Music industry finally online

Music industry finally online

But listeners stay away in droves

By Anna Wilde Mathews, Martin Peers and Nick Wingfield THE WALL STREET JOURNAL


May 7 — Early last December, three of the world’s biggest music companies launched a counterattack against the rampant digital piracy that has gnawed at their sales in recent years. It was called MusicNet, a joint venture that would provide consumers with a legal alternative to Napster Inc. and other freewheeling Internet song-swapping services.

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WITHIN A couple of weeks, the results were clear. As MusicNet Chief Executive Alan McGlade told the venture’s board: “The current version of the service is not viable.”
It isn’t hard to see why. MusicNet’s main owners — AOL Time Warner Inc., EMI Group PLC and Bertelsmann AG, along with fourth partner RealNetworks Inc., a Seattle software company — created a service that lacked just about everything that makes online music downloads appealing. It didn’t allow consumers to keep downloaded songs permanently. It didn’t allow them to transfer songs to portable devices or exchange them with friends who weren’t signed up to the service. And it charged a monthly fee. Renegade Internet services allow all that and more, for no charge.
Since the launch, MusicNet has attracted only about 40,000 subscribers. Critics have panned it. AOL Time Warner’s America Online service, which was supposed to be MusicNet’s biggest distributor, says it wants something better before it will introduce the service. MusicNet plans soon to offer about 100,000 music tracks, but it still has enormous gaps in its collection — most notably, all the artists whose work is controlled by the two biggest recording companies, Sony Corp. and Vivendi Universal SA. They have created their own struggling online venture, called pressplay.

So now, as free sites continue to attract millions of users and before most of the public has even heard of MusicNet , its backers are trying to fix it. “The first offering was too clunky and too consumer unfriendly to hold much hope for its success,” says Richard Parsons, AOL Time Warner’s incoming chief executive. “So we are going to go back, and we will come out with a 2.0 product which will be more consumer friendly, easy to use. ... This is a business of trial and error.”

‘A BEGINNING’
Mr. McGlade, MusicNet’s CEO, is in advanced negotiations with the companies involved, trying to persuade them to allow the kind of features that consumers want. “You couldn’t keep it static and say this is fine,” he says. “It’s certainly a beginning. We’re going to be able to significantly advance the ball in the next year.”
But getting it right the second time may not be easy since the program still faces the same problems that dogged it the first time. There is the tension among MusicNet’s backers, rivals in other areas whose agendas often don’t mesh. There are persistent antitrust concerns, including a continuing Justice Department investigation of record labels’ online ventures, which complicate discussions among MusicNet’s owners. And there are the problematic relationships between the record companies and the rest of the music industry, which make it difficult for MusicNet to offer as much music as the illegal services do.
The upshot is that, even with the future of their industry at stake, the companies that own recorded music are still unable to fully exploit that trove online. Global sales of compact-disc recordings fell 5.1% last year from a year earlier, the first drop since the format was launched in 1983. The industry blamed the fall largely on the proliferation of homemade CD compilations, as well as free offerings online.
It’s a problem not just for the music business, but for the entire entertainment industry, which is trying to figure out online business models for movies and TV shows at a time when these things, too, are increasingly being swapped on the Internet. Just last month, Hollywood got a lesson in how difficult it will be to harness digital distribution when News Corp.’s 20th Century Fox withdrew from a planned video-on-demand venture with Walt Disney Co. That came as the Justice Department’s antitrust division is investigating all the major studios’ efforts to deliver their films to consumers via the Internet and digital cable-TV.
The struggle to create a legitimate commercial online music service goes back years, before there even was a Napster. RealNetworks, which develops multimedia software, first began talking about it in 1995 with executives at MCA Music, now owned by Vivendi Universal. But Rob Glaser, RealNetworks’ fast-talking chief executive, was too early: The Internet was still a new medium with uncertain commercial potential.

‘PROJECT HAVANA’
Then, a little more than two years ago, the company launched a secret initiative, dubbed “Project Havana.” Mr. Glaser, a music buff who got Pearl Jam’s Eddie Vedder to play at his 40th birthday party, wanted to build a service that would allow consumers to download songs using Real software. Before that could happen, he would have to secure licensing agreements with each of the major music labels in order to use their songs.
In March 2000, RealNetworks struck its first deal, with Time Warner Inc.’s Warner Music Group. Time Warner would get a stake in the new venture. The executives involved hoisted glasses of Mo�t & Chandon champagne to celebrate what seemed like a painless entry into the world of digital music.
Mr. Glaser spent months wooing top executives at other record companies. Yet the industry still feared that creating a legitimate market for music downloads would cut into sales of compact discs. “Established businesses find it very difficult to embrace disruptive technologies that threaten them. The music industry is no different,” says Paul Vidich, an executive vice president for Warner Music.
But now, music fans were racing to outlaws such as Napster. Teenager Shawn Fanning introduced Napster to the Internet in 1999 as a free software program that let users share digital song libraries on their computers. The program, maintained by Napster Inc., Redwood City, Calif., quickly became the most popular and convenient way to exchange music over the Internet.

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By the fall of 2000, Napster had about 38 million devotees, and the music industry was scared. To stop the free-for-all, the major labels sued to shut down Napster. Then, in October that year, Bertelsmann broke ranks and formed an alliance with Napster, agreeing to lend money to the service and to help it develop a legitimate membership service.
Growing congressional interest in online music prodded the industry onward. Lawmakers were eager to see legitimate online music services. For one thing, they were hearing from Internet companies frustrated by the record labels’ slow pace licensing their catalogs. And they were also hearing from constituents who were agitating on behalf of Napster. Also, in February, a federal appeals court in San Francisco upheld a lower-court ruling that ordered Napster to dramatically curb its file-sharing service, raising optimism about the prospects for a commercial online music service that would be friendlier to copyright holders.
“We saw an intensification of interest on the part of the music companies to go beyond what they had done before, which were trials and promotions, to really do something deep and serious,” Mr. Glaser said later.
By early 2001, Bertelsmann and EMI were deep in discussions to join MusicNet , Bertelsmann hoping that MusicNet would act as a conduit for licensing music to Napster. Warner Music and RealNetworks had dropped the idea of simply selling song downloads. Instead, they focused on creating a subscription service in which users would pay a set fee for unlimited access to all the music they wanted, but on a temporary basis.
Weeks of negotiations on the shape of the venture reached a crisis point on Friday, March 30. The Senate Judiciary Committee had scheduled a hearing on online music for the following Tuesday. The record companies feared that the panel would focus on why they were putting the bulk of their efforts into blocking pirate services through litigation, rather than getting a commercial service up and running.
The companies agreed to spend the weekend hammering out final MusicNet terms. The negotiations foreshadowed some of MusicNet’s later operating difficulties. Holed up at the New York offices of law firm Weil, Gotshal & Manges, representatives of the different labels couldn’t even sit together in the same room because of competitive and antitrust concerns. On the advice of lawyers, they spread out to half a dozen conference rooms, with Mr. Glaser urging compromise as he bounced from one to the other.
The final deal, completed early that Monday, put in place a service that would be owned 40% by RealNetworks, with a $13 million investment, and 20% by each of the labels, putting in between $4 million and $5 million apiece. Hoping to respond to Napster’s popularity, the group devised something that was more like a rental model, in which subscribers would have access to songs only for as long as they paid the monthly fee. The music companies wanted generous financial terms, which meant higher charges for the service. RealNetworks, meanwhile, wanted its software, at least initially, to be favored over other technologies, despite the popularity of formats such as MP3 and Microsoft Corp.’s Windows Media.

‘EXCITING NEW ERA’
Mr. Glaser boasted in a news release that MusicNet would “catalyze an exciting new era in digital music distribution.” The next day, AOL’s Mr. Parsons declared “a breakthrough platform for online music subscription services” before the Senate committee.
But the deal was just the beginning of MusicNet’s headaches. Designing the service itself proved even stickier. Because the labels weren’t supposed to know each other’s business, board members couldn’t discuss any details of MusicNet’s distribution or licensing agreements, leaving them in the dark about many of the venture’s dealings. The MusicNet board had to keep an antitrust attorney present for all discussions.
The tensions surfaced publicly on June 5, when Mr. Glaser announced that Napster would become an affiliate of MusicNet , under a pact that he called “an important step in the process” of bringing legitimate music to the file-swapping company. EMI and Warner Music publicly disputed the significance of the agreement, which they had learned about just a few days earlier. Both said the situation with Napster hadn’t changed since they formed MusicNet , and the song-swapping service hadn’t met key conditions necessary for getting access to their music. Privately, executives at the two companies were skeptical that Napster would ever be able to use their music legally, even as Napster and MusicNet assured reporters that Napster, RealNetworks and AOL would all be offering MusicNet by late summer.

TOO OPTIMISTIC
That timetable proved too optimistic for a venture that didn’t even have a permanent chief executive until Mr. McGlade came on board on Oct. 23. The former MTV executive, now 47 years old, soon learned that obstacles to launching the service remained. The record labels had only just completed a pact with music publishers on how the publishers would be compensated for songs bought by MusicNet customers. Still, MusicNet sometimes had to track down the names of individual publishers through Copyright Office records, a slow and cumbersome process.
And in picking through old artist contracts, the labels were trying to solve another thorny problem: They didn’t control the rights to digitally distribute songs by prominent artists, including the Beatles, Garth Brooks and the Eagles, who had had the clout to retain the digital rights to their own work. Every few days, MusicNet would get lists from the record labels of what music could be offered on the service, and the results were disappointing. The venture did score one coup when it signed up independent Zomba Recording Corp., which took a small ownership stake and brought in such well-known names as Britney Spears and the Backstreet Boys.