Policy-makers scrutinize online-music stalemate

Layoffs and closures among the first generation of Net-music companies have dotted the last few months. The major music labels, which these companies hoped to rival or complement, have temporarily gained an upper hand in a string of critical legal battles. They continue to balk at licensing their popular songs to most online-music companies.

This tension is drawing increased scrutiny from influential Washington policy-makers, who are impatient with what some see as foot-dragging in regard to turning recent copyright legislation into the online services constituents are demanding.

Sen. Orrin Hatch, R-Utah, who chairs the Senate Judiciary Committee, warned the industry Wednesday that record labels and technology companies need to work out their differences, and quickly. The "celestial jukebox"--or long-awaited legal access to whole catalogs of digital music online--that Congress hoped to help create by passing several digital copyright laws has failed to materialize, he said.

"I expect to see the market provide fair and nondiscriminatory licensing of music, and not just cross-licensing among labels," Hatch said, speaking here at a policy conference sponsored by the Coalition for the Future of Music. "I will do what I can to help this happen. But I expect this to happen soon."

Two threads wend through the industry's debate at this week's Future of Music symposium and in boardroom discussions. Every company is struggling to figure out how to make money online. And part of that quest involves fights over still-ambiguous legal rules that will determine how far companies can go in distributing or otherwise providing music to their customers.

Without new laws, nowhere left to go
"I think we're at the limit in terms of what can be created without getting licenses to content," said David Pakman, president of business development and public policy at Myplay.com, a company that provides online storage for consumers' music collections.

The question of profits, common today across the Net, is hitting music start-ups of all stripes.

The strongest of the first generation of e-commerce companies are still around, simply selling CDs online. But CDNow and Amazon.com are up against the same pressures faced by all online retail companies.

Companies pursuing the Holy Grail--digital music sold directly over the Web--are still struggling. EMusic, the leader in this terrain, is posting respectable sales every quarter, but it has seen its stock languish and was recently forced to cut back staff. The companies that have tried to sell digital downloads have been hurt by competition from music-swapping services such as Napster, which have provided downloads for free.

Directory services such as Epitonic and Riffage.com have gone out of business. Even Listen.com--funded by Big Five labels EMI Recorded Music, Bertelsmann's BMG Entertainment, Sony Music Group, Warner Music Group and Universal Music Group--has been forced to lay off staff.

What many of these companies are waiting for is authorized access to the most popular music, which remains the property of the big record labels. Only then can entrepreneurs create something beyond niche services, many analysts say.

Big labels, small steps
The big music labels have begun to take small steps in this direction. Companies such as Musicbank and MP3.com have won licenses to provide authorized digital-music storage services. The labels also are beginning to toy with their own subscription and digital sales services.

"The rules are not going to be written this year," said Hilary Rosen, CEO of the Recording Industry Association of America. "I think we're still going to be in a year of experimentation. I think this year is finally the year of market trials we've all been looking for."

Nevertheless, this caution is ruffling the feathers of policy-makers, who are looking at the huge numbers of potential constituents using popular services such as Napster or Gnutella.

"There is some measure of dissatisfaction" on Capital Hill, said Manus Cooney, the former Hatch aide who recently joined Napster as a Washington counsel. "They thought perhaps that 1996, or 1997, or 1998, or 1999, or 2000 might have been the year for experimentation."

Policy-makers are still hoping for an amicable resolution to much of the bitter fighting that has gone on between file-swapping companies such as Napster and the major music labels. Ideas such as forcing record labels to license their music to technology companies for new ways of distribution have been floated by some lobbyists and entrepreneurs, but lawmakers have stopped well short of endorsing specific ideas.

Nor is the possibility of renewed legislative scrutiny of the digital copyright world necessarily welcome--even for technology companies struggling under existing laws. Legal experts warn that the big record companies dominated the last round of copyright legislation and would stand a strong chance of doing so again.

"I am frightened that the 'big' content companies would persuade lawmakers to turn their business models into law," said James Boyle, a Duke University law professor.