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Who's really going to shake up Net music?

AOL Time Warner and Bertelsmann are playing an entertaining game of reverse chicken with their Net music strategies. Evan Hansen wants to know who will have the guts to run in the opposite direction longer.

AOL Time Warner and Bertelsmann are playing an entertaining game of reverse chicken with their Net music strategies. We'll see who has the guts to run in the opposite direction longer.

Bertelsmann just got through a major housecleaning that swept the top management team at its BMG Entertainment record label out the door, including its president of new media, Kevin Conroy.

AOL Time Warner responded this week by hiring Conroy to supervise a newly created AOL Music unit.

Conclusion: Either Bertelsmann or AOL Time Warner just made a huge mistake.

AOL Time Warner may be the favorite in this race. It owns the Winamp MP3 player and Net radio tuner Spinner, and has the ears of 27 million paying subscribers.

But does that combination mean it has the vision and will to transform the music industry for the benefit of consumers, artists and its investors? We'll see.

Unlike AOL, which picked a staid old media company for a partner, Bertelsmann has embarked on a wild, counterintuitive course of embracing the enemy. It's a strategy AOL Time Warner and the other major labels should watch very carefully, and even fearfully.

This is the company that partnered with Napster last October in a stunning bid to harness the start-up's domination of the new music landscape.

Bertelsmann also purchased online music retailer CDNow and is allowing its artists to release commercial downloads in tandem with CDs, including distributing singles on Napster for free.

While Conroy helped mastermind some of these moves, the bigger driving force behind the company in recent months has come from Bertelsmann's headquarters in Germany. Word is the Napster deal was pushed through by top brass over the heads of BMG Entertainment division execs, including Conroy, prompting longstanding old-media managers at the record label to grab at fig leaves and "quit" in ostensible protest.

The meltdown has left Bertelsmann light on experienced music industry executives, but maybe that's not such a bad thing given the track record of the labels so far.

A lot is said about the potential of AOL Time Warner to really shake up the music business. With the Conroy hire, for example, it's set to create a Net music subscription service--the Holy Grail of Web music strategies, according to conventional wisdom.

But adherence to convention may be the problem when you're trying to create something that has never existed before.

History doesn't offer a grand vision of Net innovation at either of the newly joined companies.

Time Warner's Warner Music Group was the last of the five major labels to go live with commercial music download trials.

Meanwhile, America Online, which would presumably blaze the online trail for its old-media partner, has dominated using marketing rather than technology prowess.

AOL gets credit for buying some of the coolest tech companies of the mid-1990s before anyone else noticed them, namely Nullsoft (which created the Winamp MP3 player), Net radio tuner Spinner and ICQ (which popularized instant messaging).

But AOL also has a habit of doing nothing interesting with rebellious young talent. This year, the company shuttered Nullsoft projects aimed at producing an MP3 search engine, as well as the Gnutella peer-to-peer file-sharing system.

Of the other majors, only Sony shows serious signs of breaking new ground on the Net music front, driven by its consumer electronics divisions.

Universal has arguably been the most litigious of the labels when confronting companies offering new music technology.

EMI, meanwhile, is in talks to be acquired by Bertelsmann--a deal that would create the world's largest record company and further cement Bertelsmann's lead.

Bertelsmann's Napster alliance may easily fail and go down as one of the most ill-conceived gambles in music history. For one, Napster still faces the prospects of a court-ordered shutdown.

Napster does offer a huge registration base that might be turned into paying customers--some 52 million users, according to a recent count. But how that will be done hasn't been worked out.

Current steps, such as placing a link to CDNow on the Napster interface, are clearly stopgap, as the companies brace for a far more radical overhaul.

Some of the most viable options, however, would seem unsuited to Napster's technology. If BMG plans to serve up a fee-based subscription service, for example, Napster's peer-to-peer file-sharing architecture would be far less efficient as a distribution platform than as an oldfangled server farm.

More important than Bertelsmann's current strategies, however, may be the newfound Net religion of its management.

In forcing the Napster deal through, Bertelsmann CEO Thomas Middelhoff showed that he may understand the stakes of the current online music impasse better than any of his peers with far more music industry experience--even if he does not yet understand how to break the impasse and make it work for him.

For my money, all of that makes Bertelsmann the one to watch. Will the company surprise with another unlikely deal with a Net pioneer--say, MP3.com?