In Digital Music, First You Must Eat Your Rivals

Baldwin Louie — Mon, 06 Aug 2001 15:00:00 -0700

Remember Bluematter, Project Nigel or Project Madison? Hardly anybody does. Those were the obscure names assigned to the last schemes for moving the major record labels into digital downloads.

But the pay-per-download strategy failed to take at least two factors into account. First, consumers didn't care to pay $3 for a song wrapped in clunky security software that couldn't be moved to a portable player. The second factor was Napster, which made digital music the guilty pleasure everyone thought it could be, and which - not coincidentally - threatened to undermine the very foundation of the recording business.

That was last year. Today, most of the digital music dot-coms have been swallowed up; Napster has been shut down in preparation for its relaunch as a paid service; and the labels are rolling out subscription services later this summer (or, more likely, this fall) with a slew of new names and high hopes. Vivendi Universal and Sony created Pressplay (nee Duet) and BMG, EMI and Warner are behind MusicNet. The labels are also slowly warming up to independent services such as FullAudio, Uplister and Streamwaves. But just like last time, major-label digital music revolution 2.0 appears poised to become another failure.

The recording industry is asking consumers to try out a whole new concept of music ownership. Through the services now in the works, most popular music wouldn't be owned at all. Rather, songs would be rented by the month. Consumers would pay a monthly flat fee for access to a predetermined number of songs. Once they stop paying the fee, the downloaded files stop working. It's hard to see how this scheme will add up. The average consumer spends about $90 a year for six CDs and gets to keep them forever, says Gartner Group analyst P.J. McNealy. The new subscription services will ask consumers to pay about $120 a year - and come away with nothing.

Even Michael Robertson, CEO of MP3.com, which is providing database technology for Pressplay, says he's "extremely skeptical" that this arrangement will have much commercial appeal. Further complicating the fact that consumers are paying for music they cannot keep, the music will, at least initially, have to remain tethered to one computer; no flipping to a laptop, portable player or home stereo system. "There is no value there and it's going to be a disaster," Robertson says.

The labels' hopes rest mostly on anecdote and wishful thinking. Jay Samit, senior VP of new media for EMI Group, believes you need look no further than MTV or Music Choice to prove consumers are open to the idea of subscriptions for music. "What you're talking about is commercial-free music," he says. "Music Choice is a subscription, and it's the most-watched channel on DirecTV."

Piracy played a big role in the decline of digital music businesses in 1999 and 2000, Samit says. But labels also have themselves to blame for the dearth of appealing music offerings on the Web. By offering only expensive, restrictive licenses, the labels hastened the demise of many desperate Internet companies that tried to operate legally. The lack of licenses weakened MP3 .com, Launch Media and Myplay to the point that they became acquisition targets.

The new label-backed subscription services will also have a few advantages over the Internet companies they replace. They are, for one, well-funded and under no pressure to revolutionize the music business overnight. "This will not happen in the next six to 12 months," says Richard Wolpert, former Disney executive and CEO of MusicNet. "It will happen, but it will take time."

Some in the industry fear that the service itself may never become profitable - that, for example, MusicNet might be offered as an incentive to attract new members to AOL. Music is a low-margin business, and diversified media conglomerates AOL Time Warner, Bertelsmann, Sony and Vivendi Universal might sacrifice music profits to sell other products.

One thing that will almost surely doom the recording industry's new and improved business model: asking customers to pay for more than one service. For the moment, with about half the world's recordings on Pressplay and the other half on MusicNet, that is exactly the situation. The executives in charge of these services seem aware of the problem, though little progress has been made to cross-license between the two services. "We are having discussions with the other majors," says Andy Schuon, CEO of Pressplay. "We are going out with a massive catalog and a great deal of independents."

In the end, it seems, subscriptions - like downloads before them - are an experiment in an emerging market. "With every failure we learn what customers don't want," Samit says. The labels appear to be headed for yet another learning experience.

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In Digital Music, First You Must Eat Your Rivals