Online Music Goes Legit - Industry Trend or Event

Industry Standard, The, April 16, 2001 by Ronna Abramson

The Big Five music labels are finally jumping into digital distribution. But are consumers ready to pay?

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.