After years of false starts, the industry is showing the most promising signs yet that it is prepared to broadly license its content for online distribution. In the past few days alone, Yahoo, RealNetworks, Viacom's MTVi and Microsoft have announced separate music ventures aimed at bringing a wide selection of music to listeners online.
The thaw is possible partly because of a recent court decision reining in Napster, whose free file-swapping service has been credited with killing previous efforts to charge for music online. Still, there are many opportunities for missteps, with success depending on a host of details, such as pricing, ease of use and planned security features that have not been fully tested in the marketplace.
"The labels are doing their best to make the simple world of online music distribution into a complicated mess," said Steve Vonder Haar, an analyst at The Yankee Group. "The harder they make it to use, the more difficult it is to convince consumers to dip their toes in the water."
To date, consumers have mostly shown an affinity for downloaded music that they can store on their computers or take with them, as provided by services such as Napster. Pay-per-download services have been slow to take off, however, prompting most of the labels to gravitate toward other models.
Sony Music Entertainment, for example, has sold downloads on a per-track basis over its Web site since last year but now is working on a joint venture with Vivendi Universal, dubbed Duet, to offer a music subscription service. On Thursday, Web giant Yahoo unveiled its involvement with Duet and announced it would launch the service on its site by the summer.
"Downloading is a very difficult (business) because people don't want to pay," said Fujio Nishida, president of Sony Electronics.
Nishida said he believes subscription services will become the norm in the industry, but added that for now it is impossible to say what shape these services will eventually take. Consumers might go for a $10 all-you-can-eat-for-a-month format, he said. Then again, they might not.
He said the exact terms of the Duet partnership remain vague, but new details will be announced soon. Sony also is working on creating an Internet radio service called Sony XM, which is scheduled to debut later this summer.
What's the plan?
The labels appear open to almost any plan that leaves them in control of the underlying music files made available to consumers. Still, details of the services announced this week have been thin, leaving the jury out on how far these ventures will lead the Net toward viable for-pay music options.
Microsoft's music plans, which mostly replicate Net radio offerings pioneered years ago by companies such as Spinner.com, bring little new to the table other than the Redmond giant's potent marketing prowess.
Similarly, plans by Viacom's MTVi Group and online music infrastructure company RioPort to offer paid song downloads harken back to strategies that have been tested with little commercial success to date.
Among the deals announced this week, RealNetworks' pact with AOL Time Warner, Bertelsmann and EMI Group has created the most buzz. The partners on Monday said they plan to launch a company, dubbed MusicNet, that will develop an online music subscription service.
MusicNet will package songs with secure technology to offer third-party Web sites the chance to market their own subscription services. RealNetworks executives characterized MusicNet as a "business-to-business" play in which the company will act as a middleman between the labels and consumer Web sites. It will be up to the third party to determine pricing and the types of technology that will be employed to deliver the music.
"We've maintained all along that the (record) industry would try many distribution models that would eventually come--but not this soon," said P.J. McNealy, an analyst at Gartner. "It's not just Napster, but it's the music industry waking up from a year ago and recognizing the potential dollars out there and the consumers' needs."
Perhaps the biggest outstanding question facing this and other commercial services is the degree of control copyright holders will seek to build into the technology to prevent people from duplicating and trading songs. Technologies for recording online music streams are increasingly reaching consumers' hands, and record labels have been adamant that any subscription service strictly limit how consumers may use the music they buy.
Formats caught in an MP3-for-all
As a result, formats remain a significant sticking point. Few in the industry are willing to endorse the de facto MP3 standard, which can be freely copied, traded and burned onto writable CDs.
But consumers have so far been turned off by the bewildering array of secure alternatives, which have been available for some time from companies such as Liquid Audio, Sony, IBM and Microsoft. Outside of Microsoft's Windows Media format, adoption for these MP3 alternatives has been negligible, leading at least one of the early pioneers in this market, Supertracks, to drop the business altogether.
EMusic Chairman Bob Kohn, whose company has been selling MP3 music downloads with minimal success alongside the Napster steamroller for months, said he believes services that attempt to use secure formats will be soundly rejected.
"The format is key," he said. "Consumers have made it clear that they want MP3s."
Napster also continues to complicate the adoption of for-pay services. The company is operating under a court order requiring it to take steps to block copyrighted works from being traded over its service. It is also working to develop its own subscription service in partnership with Bertelsmann that would wrap MP3 files in a layer of security to stop unauthorized file-swapping.
Nevertheless, a report Wednesday from online music site Webnoize showed that large numbers of files continue to be traded, indicating that the specter of free alternatives may dog the industry for some time to come.
In addition, analysts warned, Napster's success will not be easy to reproduce in a commercial environment where controls on content are seen as a necessary cost to be carried by the consumer.
"Napster was the epitome of consumer friendliness," said The Yankee Group's Vonder Haar. "Now, as you have companies trying to build viable business models, you're getting walls."
News.com's Michael Kanellos and Jim Hu contributed to this report.