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Big Record Labels Start to Like the Sound of Online Music

By David Segal
Washington Post Staff Writer
Sunday, January 30, 2000; Page H01

They marketed rap, rock and hip-hop, but a funeral dirge seemed more fitting music for the major record labels over the past year. The reason: the threat of online music, which many have said could kill the majors outright or vastly erode their power over artists and retailers.

In the future, the logic went, bands would simply upload songs to a Web site and sell them directly to fans, who would download them onto their computer hard drives and play them at leisure. Record executives, and the hordes of other middlemen in the business, would become as superfluous as stockbrokers. And best of all, most music wouldn't cost a dime, since it would be easy to mass-copy the bits and bytes of a downloaded song and send them all over the world.

Suddenly, however, this vision of a music free-for-all seems as silly as "Weird Al" Yankovic.

In a comeback that few predicted even a few months ago, the heavy hitters of the rock world aren't merely embracing the online music world; they are on the verge of dominating it. Far from a life threat, the labels are beginning to prove that the World Wide Web is likely to be an unbeatable moneymaker for them, not to mention an unparalleled promotional tool.

Recent deals by Time Warner Inc.--a proposed acquisition by America Online Inc. and an alliance with rival EMI Group PLC--underscore the shift. Rather than getting outmaneuvered by smaller rivals, the majors are going to multiply their marketing muscle as they wade into the Web, drawing on their track record for hyping new artists and exploiting their back catalogues of music. More important, though, are a slew of arrangements the labels have quietly inked in recent months with companies that have mastered the technology and art of turning online music into dollars.

By acquiring Internet commerce savvy, the majors are offering a convenient, easy-to-navigate alternative to the glitch-prone world of illegally pirated music. It's too early to declare victory yet, but the labels--and their various pay-for-play strategies--now look like the odds-on favorites in the war for listeners and revenue on the Web.

"The Internet has opened up a whole new range of business models," said Aram Sinnreich, an analyst at Jupiter Communications Inc., an online research company. "But that change doesn't mean labels will disappear. On the contrary, because these labels are part of consolidated media companies, they're in a much stronger position than anyone else in this business."

Fans of free music are bound to be disappointed. In recent years, millions of them have downloaded songs at no charge in a format called MP3, which allows computer users to send and receive compressed songs, just like other computer files. MP3s delighted plenty of Web surfers, particularly college students with the time and know-how to navigate the thousands of sites that offer the songs.

Hard-core supporters regard the format as more than just a ticket to a free lunch. Major labels--Sony, EMI, Warner Bros., Universal Music and BMG--have long stirred the enmity of rock fans bothered by the influence that labels exert over the country's retail shelves and radio play lists. To many, MP3s seemed like the ideal way to decentralize power, and for a while, the format had the patina of a guerrilla movement. The labels' collective grip would loosen or vanish, it was said, when any artist with a modem could have access to millions of potential listeners on the Web.

But this revolution is spluttering. To understand why, listen to the members of Red Delicious, a Pasadena, Calif., trio. For weeks, the band's song "Want Me" has been a fixture on the alternative-rock charts at MP3.com, downloaded some 800,000 times by fans around the globe. Under a deal that's typical, the band simply uploads its tunes, a few of which are downloadable for free. Those who like what they hear can, for $10, buy a compact disc of songs that MP3 then manufactures and sends them. Red Delicious splits the proceeds 50-50 with the site.

Not a bad deal, acknowledges Steven Baca, the band's guitar player, and one that generated enough cash to cover rehearsal time and other overhead costs. But the best part is that MP3.com has generated enough buzz to tempt a major label into offering the group a contract. Red Delicious isn't interested in just sticking around the Web.

"Some groups want to stay underground, but we saw this as a promotional tool," Bacca says. "MP3.com has no retail presence."

Another MP3.com chart topper, Lucky 7, a San Diego punk band, is talking to a subsidiary of Time Warner about a deal. The band is grateful that the Internet raised its profile, but "our main priority is to play and tour the world," said singer and guitarist Allen Collaneri. At least for the foreseeable future, only major labels have the money and clout to launch a band on a national tour.

So instead of a mortal challenge, MP3.com is becoming more like a farm club. The bands get the exposure they crave, as well as fatter contracts and a shot at stardom, and the labels get an act that has already been test-marketed. The hard work of determining who will buy Red Delicious and Lucky 7 music, and how to pitch it, has already been done.

Meanwhile, music lovers have figured out that major labels are invaluable in ways that weren't obvious until MP3s came around. Pirated-music sites are wobbly, and there's usually a long wait for the songs you'd actually want to hear. Downloads are interminable, when they work at all.

It's even worse browsing sites that carry legally licensed songs, because they present a bewildering array of unknown names. Dying for a song by MaD DoLL, or Stuck on Amber or SofaWide? How about Eternal Decision or Henry Cheng? Unless you've got plenty of spare time, how would you know?

Many sites have Top 40-like charts based on the number of times a song is downloaded, to help listeners sort through the mess. But those charts are hard to trust. Some bands are said to enlist friends and fans to generate downloading campaigns that send them up the charts--the practice even has a name, "clickola." And once a band is on the charts, its presence is often a self-fulfilling prophecy, since few users have the inclination to rummage for tunes in the vast landscape of uncharted music.

Not every band with a computer, it turns out, deserves an audience; there are a thousand mediocrities out there for every Pearl Jam. That's why the labels employ armies of talent scouts, and why music lovers rely on them, whether they know it or not. One key reason the majors will survive is that fans need them to survive. They can locate the good and filter out the bad.

Meanwhile, the labels are starting to figure out how consumers want to deal with cyberspace. By 2003, about $2.5 billion will be spent on online music, according to Jupiter Communications. But just a tiny fraction of that sum, about $150 million, will be spent on songs downloaded from one computer to another. Vastly more, nearly 90 percent of the total, will be spent buying CDs from Amazon.com and CDNow.

"People enjoy having CDs because they consume music as part of the mobility of their lives, something they can play in their car or lend to friends," said Paul Vidich of Warner Music Group. "Computers crash, and, based on our research, consumers have a fundamental need to know they own something more permanent."

And once consumers get accustomed to downloadable music, the labels will offer a variety of ways to experience songs without "owning" them in the conventional sense. Already in the works are sites that allow subscribers to tap into a remote hard drive and listen to songs at any time, for a monthly access fee.

Scores of companies are eager to partner with the labels to make such new "distribution channels," as they're known in the business, a reality. And that points to another reason the labels are prevailing online: There's not much money in free music. Tech companies interested in profits--and eager to avoid litigation--have strong incentives to strike deals with the labels and turn downloadable music into cash.

A few weeks ago, for instance, Universal Music Group signed an arrangement with Real Networks, owners of Real Jukebox, one of the Web's most popular players of MP3s and other formats. Universal isn't getting ready to give away the store; instead it will work with Real Networks to develop e-commerce strategies that treat the Web more like radio. Some songs will be freebies, but the goal is luring listeners to take out their credit cards and buy.

"When videotapes came out, everyone worried about what would happen to movie theaters," said Dave Richards, a Real Networks executive. "Well, video brings in more revenue than theaters now, but theaters are bigger than ever. That's what will happen with music. Online distribution is going to expand the music market."

Even companies that the record industry has sued say they would like to join the label's side. Napster.com, for example, bills itself as an online community where users can post their songs and trade them with anyone else. The majors say this encourages piracy, and they have filed suit against the San Mateo, Calif., company. Napster executives deny the allegations, but, more strikingly, they are looking to cut their own deal with the labels.

"We're an evolving business model," said Liz Brooks, the company's vice president of marketing. "What we have is the trust and eyeballs of a large community of people who love music, and that's a gold mine to anyone who wants to promote or market music."

As important, the majors have begun to offer an alternative to the MP3 format. Caught flat-footed at first and worried that any step online would lead to piracy, the labels initially tried to litigate the MP3 problem out of existence, sending hundreds of cease-and-desist orders to MP3 sites. That turned into a game of Whack-a-Mole that the labels still have not won. For every hundred sites shut down, another hundred are launched.

The labels, however, have now deployed their marketers, not just their lawyers. The Secure Digital Music Initiative, a collaboration of consumer electronics makers, labels and retailers, is still a work in progress, but it has a fighting chance of yielding devices that make digital music as portable and appealing as a compact disc, with watermarking technology that prevents mass duplication.

Though behind schedule--the first SDMI devices failed to reach retailers by the original Christmas 1999 deadline--the initiative has brought a carefully negotiated peace between the device makers and the labels. The upshot is that online music hardware is highly likely to bear the imprimatur and blessing of the labels, which means that, one way or another, the labels will collect fees for whatever songs these devices play.

So the music industry will indeed look different in a few years. A range of new online companies will enter the fray, newfangled gadgets will be for sale at Best Buy, and music collections might be stored in remote servers rather than in homes. But the labels, it seems, will be around, too--sharing profits with new players, perhaps, but keeping plenty of earnings for themselves.

"You have to remember that the music business is an old business," said Rick Fleischman, a senior director at Liquid Audio, a Redwood City, Calif., online music company. "It's an intertwined web of artists, labels, hardware companies, retailers and radio stations, and they keep each other in check. Then along comes this online music thing to shake things up, and that in and of itself was a threat. But now you're seeing all the players moving beyond fear and apprehension. They're looking at this as an opportunity."

© Copyright 2000 The Washington Post Company

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