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Net music's Groundhog Day

Record labels and other music powerhouses are finally beginning to thaw to new kinds of Web music services, but those emerging may be a disappointment.

Big record labels and other music powerhouses are finally beginning to thaw to new kinds of Internet music services, but those emerging so far may be a big disappointment--to both consumers and the companies offering them.

On Monday, start-up FullAudio announced it won rights to the EMI Recorded Music catalog--not long after winning associated rights from EMI Music Publishing. The deal marks the furthest any independent company has come in navigating the tortuous set of rights needed to create a download subscription service. Getting those sets of rights is critical for launching any kind of legal music-subscription plan.

But the services planned by FullAudio and others that have won partial rights to distribute online music will be sharply limited, a far cry from the all-you-can-eat world many consumers expected from Napster and other services. Moreover, the price that independent companies have to pay to gain even limited access to songs will serve as a massive weight on any business plan.

As these types of deals are announced, "the labels say this is what the market is," said one longtime industry executive who asked not to be named. "Then we have to wait for that company to go bankrupt before we can start having reasonable conversations again."

Even as the record industry embraces the Net, critics of the labels charge that the terms of online deals may hamper rather than boost commercial online music sales. Instead of laying the groundwork for competitive online distribution, agreements brokered to date may be a way to fend off regulatory scrutiny as the record labels work to create their own services.

According to sources inside the industry, the big labels are continuing to ask prohibitive terms for the rights to distribute their music online--as much as 50 percent of an online company's gross revenue to be shared among labels, or a penny per song distributed, whichever is more.

That means that if a company signing that type of license offered consumers a $10 subscription, they would have to pay $5 to the record labels, unless a person listened to more than 500 songs a month. Another large chunk of that would have to go to the publishers, even before the company started paying for costs such as labor or bandwidth.

Insiders say most Net music companies have balked at these terms as impossible. Those that have signed with the record companies to date were "desperate companies doing desperate deals," one executive said. The experience of MusicBank, which went out of business before launching--after paying for limited licenses from all the big labels--is proof of the value of those deals, the executive said.

FullAudio would not comment on the terms of its own deal, saying it was "specific to us," rather than representing an industry trend.

"I don't think there's going to be an opening of doors to everyone who comes in wanting licenses," said James Glicker, FullAudio's president of music services.

Still, FullAudio and others coming to the labels do have one advantage that previous generations of companies lacked, analysts say. As online companies fall by the wayside, Congress is watching closely to make sure the labels aren't engaging in unfair pressure tactics to benefit their own affiliates.

The labels need to prove that some independent companies can survive, these analysts say.

"My guess is that the labels will (offer terms that will) let them stay alive, in order to showcase their permissive licensing," said Aram Sinnreich, a Jupiter Research analyst. "FullAudio is really taking advantage of regulatory pressures looming over the labels."

A false dawn?
The critical stumbling blocks to any legal online music services are the rights to distribute music. Those rights aren't yet well defined, but companies generally must buy permission to use music from the record labels, which own the recorded song, and the music publishers, which represent the actual songwriter.

For the most part, these two groups have been singing from the same page in court. The labels and the publishers teamed up to sue Napster, Scour, MP3.com and others. But each has also fiercely protected its own businesses against the others.

The publishers sued Universal Music when it launched a trial subscription service of its own last year, saying the label had not paid them for the rights. The labels themselves have gone to Congress asking policy-makers to change the way the copyright law treats songs, so they don't have to get the publishers' permission for every song distributed online.

All of this gets expensive. A few companies--MusicBank, Streamwave, MP3.com after a painful lawsuit--have won bits and pieces of the licenses. But nobody, not even the services backed by the major labels, has unambiguously lined up all the pieces to offer the kind of wide-ranging service that Napster and others have provided without legal cover.

Underlying all these difficulties is the reality that nobody knows what the market might be.

Millions of people have flocked to Napster and other free music services, but paid services have attracted a few thousand at best. EMusic's subscription service, which offers mostly independent-label music, has about 20,000 subscribers.

FullAudio plans a new twist on the subscription idea also being pursued by the major label-backed MusicNet and Pressplay. The company will offer three levels of service between $6 and $20. Consumers will be able to download a given number of songs for each tier of service--a little like having a quota of books that can be checked out from the library in any given month.

"I think this could have a fair amount of consumer appeal," Sinnreich said. "But it's impossible to see what models will ultimately be the winners."

FullAudio, however, has a long way to go in winning rights. It still has to sign up the remaining four major music labels, and even within the EMI catalog there are holes. In the case of The Beatles, EMI's biggest artists, publishing rights are owned by other parties and don't fall inside FullAudio's permission list, for example.

All of the subscription models coming up will still have to contend with Napster-like services that continue to grow and are offering access to huge amounts of free music. In the wake of Napster's collapse, companies including Music City, Audiogalaxy and iMesh have gained hundreds of thousands of consumers.

And without bringing in serious revenue--somewhat quickly--it will be difficult for any independent company to survive, insiders say.

"At this point, based on what's happened, I don't think you're going to find a VC or investors that want to deal in this environment," said Michael Downing, former CEO of MusicBank.