Music labels battle former digital demons

Need for online cooperation highlighted at WebNoize confab

By ANN DONAHUE

In the not-so-recent past, music industryites were ranting that the digital age was going to prove disastrous for the Big Five record labels.

Doomsayers predicted Napster was going to encourage widespread piracy: MP3.com was going to co-opt the A&R process and break new bands online without major label support. Netizens were going to convert their CD music collections en masse into digital forms without paying anything for the privilege.

But, one by one, the major labels are taking care of all of these concerns.

As highlighted this past week at WebNoize, a digital entertainment confab held Nov. 13-15 in Los Angeles, the downturn in the Nasdaq is stalling some digital music dot-coms and well-targeted lawsuits by the RIAA are stymieing others.

Because of this lag, the music labels are slowly taking control of online music in a way that seemed impossible at this time last year.

"The fact facing music is that it has become more ubiquitous that it has ever been," says RIAA Prexy Hilary Rosen. "It's no longer a one-format medium. We now have to look at the CD format and the online format, and we're looking at wireless -- and the quicker we do that the better."

Signs of the inroads the major labels have made online have become particularly apparent of late. .

Enemies re-align

MP3.com reached a settlement Nov. 14 with Universal Music Group, the lone standout in the dispute, to the tune of $50 million and a 5% share in the company. Warner Music Group, EMI, BMG and Sony had all previously settled their ends of the dispute.

Additionally, the Netco announced it would restart its My.Mp3.com service -- the program that allows users to convert their CDs into digital files and save them on the company's servers for access from any Web-enabled computer.

While MP3's refusal to charge for the service was what earned them the ire of the major labels in the first place, the second incarnation of the service will charge users a fee, which will be split with the labels.

And Napster, long the nemesis of the major labels, made a move to go legit last month with the announcement that it will work with BMG to create a membership service that will charge users and turn part of that money over to the owners of the song's copyrights.

Easily the biggest lovefest at WebNoize was the panel discussion with Napster founder 19-year-old Shawn Fanning, interim CEO Hank Barry and Andreas Schmidt, prexy and CEO of Bertlesmann's e-commerce group.

"Three weeks ago, every single label was out to kill Napster," Barry says. "Things have changed tremendously. We're a great service to the labels for promoting music."

Gnutella and FreeNet, the much-publicized alternatives to Napster that offer Netizens a way to trade files online without being traced, are neither as intuitive to use nor as comprehensive as the original Napster program.

Demand for deals

With BMG's settlement and subsequent partnership deal helping to legitimize Napster, other record labels now have an additional incentive to strike similar deals with the Netco.

Such deals would help maintain the diversity of songs available on the site and maintain its lure for users. Indeed, according to a study released by WebNoize's research arm, a vast majority of college students would be willing to pay upwards of $20 a month if they could continue to access Napster in its current form.

Not that everyone considers the consolidation of digital music power in the hands of the major labels a good thing.

Billionaire Mark Cuban, the founder of Broadcast.com and owner of the Dallas Mavericks, warned that compacting all aspects of digital music within the traditional structure would stall innovation.

"The RIAA, with the record labels behind them, is trying to put Internet radio out of business," Cuban says. "I tried to buy Napster, but they decided to go to bed with the devil."

Model behavior

Although many Netizens have decried the Napster-BMG deal as a sellout on the part of the Netco,it was obviously the only way for the company to make any money whatsoever.

Scores of other dot-coms have taken a hit since the Nasdaq correction in April and Napster, albeit a nifty technology, had no real business plan until the deal with the record label pushed them toward a membership model.

Among the digital music dot-coms singing the blues are ArtistDirect, trading under $1 last week, down from their IPO price of $12 earlier this year; eMusic, also trading at under $1, down from a one-year high of $19.63; and MusicMaker, trading at around $2 from a high of $103.75 reached last November.

But those that have an affiliation with the record labels continue to bring in investor coin. Listen.com, which received $50 million in funding from all five major labels in February, is currently engaged in a bidding war to buy the assets of bankrupt peer-to-peer search engine Scour.com.

"People have questions about if this is the right space," says Listen.com CEO Rob Reid. "Two years after MP3s became a popular format, 50 million people are using them. Compare that adoption rate to the 15 years it took for CDs and the 15 years it took for TV. We're at the tip of the tip of the tip of the iceberg."