Music online: Big boys team up on delivery system

Seagram Co.'s Universal Music Group is enlisting powerful allies including AT&T Corp.

Seagram Co.'s Universal Music Group is enlisting powerful allies including AT&T Corp., BMG Entertainment and Matsushita Electric Industrial Co. to back its digital music-delivery system in an aggressive push to become the de facto standard for delivering music over the Internet.

AT&T said earlier this week that it "wants to be a major player" in selling music online, and early involvement in promising new business areas such as the nascent music-delivery business could certainly help justify AT&T's heavy investment in cable systems.

A deal to collaborate on a digital delivery platform, code-named "Nigel," could be signed as early as next week, although people close to the talks caution it could still fall apart, or the closing could be delayed by AT&T's intense focus on the acquisition of MediaOne Group Inc.

With the closure of the MediaOne deal, AT&T will have spent more than $100bn (£61bn) acquiring cable systems that reach more than 20 million subscribers. Under one model being contemplated, AT&T and the music companies would charge subscribers a monthly fee for delivering a steady stream of tunes to customers' homes, according to people close to the talks. "The idea that people might want high-quality digital music delivered to their homes is kind of a no-brainer," said an executive familiar with the talks. The music companies declined to comment.

An AT&T spokesman declined to discuss the pending music deal, but said, "Certainly AT&T is active in this space and thinks it is a very interesting, promising business to be in." Seagram Chief Executive Edgar Bronfman Jr., and AT&T's chairman and chief executive, C. Michael Armstrong, have met to discuss how the companies could work together, including one meeting at AT&T Labs where technicians showed off their latest audio compression technology to Mr. Bronfman.

If the pact is finalised it would create powerful momentum behind the Nigel system, since together, Universal and BMG, a unit of Germany's Bertelsmann AG, control more than 40 percent of the U.S. market. The two companies are already collaborating on GetMusic, an ambitious e-commerce site designed to promote and sell compact disks online. The Universal/BMG alliance is reshaping the power structure of the music industry, which has long been dominated on technical issues by an alliance between Time Warner Inc.'s Warner Music and Sony Corp.'s Sony Music.

Sony and Warner, which jointly own Columbia House record club, together control about 33% of the market. Sony and Warner prodded the industry to support a test of a separate digital delivery system developed by International Business Machines Corp., referred to as "Madison." Sony says it plans to make a significant announcement about its delivery platform "very shortly" but declined to provide details.

Consumer-electronics giant Matsushita, parent of Panasonic, owns 8 percent of Universal Studios, Montreal-based Seagram's entertainment operations. Matsushita, which declined to comment, would likely make portable devices to play digitally delivered music.

Despite the proliferation of competing systems, they are still largely in the development stage and a commercial digital-delivery music is not expected until the end of this year at the earliest and most likely next year. Experts say that digital delivery of music won't really take off until a significant number of the nation's homes have high-speed cable modems that can deliver albums in minutes not hours.

A recent report by Sanford C. Bernstein & Co. estimates that in 2003, 22 million U.S. households will have high-speed Internet access. At that penetration level, 16 million albums will be digitally downloaded in 2003, estimates Bernstein analyst Michael Nathanson.

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