Digital music goes corporate

Major labels plan to offer pay services this summer.

COMMENTARY--Like so many Internet proponents in the early days of digital music, I was once pretty naive about how quickly online music services would transform the industry. From 1996 to 1998, it seemed artist backlash against record-label control (à la the Artist Formerly Known as Prince), coupled with the rise of new secure digital formats such as Liquid Audio, would compel record companies to give artists more control over how they distribute online music, and consumers more control over how they compile and listen to it. But the labels refused to make their catalogs available digitally—until Napster and MP3 brought digital music to the masses.

Now that the era of free music may be nearing an end, it's hard to say whether Napster ushered in the digital age or caused such a legal furor that it kept the labels from focusing on creating the for-pay services we hoped for.

Whatever side of the Napster debate you're on, there's no way to separate the popularity of the medium from the fact that it was free. Did people like the idea of sampling music from like-minded souls, or were they just in it for the freebies?

Bertelsmann intends to put an end to Napster freebies through its strategic alliance with the service. While Napster tries to make good on Bertelsmann's promise to deliver a copyright-protected, for-pay service by this summer, the rest of the recording industry has made their most positive announcements yet regarding digital music. In one week's time, all five labels committed to offering some portion of their catalogs via new secure digital-music services by this summer.

Sony Music and Universal Music announced Duet, a digital-music service that will package their content around applications and distribute private-label versions on affiliate Web sites. Yahoo has agreed to launch a Duet-driven service this summer. AOL Time Warner (Warner Music), Bertelsmann (BMG Entertainment), and EMI, which make up the rest of the big labels, agreed to work with RealNetworks to launch a similar music service this summer called MusicNet. Like Duet, MusicNet will partner with third-party distribution services to offer the labels' content via private-label applications. AOL and RealNetworks will be the obvious initial affiliates. None of these companies offered details on the initial catalog, formats, or specific business models, but they may announce additional details by the time you read this.

"This is a land grab," says Yankee Group analyst Steve Vonder Haar. "They're going to be there with digital-music services without having the foggiest idea how to make money."

The result, he says, will be more consumer confusion, particularly as format battles arise and the labels experiment with subscription fees versus à la carte download fees—neither of which has proven successful.

Battle lines are already forming around the Windows Media and RealNetworks formats. MTVi announced it would work with RioPort, a digital music ASP that uses Windows Media for downloads, and Microsoft launched a new MSN Music channel. Microsoft's offering will be initially free and focused on audio streaming, and promises some cool features such as preference matching to help you discover music that matches your interests, but everyone expects the Windows behemoth to move into the for-pay download space.

"Napster had everything right except the copyright," says Vonder Haar. "It had the easiest interface and all the relevant titles in a single place with a single technology format. Now we're going to have a matrix, with mix-and-match label alliances based on different flavors of services."

Bertelsmann claims Napster is doing well in talks with Duet and MusicNet, although how the MP3 format factors into any service remains to be seen. (At press time, Universal Music announced it would buy struggling MP3 pay-per-download service Emusic, potentially for integration into Duet.)

Where does that leave listeners? In one sense, right back in 1997, hopeful but dissatisfied. In another sense, the labels are finally participating, so these initial experiments will justify the necessary hardware, software, and most important, business development to make digital music a success.

Although The Gartner Group has publicly predicted failure for any service that doesn't include all five labels' catalogs, the labels have a tremendous opportunity to show how serious they are, even with the current 3-to-2 split.

If Duet and MusicNet arrive with a diverse cross section of the labels' respective catalogs, all it takes is a halfway-decent application and low initial pricing to let listeners discover and rediscover music the way Napster did. The rest of the label alliances can fall into place over time. But if we see prices similar to those of physical CDs and catalogs that cater to Top 40 hits you can hear everywhere, we're back to square one.