Off-key efforts hinder paid Net music

As hardware manufacturers, retailers and online music services sign deals at a breakneck pace, the question remains: What will it take to get consumers to bite?

7 min read
As the Internet upends the recording industry's traditional distribution system, some computer makers and retailers have been stepping into the music delivery business.

Last month, for instance, Gateway signed up with EMusic, which sells music from independent labels online, to bundle music with its direct-order PCs. The announcement was just the latest in a string of deals aimed at bringing music to the masses legally while spurring new sales of computers and extras such as CD burners, MP3 players and broadband Internet service.

But as hardware manufacturers, retailers and online music services sign deals at a breakneck pace, the question remains: What will it take to get consumers to bite?

"The major record labels have not done a good job of enabling consumers to buy online," Gateway spokesman Brad Williams said. "So we think there is a huge opportunity" for Gateway to serve consumers' need to purchase legal music online.

The stakes are high. The recording and entertainment industries are aggressively seeking to shut off the proliferation of free music, films and other digital content unleashed by the availability of fast Internet connections and potent compression and file-swapping technologies. Their weapons have included lawsuits and a congressional lobbying campaign. The goal in Congress: to win passage of a bill that would force consumer-electronics companies to include a government-mandated copy-protection system in their products. That proposal has sharply divided content owners and equipment makers, who fear such controls could severely hamper demand for some of their hottest products.

In this accusatory environment, cross-industry promotions offer a glimpse of how music companies and equipment makers are seeking common ground. Unfortunately for both sides, most deals to date have been flops, partly because of the slow adoption of paid music services in the face of file-swapping networks that offer a smorgasbord of free music online.

"This is the next step in the evolution of changing a mentality--opening consumers' minds to legal alternatives," said Jarvis Mak, a senior analyst at research firm Nielsen/NetRatings. "Hopefully, they'll migrate in that direction, but it's not as easy as that."

The dealmakers
Music service companies such as EMusic, MusicMatch, Liquid Audio and Listen.com all rely on deals with original equipment manufacturers that create components other companies use to build a product. They say these agreements play a key role in discovering what works and what falters in selling music subscriptions.

As a result, the music services spend a significant percentage of their time on collaborating deals. EMusic, for instance, said it spends about 60 percent of its time on how it markets its paid service through its partnerships.

The company, which Vivendi Universal bought last year, has cut a host of bundling deals, including a pioneering agreement in 2000 that packaged two months of free, unlimited downloads from its site along with Hewlett-Packard's CD-Writer recordable drives. That arrangement, which lasted only three months, was followed by a string of others, including a second HP deal as well as pacts with Iomega, Sonicblue and Gateway.

So much for synergies. In two years, EMusic has signed up just 50,000 paid users for its menu of some 100,000 independent label tracks, according to the company, a trivial number compared with the ranks of Web surfers drawn to the free file-swapping services it competes against. LimeWire, one of the most prominent versions of Gnutella-based software, reported that in one day, it reached 300,000 people.

EMusic General Manager Steve Grady acknowldged that some of the deals didn't work, but he defended them in general as useful experiments and, in some cases, as a cost-effective alternative to mass marketing. When EMusic was an independent company with a small marketing budget, he said, it didn't have the money to conduct tests for its service, and the collaborative deals enabled it to know that every dollar it spent was going toward a subscriber coming into the service.

Still, he said, some partnerships didn't meet the company's expectations. A partner might have a million customers, but if it doesn't deliver them in a way that is "compelling or visible," it doesn't help sell the service.

According to Grady, EMusic's second Hewlett-Packard partnership, involving the Pavilion PC, has been among its most successful to date.

"The whole concept of a music subscription service is new to people...Paying for downloads is something that most people are not accustomed to," Grady said. "You have to keep the marketing messages...compelling enough to get them in the trial--and that's the only way you really have an opportunity to show them what the benefits are of a service like ours."

EMusic's monthly service has two models: $14.99 per month for a minimum three-month commitment, or $9.99 per month for a one-year commitment. EMusic's library includes an eclectic collection of songs by artists ranging from classic rockers Creedence Clearwater Revival to alternative bands Pavement and Yo La Tengo, and numerous jazz and blues greats. But to date it has only one song from a major record label: a dance version of "Earth" by Meshell Ndegeocello.

Ambitious campaigns
As music companies are experimenting with their services, hardware manufacturers, consumer-electronic companies and retailers are pushing aggressively to be at the forefront of the digital music frontier.

PC manufacturer Gateway, for instance, has been hammering out a niche for itself in the music publishing and distribution process. Over a course of one month, Gateway teamed with a music provider, unveiled a music site, and even launched a campaign against a bill proposed in Congress.

Through its ambitious initiatives, Poway, Calif.-based Gateway has been attempting to show consumers how easy it is to access music legally on the Internet. Its MusicZone site lets people legally download select singles. Gateway has a deal with MusicMatch that allows the computer maker to bundle music software with its desktop PCs. And Gateway's marketing program with EMusic offers music fans legal MP3 downloads from EMusic's library of more than 215,000 tracks. The companies said any consumer could sign up for the 30-day trial and download up to 100 free MP3 files.

The computer maker declined to provide specific subscriber numbers but did say it's pleased with the reception it's received. The company said it has shipped "hundreds of thousands" of MusicMatch's Jukebox.

Gateway said the objective of its music partnerships is not necessarily to experiment. Rather, it sees the deals as "an opportunity to give customers something they want."

The deals are "part of a larger initiative to speed the adoption of digital technology," said Gateway's Williams. "It's exploded with consumers. It's become something very popular with them, and for a short period of time we're doing everything we can to give consumers new ways to enjoy digital music legally."

Although Gateway is examining several ways of becoming a key player in the digital music evolution, it has been at odds with the music industry. Two months ago, the PC maker began a campaign against a bill proposed by Sen. Ernest "Fritz" Hollings, D-S.C. The bill seeks requirements that computer manufacturers and consumer-electronics companies install anti-piracy software in their digital devices, among other things.

Gateway reacted strongly against the bill, saying it would be a threat to shipments of CD burners. The PC manufacturer then launched a series of TV advertisements and public statements promoting legal digital downloading. The campaign included 60-second TV ad spots as well as free demonstrations on how to legally download songs and burn them onto CDs through Gateway Country retail stores.

The hardware manufacturers are not the only ones to try to capture the consumers looking for legal music online. Retail outlets are also grappling to become part of the digital evolution. A few weeks ago, for instance, Best Buy relaunched its digital music Web site with Liquid Audio.

Best Buy said the new storefront offers people access to some 240,000 music downloads. It also features a Best Buy-branded Liquid Player, downloadable software that lets people listen to music, buy songs and transfer tracks to a portable device or CD. Best Buy added that the site uses Liquid Audio's commerce service, dubbed The Liquid Store, to sell secure digital music and online gift certificates to consumers.

The retailer's deal with Liquid Audio is just one it has signed with music providers. Best Buy declined to provide any figures for the number of music fans using its services, although a company representative said the deals are "meeting our expectations."

Launching pad
Despite their various partnerships, consumer-electronic companies, hardware manufacturers, retailers and music providers all face the same hurdles. Among the challenges are gaining access to content from all Big Five record labels and making digital music portable.

"It's a learning curve that we're all scaling simultaneously," said Susan Kevorkian, a research analyst at IDC, a Framingham, Mass.-based research firm. "The music labels are the ones that have been starting out a little slower."

By 2005, IDC predicts that a little over 10 million people will be paying for music online through individual downloads or subscription services. Kevorkian said the future looks promising, assuming that licensing issues are hammered out to allow consumers to go to one place to find music from all the labels, much as record stores offer.

"What we're seeing is a series of experiments with retailers, and with distributors of online music, trying to find the sweet spot," Kevorkian said. "The general consensus is that ultimately music distributed via the Internet is a very viable opportunity. But the ongoing question is: How soon is it going to take off?"