The push toward digital music just got a shove.
America Online Inc.'s proposed merger with Time Warner Inc. may vastly hasten the online music revolution, say record industry specialists, and could transform the race to find new ways to sell and distribute music over the Internet.
Although no one knows how successful AOL and Time Warner will be in delivering the $183 billion combination's promised synergies, digital music could be one bright spot. For the first time, a technology powerhouse and a record label will share the goal of turning digital music into cash, an ambition largely frustrated so far by consumers accustomed to downloading their songs for free and record companies afraid of widespread pirating.
By tossing their combined weight behind the pay-for-play approach, AOL and Time Warner could enhance not only their own bottom lines, but also, if they are able to set a standard for distributing digitized music, those of the dozens of companies now angling to turn the Internet into the music marketplace of the future.
"What this brings together is a tremendous wealth of music assets and a group of people who have mastered the art of making things simple on the Internet," said Hilary Rosen, president of the Recording Industry Association of America (RIAA).
The size of the potential payoff is enormous. Last year, sales of online music amounted to roughly $1 million, according to Boston-based Forrester Research, but they are expected to rise to as much as $4 billion by 2003. That's a hefty slice of the $13 billion in music sold in the United States each year.
In its simplest terms, AOL has what Time Warner lacks but desperately needs: Internet savvy and a way to market music in cyberspace. Time Warner, meanwhile, has something that AOL hasn't even tried to acquire: a sizable catalogue of rock-and-roll superstars, including Cher, Madonna, the Red Hot Chili Peppers and Tom Petty.
AOL would not say much yesterday about its digital music plans, aside from stating that a transition team would study how to proceed.
"To us the whole online music category is pretty exciting," said AOL spokeswoman Regina Lewis. "There's a lot that can happen there, and you now have the best and the brightest minds in both the Internet and music world focused on this."
AOL already owns some high-profile music assets, including Spinner.com, an online music site that allows users to download custom playlists, as well as Nullsoft, makers of Winamp, a program used to play and sort MP3 files, a digital format to store and play digital music.
AOL last week struck a deal with Liquid Audio, an online music distributor that markets software helping all parties in a downloadable music transaction--including the label owner--get paid. Terms were not disclosed but AOL said the point of the deal was to develop software so that users of AOL and Winamp could purchase music online.
"This will speed up how fast the digital music market emerges," said Andrea Fleming, a spokeswoman for Liquid Audio, referring to the AOL-Time Warner deal. "Any time you pair content with bandwidth and Internet strategy, that's the special sauce that makes it all happen much faster."
Still in its infancy, the online music business is today a hodgepodge of formats and a source of both anxiety and promise for record executives. The problem is that among consumers, the most popular way to download music is through the MP3 format. MP3 sites have multiplied on the Internet and today millions of users are downloading and trading music without sending a nickel of profits to the record companies or their artists.
This terrifies label executives even more than the advent of blank cassettes, since a song that's been downloaded can be instantly sent to and copied by a virtually limitless number of people. A digital tune, after all, is nothing more than software, and as anyone in the software business knows, stealing a copy of a program can be a cinch.
Only a year ago, some MP3 fans and even a few industry analysts were predicting the outright demise of the major labels. It didn't help that some rock stars embraced the give-it-away spirit of online music and began to post tunes on the Web without charging for them, treating the medium as a promotional tool, like radio.
The tensions between artist and label were highlighted last year when Tom Petty decided to give away copies of a song from "Echo," his latest album. His label--Warner Bros., which is owned by Time Warner--wasn't amused and demanded that he un-post the song three days later.
So in something close to a panic, the industry in 1998 began to strike back and search for ways to sell piracy-proof music on the Internet. The effort has united the consumer electronics industry, which is developing new devices to play digital music, and a handful of the world's largest record labels, which are struggling to find ways to turn a profit in the everything's-free medium of the Internet.
In the meantime, lawyers for the Washington-based RIAA began a campaign to sue, or threaten to sue, any Web site that offered downloads of unlicensed music. And the industry also promised consumers that by paying for online songs, they could enjoy better sound quality and quicker downloads. Most MP3 users must endure the sort of waits, frustrations and long lines that are common at the Department of Motor Vehicles.
The consumer electronics business has been slow about bringing to market devices that support the Secure Digital Music Initiative, the industry's anti-piracy effort. Initially, Christmas 1999 was the target date for industry-backed digital music equipment. And it's still an open question whether music lovers now accustomed to online freebies are prepared to pull out their credit cards and pay for songs. Today, an online song costs anywhere between 99 cents and $1.99 and takes about five minutes to download on a 56-kilobit-per-second modem.
AOL and Time Warner will now try to convince consumers that the outlays are worth it. More than that, the deal could bring a variety of other music "programming" to the Web.
"One area of common interest is developing an online video music channel in competition with MTV," said Paul Vidich, an executive vice president at Warner Music Group. "There might also be Webcasts associated with the Internet delivery of a concert."
Vidich said he and his colleagues have yet to discuss any plans with AOL. "It's fair to say that we'll set meetings and look for some common ground on which we can work together."
An outbreak of marriages among labels and Internet heavy-hitters is anticipated and in fact, some have already been consummated. Last week, for instance, Seagram Co.'s Universal Music Group announced an alliance with RealNetworks Inc., maker of one of the Web's most popular storage and player programs. The companies plan to use a technology that protects copyrights while also making it easier to download songs, albums and self-created collections.
"The goal is to create a bigger pie together" said David Richards, a vice president at RealNetworks, which is based in Seattle. "You're going to see a lot more alignments like this."
Staff writer Rob Pegoraro contributed to this report.
CAPTION: Artists in Time Warner's catalogue include, clockwise from above, Cher, Adam Sandler, Madonna, Tom Petty and Alanis Morissette.