Microsoft ultimately hopes to offer music subscription services on its MSN site, charging customers a monthly fee. But the record labels have been wary of handing it too much power over their online plans, and the software giant has yet to broker thethat would let it offer access to the labels' full catalogs, as have Yahoo, Napster and archrival RealNetworks.
Nevertheless, the company has been able to use the growing influence of its Windows Media audio and video technology as leverage over the rest of the industry. This has shown up particularly in the creation of the MusicNet joint venture between RealNetworks and three major record labels, where Microsoft's technology has been one source of tension between the streaming media company and its partners, sources say.
Microsoft isn't an official part of that venture. But sources say that the labels pressured RealNetworks to include support in MusicNet for Microsoft's Windows Media technology, which is battling for dominance with its own RealAudio and RealVideo formats. Although RealNetworks will serve as the default software for MusicNet, other Web sites that license MusicNet will have the option to use Windows Media technology as well.
"If MSN wanted to license MusicNet, they could do it in Windows Media," said a source close to MusicNet who requested anonymity. "While agendas may intersect, they diverge in many places. What's good for RealNetworks isn't always good for MusicNet as a service."
Microsoft's future in online music hinges on whether it can turn such influence into a foothold in the alliances forming between technology companies and record labels. At that point, the company's ambitions to turn the widespread use of its technology into a recurring stream of new profits could come together, at least in the digital music realm, analysts say.
"Basically they see (America Online), the biggest consumer-oriented service, on the desktops of 27 million or 30 million people, collecting monthly fees from all of them," said Matt Rosoff, an analyst with Directions on Microsoft, a research firm that focuses on the software company's actions. "Microsoft thinks they should be able to collect a monthly fee, too."
The record companies and Microsoft have different business goals. But in the last year or so, the ambitions have come together.
The big music companies are in the process of trying to create their own online subscription services after resounding legal victories against start-ups such as Napster, which had once threatened their pre-eminence on the Net.
The labels have broken into two camps. MusicNet is backed by Warner Music Group, BMG Entertainment and EMI Recorded Music, and controls about 40 percent of the U.S. music market. Pressplay, a joint venture between Universal Music Group and Sony Music Entertainment, owns about 43 percent of the market. The remaining share is held by independent record companies.
Each group seeks control over the distribution of music online that they had temporarily lost to popular file-swapping services.
Microsoft, meanwhile, is trying to boost revenues from "Web services," ranging from instant messaging to software subscriptions to potential services hosted inside the Microsoft Network of sites. The company has taken one interim step into the music distribution business with online streaming music services similar to AOL Time Warner's Spinner.com, but it doesn't yet have the licenses to offer downloads or on-demand services.
Its radiolike site allows people to choose the type of music they want to hear by letting them select an artist and then listen to a preset stream of music closest to that choice. It doesn't offer music on demand, however, or even the rudimentary level of interactivity that has drawn industry lawsuits for other Webcasters including Launch.com and MTVi.
The company is "super careful (to stay) within all the legalities out there today," said Sarah Lesko, an MSN product manager working with the music service.
The other, and to date more successful, facet of Microsoft's push is its digital media technology.
Windows Media comes with every copy of the Windows operating system, making it one of the most universally accessible software programs for computers. Under its new Windows XP, the audio player will be folded more fully into the operating system without separate downloads. But the company has also built strong copy-protection technology into the software itself, helping to ameliorate record labels' concerns about people sharing music illicitly online.
Those pieces together provide the framework for a strong new set of revenues from the music business, which appears to be one of the first areas to truly fire consumers' imaginations on the Net. There's just the single piece missing: the music itself.
"Look at where the potential revenue streams are for them"--selling music over the Web, selling advertising on MSN and licensing the music technology, said Gartner analyst P.J. McNealy. "They're the only ones with everything in-house except the content."
A slow starter?
The announcement of MusicNet, with RealNetworks as the biggest partner, was seen as something of a strategic slap in the face to Microsoft. The deal instantly gave added life to RealNetworks' audio technology, which has long been a target of Microsoft.
The pressure from the labels to include support for Microsoft's technology mitigated this somewhat. But now the software giant needs to prove it isn't falling behind on the content side.
The company says it's in constant negotiation with the labels, both on the technology and content side, and has good relationships with all of them.
"For us to say we're not part of MusicNet would be premature," said Dave Fester, general manager of Microsoft's Windows Digital Media division.
Microsoft and Pressplay have also reportedly discussed a technology partnership that could allow the service to support Windows Media Player. Pressplay executives, however, remain noncommittal as to what kind of technology they would consider.
The room for alliances is still broad. Pressplay and MusicNet each are scheduled to launch later this summer or in early fall, and some analysts have said even that is likely to be an ambitious timetable. Moreover, adoption of these services will likely be somewhat slow, since consumers will have to move from old habits of downloading music for free to paying for their songs.
Thus, even if Microsoft trails some of its competitors in providing the full spectrum of music, it has time to cross the gap, analysts say.
"Based on our record, it would be unwise to assume we aren't in this game in a very serious way," Fester said.