Net music waits for its cue

But college-aged music connoisseurs and experimental artists are no longer the only ones tuning in to digital music.

Kick-started by the free MP3 craze, a truckload of music companies came online this year. Bitten by the Net music craze were download sites filled with songs from independent labels, directories that categorize all the free tracks on the Net, and Web sites featuring jukebox players that store and play songs.

Adoption of digital music promises to give consumers more flexibility and portability than vinyl albums, tapes or CDs ever did. Consumers increasingly can buy singles, albums or obscure tracks and organize and play tracks via any computer, device or stereo.

Still, many obstacles stand in the way of the day when the masses will use the Net or in-store kiosks to click, pay and carry away digital music.

Although shifts need to occur in consumer behavior--and in the way the recording industry prices and packages music--great investments were made this year to push forward digital distribution.

Among the key milestones was the plethora of legal digital music tracks that came online.

Independent labels were the most prominent online music providers, but the "Big Five" record companies--Warner Music Group, Sony Music, EMI, BMG and Universal Music--promoted digital tracks by artists such as Jewel, Tom Petty and David Bowie. Other well-known artists, such as Public Enemy, circumvented the big labels by releasing their records entirely in the MP3 format through sites such as Atomic Pop.

Then there was Wall Street's growing infatuation with digital music. MP3.com, which offers more than 250,000 songs by mostly independent artists, had a stellar initial public offering in July, closing up more than 126 percent on its first day out. The company rose from 35.31 to 63.31 and at one point reached a market value of $6.9 billion.

"In January 1999, virtually no companies were offering digital downloads," said Michael Robertson, MP3.com's CEO. "Now, less than 12 months later, there's a long list of companies offering digital downloads, and there are a handful of publicly traded companies. It's a shocking turnaround from a year ago, when the music establishment was discounting the entire trend."

Also this year, hardware manufacturers battled over the emerging digital handheld player market, and major media companies made acquisitions and marketing deals to get a piece of the traffic and sales generated by online music lovers.

Staking claims online to connect music listeners with their brands, Viacom, Microsoft, RealNetworks and America Online were among the major companies that hammered away to establish their digital music strategies.

For Viacom this meant overhauling its MTV, VH1 and SonicNet Web sites with more content. It also meant laying the groundwork to sell digital singles through its partner RioPort.com, Diamond Multimedia's spin-off, which has deals to distribute songs by Universal Music, for example.

Microsoft's moves were reminiscent of its browser war with Netscape, as it aggressively targeted the more popular RealNetworks streaming format with its Windows Media Player and secure encoding format. The software giant cut deals with everyone from Sony to jukebox software maker MusicMatch.

Recently, there has been even more speculation that RealNetworks is in danger of losing its market lead to Microsoft, as the streaming firm's major contract with portal giant Yahoo comes up for renewal.

"Microsoft's arrival at the party meant another year with the entertainment industry as the beneficiary of a competition for its affection," said Jim Griffin, who created the technology department at Geffen Records, which he ran for five years until 1998. He now runs his own company, Cherry Lane Digital-OneHouse, which offers advice to companies on how to create, manage and implement entertainment technology projects.

And in its usual style, AOL made a few key acquisitions, such as snapping up Net radio company Spinner.com and Nullsoft, maker of the Winamp MP3 player. It also struck content deals with EMusic and other music Web sites.

For its part, the relatively nascent online music label EMusic, which sells digital downloads, snatched up Tunes.com along with the company's rights to the RollingStone.com brand. Yahoo also dove into online radio with its purchase of Broadcast.com.

In the bricks-and-mortar world there also were clear signs of the digital music wave. Virgin Entertainment Group said its megastores throughout the United States and Canada would let shoppers search for popular music using Digital on Demand kiosks, which include music by Sony and EMI artists such as Mariah Carey, Ricky Martin and Lauryn Hill. The kiosks are to be compatible with Diamond's Rio portable music players and will let consumers download digital music to CDs, DVDs or minidiscs.

But the high points and heavy investments haven't been without their sobering moments.

For instance, this month MP3.com's shares slipped below the company's initial offering price. And although a handful of analysts say now is the time to buy, major record labels have said their content won't be housed at MP3.com, calling into question how it will stay on top when more mainstream music lovers start subscribing to digital music services or paying to download tracks.

In addition to MP3.com's bumpy market ride, sales of portable music devices didn't hit analysts' benchmarks. Forrester Research had predicted that a million players would be sold, but figures so far show that only 500,000 to 600,000 units have been purchased, the firm said.

Analysts and insiders from all corners of the industry agree, however, that the 1999 sales books aren't what's important--it's the big picture that matters. Digital music is obviously here to stay.

"What we're talking about is empowered consumers being able to buy what they want," said Joe Butt, a Forrester analyst.

"What we saw coming out this year was the rise of MP3 and the whole idea of having this music available; it was the pirate era moving into promotional era," he continued. "But because of royalty and licensing issues, you're not seeing mainstream or big-name music available for download. We need a better supply of desirable music, and this has to go beyond people who are wired."

The question now becomes: When will the bulk of music go digital, and who will build the device and the all-inclusive digital record store site that will make it worthwhile for consumers to change the way they buy and store music?

"Content will be the single development that will propel digital music adoption next year," said Dennis Mudd, CEO of music software firm MusicMatch.

Some of the Big Five already are plowing ahead. EMI said that through its partnerships with retailers and secure digital music encoder Liquid Audio, it will offer singles for sale via the Net.

But like others in the industry, EMI wants to safeguard its content. And for now it is still unclear when specifications set by the recording industry's Secure Digital Music Initiative (SDMI) to curb the illegal copying of music will finally be released. The delay of the SDMI is seen as a serious setback for companies that are banking on digital music taking hold.

"It has been a year of unsteady and uncertain progress, a chaotic series of alliances and testing of the waters by the major labels," Mudd said. "SDMI--which had the potential to be an enormous advancement--wasn't, and shows what a disappointing year this was for moving along adoption of digital music. As an industry we need to do a better job of delivering compelling digital music to consumers."

MusicMatch is working with Microsoft to securely deliver content by the major labels, but other companies see the digital music wave as the key to loosening the major labels' grip.

"Bottom line: The whole security argument has never been about piracy, it's about control," said Steve Grady, EMusic's vice president of marketing. "The big record labels are physical distributors, and the adoption of downloadable music signals the end of their ability to dominate the channel for delivering music to consumers."

How to keep profit margins up through their current money-making distribution mechanism--the CD--is what the labels are really worried about, insiders say.

"Music and all entertainment are shifting from product to service, from the controlled distribution of packages to the just-in-time delivery of customized digital packets," Cherry Lane Digital's Griffin said. "They can no longer control the quantity and destiny of content, and the primary effect of this is to deprive them of the ability to establish a price that is significantly different from marginal cost."

Another issue that needs to be resolved is the ongoing negotiation over a license fee to be paid by Webcasters, such as SonicNet.com, to record companies for the performance of a sound recording. A provision in the Digital Millennium Copyright Act, which was signed into law in October 1998, calls for Webcasters to pay the license fee in addition to what they already pay to licensing groups such as ASCAP and BMI, which represent composers, publishers and authors.

When these legal snags are worked out and more content is available, however, the hardware still has to be churned out to give music listeners what they really want: easy access.

"Truly, the radio is to the car what the television is to the home. Digits must travel to the car, to the subway, to the street, to the beach, to the basketball court, before they make a dramatic difference in the way we use music," Griffin said.

Music Match's Mudd agreed. "When the car and home appliances start to truly hit the market, and digital music is no longer tied to PCs, we will see widespread adoption," he said.

By the most ambitious predictions, 2000 will be the year of the digital music player.

"We're going to see major new consumer products designed to allow consumers to play digital music everywhere they play music today," said EMusic's Grady. "There will be products on the market in 2000 that allow you to take your entire music collection with you in a device no larger than a CD player."