Online music sales hit sour note

It looks like the online music industry, grappling with concerns over digital formats, piracy and technical woes, will have to wait until next year for Santa to deliver a merry Christmas.While other Internet businesses, from selling books to booking tickets, are ringing up billions of dollars in sales, Web music is still largely confined to the tech-savvy crowd despite early predictions of a blockbuster holiday season.

It looks like the online music industry, grappling with concerns over digital formats, piracy and technical woes, will have to wait until next year for Santa to deliver a merry Christmas.

While other Internet businesses, from selling books to booking tickets, are ringing up billions of dollars in sales, Web music is still largely confined to the tech-savvy crowd despite early predictions of a blockbuster holiday season.

Companies like MP3.com Inc. (Nasdaq: MPPP) and EMusic.com Inc. (Nasdaq: EMUS) that let users download music to their computers have generated a lot of buzz and attracted the attention of Wall Street.

But complicated software, pricey portable music devices and a battle over how easy it should be to copy songs means it will be some time before the PC replaces the stereo system.

"It is probably one of the biggest killer apps on the Web in the next 12 months, but it's also one of most chaotic and least defined," said Bob Ohlwiler, vice president of marketing for software company MusicMatch.

MusicMatch and others, most notably RealNetworks (Nasdaq: RNWK), have brought a semblance of order to the industry with their jukebox software that records CDs, downloads songs from the Web and organizes music files on the PC.

What's the holdup?
But the Holy Grail of actually selling music online remains a distant goal.

For one thing, record labels, haunted by visions of hackers e-mailing Top 40 hits for free, have been reluctant to release songs in formats like MP3, which is favored by many users but has no copyright protection.

MP3 and other formats work by compressing a digital music file, such as off a CD, to one-tenth or less of its original size, making it easier to send over the Web.

An initiative to decide how to make the music pirate-proof is bogged down by bickering between labels, who want to make it difficult to record new CDs, and hardware and software companies who say listeners will demand the power to record and play all their music.

Another problem is in unshackling listeners from the tinny confines of their personal computer speakers.

Sales of portable gadgets that can store music on tiny memory cards or chips have sputtered, reaching maybe 750,000 units, well short of industry estimates of 1 million by the end of the year.

Devices that will let people play music files in their car or home stereo are only just coming to market, at prices only technology fanatics won't protest.

"It hasn't taken off as much as analysts expected," said Andy Rathbone, author of "MP3 for Dummies", a how-to guide for digital music that recently hit the shelves.

"There is reluctance among record companies to use the MP3 format and make a lot of music available in that format. The industry is in a state of stagnation about what to do about this MP3 monster," Rathbone said.

Such concerns have made investors uncertain.

Wall Street expectations -- and reality
Shares in MP3.com were trading around 28-1/2 on Monday, unchanged for the day, but near a 52-week low of 23-5/16 and far below its high of 105. EMusic traded at 10, down from a peak of 35, while Liquid Audio Inc. (Nasdaq: LQID), which makes software to encode and play songs, was at 36-3/4, off its 52 week high of 49-1/4.

Others insist the industry is booming and that the incredible velocity of Internet business has warped people's expectations.

"If you look at the rate of adoption ... it's happened much, much faster than CDs happened or cassettes happened," said Ken Wirt, CEO of Riffage.com, which offers music by unsigned bands.

Hardware makers appear ready to bring better and cheaper portable devices to market.

"There's some really compelling devices out already and even better ones coming out in January and February of next year," said EMusic CEO Gene Hoffman.

There's even good news from the labels. EMI Recorded Music, a division of EMI Group Plc says it could start selling singles on the Web next year.

"Technology is not a threat. It gives birth to new and expanded markets," Jay Samit, vice president of new media for the label, told an industry conference recently.

Such developments have led to promises that 2000 will be the industry's breakout year and that a winter wonderland will await those who are patient.

"There is going to be a really, really serious Christmas next year that we don't really have any inkling of right now," EMusic's Hoffman said.