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For Net music, exclusives are king

iTunes and rivals are building a cozy relationship with labels through online promotions. Photo: U2's Bono at iPod launch

U2 singer Bono strode onto stage at Apple Computer's iPod release party last month with his trademark swagger and sunglasses, along with words of praise for the company and its music products.

In the online music business, where top artist exclusives are the subject of bitter competition, this was a singular coup. On the eve of a major record release, U2 was freely giving Apple the rights to use its first single in an iPod commercial, was lending its brand to a new version of the music player, and giving the company first crack at selling its new single and album online. Bono and guitarist David "The Edge" Evans even played a few tunes together at the release event.

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What's new:
A combination of idealism, fear and hunger for publicity is driving a cozy new relationship between the music business and young online music services.

Bottom line:
If any one online music service becomes the Amazon.com of downloadable tunes, the online world could well find its way to the "pay for placement" model that has periodically marked the radio and retail music businesses.

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Onstage, the understated Edge gave his take on why musicians increasingly are providing Apple and its online music rivals with unprecedented access to their work.

"When Napster first got up and running, I was immediately very excited, and appalled at where it might lead us," he said, praising Apple for finding the right response with its iTunes store. "People are using computers to store and listen to music. As long as we find a way for us to get paid, that is ultimately going to be a good thing."

This combination of idealism, fear and hunger for publicity is driving a cozy new relationship between the music business and young online music services, which insiders say is likely to define the online music industry for years to come.

For now, it stops short of money changing hands. The online services need exclusive content too badly to risk losing it by charging advertising or promotion fees for prime placement. Moreover, they control too little of the overall music market to have much leverage.

Nevertheless, the winners of today's competition for eyeballs and online customers may ultimately have a very different role. If any one service becomes the Amazon.com of downloadable music, the online world could well find its way to the "pay for placement" model that has periodically marked the radio and retail music businesses.

"It's as certain as fleas on a yard dog," said Phil Leigh, an analyst at Inside Digital Media. "It's probably years away, because the industry is not yet highly dependent on the online distributors...But brand recognition in cyberspace is going to become important, and the labels themselves are going to be influenced by wanting to deal with the brands that get the most traffic and recognition."

Other mediums have slipped quickly into money-for-placement models. The commercial radio business was rocked by payola scandals in the late 1950s and early 1960s, after it became widely known that record labels were paying disc jockeys, ostensibly to play their music. One prominent DJ, Allan Freed, was indicted.

Nevertheless, insiders said pay-for-play arrangements using independent record promoters as middlemen continued long afterward for years, ultimately leading to an investigation by the New York attorney general this year. Similarly, in the case of big retail record stores, labels have long provided "promotional allowances" for big releases, essentially buying prominent placement for wall posters and prime shelf space.

By contrast, a barter system underlies today's online world.

Online music executives seeking exclusives from artists or labels say they'll often put together a proposal promising them top visibility--front-page exposure, a themed playlist, artist of the week status, or sometimes even a whole section dedicated to them--in return for access to new songs or videos.

In some cases, marquee artists have asked for money or sales guarantees, but this is rare. Industry sources have said that The Beatles have sought millions of dollars for the exclusive rights to sell their music online, for example.

"Money isn't really on the table. It's more of a programming opportunity."
--John Jones, vice president, MusicNet

"I think for the most part it is a bit of a landgrab just to get some point of differentiation," said John Jones, MusicNet's vice president of programming and label relations. "Money isn't really on the table. It's more of a programming opportunity."

This sometimes results in albums or singles being released solely on one service for a short period of time. But some labels work with several at once, having artists record live tracks unique to each service, distributing the exclusives around.

Joss Stone, a young British soul singer that EMI has put substantial resources behind for the last year, created exclusive live tracks for several different services this way.

The arrangement can work less competitively in the case of back catalog or out-of-print material. The music services are often run by music aficionados who consult their own record collections and then tell labels what's missing from the online catalogs.

"A lot of times the labels don't know what they have," said Tim Quirk, executive editor for RealNetworks' Rhapsody editorial team. "They've been amassing recordings for so many years, but records go out of print, and regimes change. Buildings occupy the same space, but the people aren't the same, and there's no institutional memory. They need music geeks like us to go, 'Why isn't this available?'"

Frequently, if one of the services is able to surface an out-of-print title, the label provides it with exclusive access for a period of time, Quirk said. RealNetworks has been able to help drive digital re-releases with jazz label Verve Records, among others, he said.

Analysts don't expect this relationship to change dramatically until the online market grows substantially. Digital music single sales are on track to reach well over $100 million in the United States alone this year, a respectable figure but barely 1 percent of the music business as a whole.

But that's still enough to support a comfortable relationship of mutual dependence online, well removed from the days when online companies had trouble finding champions inside the traditional music business.

"We used to have this ghetto called new media," said EMI Group spokeswoman Jeanne Meyer, whose label last week credited digital music with helping to bolster its bottom line. "Now that's part of everybody's job."

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