Record labels subscribe to online music deal

In a widely anticipated move, RealNetworks on Monday formed a pact with AOL Time Warner, Bertelsmann and EMI Group to create a company that will develop an online music subscription service dubbed MusicNet.

Although the agreement signals a significant step in the union of major record labels and technology companies, details of the new service remain murky. Questions persist over the type of technology that will be used in the service and whether consumers will adapt to the digital rights restrictions that will encircle every song.

Under the agreement, media giants AOL Time Warner, Bertelsmann and EMI will each own a minority stake in MusicNet, and the companies' record labels will separately license their music nonexclusively to the new venture. MusicNet, which will operate as an independent company, will offer a wide collection of downloadable and streaming music backed by RealNetworks' core streaming-media technology.

MusicNet will package music with secure technology to offer third-party Web sites the chance to market their own music subscription services. RealNetworks executives characterized MusicNet as a "business-to-business" play where the company acts 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.

AOL Time Warner's America Online and RealNetworks will be the first companies to offer subscriptions through the service, slated for launch by the end of summer. The start-up expects to license itself to music delivery companies including file-swapping service Napster once security and copyright concerns are addressed.

RealNetworks Chief Executive Rob Glaser will become chairman and interim CEO of MusicNet. Financial terms of the agreement and the investments were not disclosed.

Wall Street showed skepticism for the deal in trading Monday. RealNetworks gained 50 cents, or 7 percent, to $7.56 by the 1 p.m. PT close of regular trading. AOL Time Warner fell $2.98, or 7 percent, to $37.17.

Give them what they want
Monday's news underlines the need for many music companies to address growing consumer demand for online services that offer affordable, easily accessible and legal digital music.

The drive to create a subscription service has stemmed from the popularity, and threat, of Napster, the free file-swapping service that the record industry sued in 1999 for alleged copyright infringement. Record labels and technology companies alike have praised the subscription model as a legitimate way of offering music in an all-you-can-eat format, charging consumers a periodic fee for accessing copyrighted material.

Eric Scheirer,

Meta Group says a revolution is brewing in the music industry, and the major distribution companies, which have the most to lose, must negotiate very tricky waters. see commentary

an analyst at Forrester Research, said Monday's deal represents a significant step in the right direction by music companies and technologists. Despite the holy war waged against Napster, the two sides have seen eye to eye on the need to create music subscription services.

"It's the beginning of the rapidly thawing relationship between record labels and technology companies," Scheirer said. "The importance is that the licenses are available, and things are moving forward."

However, RealNetworks executives have remained hesitant in divulging specific details about the service. One of the biggest questions is whether MusicNet will support archrival Microsoft's Windows Media Audio technology for streaming and the secure downloading of music. Many of the major record labels have supported Microsoft's audio format, leaving the question open as to whether RealNetworks may be forced to adopt its enemy's technology.

"We are not talking specifically about the other technology pieces," RealNetworks' Glaser said during a press conference, adding that more details will be revealed in the coming months.

MusicNet will use RealNetworks' RealSystem iQ as its security backbone.

Questions have also been raised about when and whether MusicNet will license content from the remaining two major labels: Sony Music Group and Vivendi Universal's Universal Music Group. Those two labels recently struck an agreement to collaborate on a subscription service of their own, dubbed "Duet."

Glaser acknowledged the absence of Sony and Universal but remained mum about whether MusicNet will aggressively court the two companies to participate.

"We invited a number of folks to participate," he said. "It's logical to assume that we talked to all five" major labels.

The agreement comes as Congress kicks off hearings this week to discuss online copyright issues and help push progress in the Web-based music business. The sessions begin Tuesday in the Senate Judiciary Committee.

To date, the record labels have launched their own pay-for-play services where people are charged to download individual songs. These efforts have largely failed because of the sweeping popularity of Napster. But so far, little has been tested in the market for charging subscriptions for music.