AOL offers glimpse of music strategy

Web portals struggling to harmonize their online music plans are closely watching moves by America Online and Time Warner to create a music subscription service, although the strategy may be more difficult for free sites to pull off, analysts say.

Top executives at both companies last week said they are interested in creating an online music subscription service on AOL's proprietary online service. Time Warner chief executive Gerald Levin and AOL CEO Steve Case made the comments in a conference call following their companies' earnings reports.

An AOL representative confirmed the company's plans but declined to elaborate on details.

Analysts said that the subscription model plays to AOL's strength as the world's largest Internet service provider, with some 24 million paying customers.

"Clearly they are the logical site to do it," said Eric Scheirer, an analyst at Forrester Research. "The important thing is they have a billing relationship with customers already buying from them."

Subscription services are climbing the charts as one way to sell music online, threatening to knock off pay-per-download plans that have recently held sway among major record labels.

Selling an all-you-can eat menu of music for a flat monthly fee would dovetail with AOL's proprietary subscription Internet service and perhaps settle a question that has vexed Web portals since music first burst onto the Web: How can legitimate businesses make money off the MP3 revolution?

Despite the popularity of free music-swapping services such as Napster, major Web portals including Yahoo, Lycos and the Microsoft Network have been struggling to gain traction with their commercial online music plans. For AOL, the question has gained importance since it proposed an acquisition of Time Warner, which will bring a music publishing powerhouse under the same umbrella as AOL online music subsidiary Nullsoft--the company that created the Winamp MP3 player.

Major record labels such as Seagram's Universal Music Group and Sony Music Group are developing subscription services in which consumers pay a monthly fee for access to selected songs. Universal has begun a closed trial for its service, according to a company representative.

Where are the portals?
Among the Net giants, AOL has led the pack in developing its Web music strategy with its early purchase of Nullsoft and online music tuner Spinner.

AOL's forays into online music have not been painless, however. Nullsoft, founded by 20-something developer Justin Frankel, has become something of a thorn in AOL's side. Frankel was the brains behind Gnutella, a file-swapping service similar to Napster that AOL pulled shortly after it was released on the Web.

AOL also pulled an MP3 search engine developed by the Nullsoft team because it could not distinguish between legal and illegal songs.

Still, AOL and other portals stand to benefit by beefing up their music offerings. Since portals are the most trafficked sites on the Internet, it makes sense for them to develop services that would increase their appeal among music fans.

So far, Lycos and Excite@Home have agreements with major record labels to offer samples or paid downloads for their copyrighted songs. Yahoo has cut a deal for its visitors to sample songs and buy CDs.

Many of their efforts are behind the curve, however.

The reality for these companies is that file-swapping software has dramatically altered the way consumers want their music. Napster demonstrated that consumers want to download their songs quickly, easily and without restrictions or fees.

Although that company continues the fight for its life in federal court, every company considering stepping into online music distribution needs to match Napster's appeal to give consumers a reason to switch. That makes it even harder for Web portals to substantiate their music ambitions.

Holding the keys
The difficulty for these companies is to strike deals with the masters of the music vaults--the record labels. In the end, companies that want to offer their customers the full gamut of songs need to first get access to these collections, which could result in hefty licensing fees.

Discussions between record labels and Web giants have been on and off. Portals are using their high traffic numbers as a bargaining chip for sweeter licensing deals, but record companies are not quick to give away their prized song libraries, industry sources have said.

Jupiter Media Metrix analyst Aram Sinnreich said Web portals trying to step into subscriptions are more likely to strike third-party relationships than to deal directly with the labels. This could circumvent the potentially massive licensing fees that record labels charge and let third parties manage the portals' services.

"Portals stand to benefit in selling subscriptions, but I don't think Yahoo can create a 'Yahoo Subscriptions'" without a third party, Sinnreich said.