where all of the music is made available through a single service," says David Mandelbrot, VP and general manager of entertainment at Yahoo, which is negotiating with the companies behind MusicNet to offer the full menu of major-label options. But, Mandelbrot acknowledges, it's possible that Yahoo visitors may have to navigate two different platforms to play music - one from Duet and one from MusicNet.
Four new digital music ventures in just one week, added to the dozens of music sites already out there, sounds like a sure recipe for consumer confusion. It also suggests that the field is ready for a shakeout. Consider the case of EMusic.com, which, like many of the spunky upstarts that until now have dominated online music, makes little or no money. It amassed its 165,000-track collection through agreements with artists and independent labels. With its shares languishing below $1 and facing delisting by Nasdaq, EMusic announced Thursday that it signed a letter of intent to be acquired by an undisclosed "major media company," which the Washington Post reported was probably Universal. The label would likely turn EMusic into a distribution outlet for Duet.
The consolidation is certain to accelerate. If the same music is widely available through an array of sites, those outlets will face the difficult challenge of differentiating themselves. Smaller sites will be at a disadvantage as behemoths like AOL, Yahoo and even Napster market subscription services to their huge audiences. And MusicNet and Duet, with the major labels behind them, could price smaller players out of the market. "It is incredibly expensive, prohibitively so, for most competitive sites to get access to these kinds of subscription catalogs," hypothesizes Drew Denbo, affiliate relations manager at online radio company TuneTo.com.
Denbo may be right, but Duet and MusicNet so far have declined to disclose what they'll charge for music licenses. Yahoo isn't paying Duet for its catalog. Rather, Yahoo will promote and advertise the service and share an undisclosed portion of revenues, says Mandelbrot. Duet plans to offer a tiered system with monthly rates as well as a pay-per-download option.
In addition, nobody knows whether a subscription model will work any better than the largely unsuccessful pay-per-download approach. Listeners, after all, got used to Napster, which, until a federal judge reined it in a month ago, let users download for free just about any song they could imagine. It also remains to be seen how much users will be willing to pay for such services - and whether record companies will really make their entire catalogs available online for a small monthly sum.
Given all that uncertainty, some online music companies are reluctant to license music from MusicNet or Duet. "We'd love to offer something if it made sense," says Dave Goldberg, CEO of online music company Launch. "But until you know what the consumer value proposition is, it's impossible to judge whether you can actually offer something that consumers want."
Webnoize analyst Ric Dube predicts online music will increasingly mirror traditional record stores. Labels will distribute their music online through a few major outlets, akin to Tower Records in the brick-and-mortar world, that appeal to the lowest common denominator of music devotees, and other smaller players will have to find a way to appeal to a niche market.
But don't write off the early entries, counters Greg Wilfahrt, a spokesman for MP3.com. "We've been in this space for a couple of years and have an incredible lead," he says. MP3.com, whose stock is trading at just less than $2, has 15 million registered users and has reached agreements with the five major labels to offer downloads of their music on a single platform. MP3.com has also signed a deal with Harry Fox Agency, which represents the vast majority of American music publishers. The publishers' participation in online distribution is essential because they also hold copyrights to the music that the labels release.
Harry Fox CEO Ed Murphy says the agency has not been contacted by either Duet or MusicNet. Sony and Warner say they're in talks with publishers; the other three major labels are keeping mum about their plans to secure the publishers' clearance. However, Murphy says there's still plenty of time to iron out details, and the labels can bypass the agency to go directly to the publishers. The Duet music service "will have all of the licenses necessary to be able to offer those services online," says Yahoo's Mandelbrot. "Those licenses will exist between Duet and the publishers."
Maybe, maybe not. Until the music starts playing this summer, no one will know for sure whether the slew of announcements last week was anything more than a lot of noise.
JOINING THE CHORUS Las week, against the backdrop of a congressional hearing on Net entertainment and copyright, some big players announced new ventures WHO WHAT WHEN Duet The Universal/Sony subscription service will be distributed initially through Yahoo. It is planning to license its vast catalog to other Web outlets. Summer MSN The company launched MSN Music, a streaming radio service, and is negotiating with record companies as part of a plan to offer a download-subscription service. Beta launched last week MTVi The site signed deals with all five major labels to sell digital downloads while the songs stream on Radio MTV.com and VH1 at Work Radio. "In the near future" MusicNet With music from BMG, Warner and EMI, the clearinghouse and platform will be licensed to RealNetworks, which owns the venture jointly with the three labels and America Online. Late summer Napster! The song-swapping service urged Congress to enact a compulsory license for music delivered over the Internet. The company is being pursued by MusicNet, which wants it as a licensee. Who knows? Source: companies listed
Hane C. Lee in New York and Kristi Essick in Paris contributed to this report.
