Labels brace for post-Napster music world

NEW YORK: Here's a little music quiz: Name the record label that issues
albums by The Beatles. How about the label for Bonnie Raitt? Toni Braxton? The
Replacements?

If you know all the answers, then you are ready for online music after
Napster, the song-swapping software service that has been under siege by the
record labels. Until record companies prove they can work better with smaller
technology companies and each other, you'll need to know your favorite artists'
record label in order to find their songs online.

If the record companies prevail in shutting down Napster, a vacuum will be
created in the online music world. Granted, most major record companies are
building services that could conceivably fill Napster's shoes.

But until they sign cross-licensing deals or agree to make their systems
interoperable, those recording companies would only be able to offer music from
their own labels. For example, German media conglomerate Bertelsmann AG, which
owns BMG Entertainment, held out an olive branch to Napster in late October,
pledging to invest $30 million to $50 million to help Napster build a service
that allows users, for a monthly fee, to download music legally.

But unless the other four major record labels agree to license their music to
the joint venture, Bertelsmann-Napster would only be able to offer a small
fraction of music. Bertelsmann called on other labels to join its service with
Napster, but so far the response has been cool.

Meanwhile, AOL Time Warner Inc., which owns the Warner Music Group, is
planning a music subscription service of its own.

Vivendi Universal's Music Group, the world's largest record company, is
testing its own subscription service. And last week, Vivendi Chief Executive
Jean-Marie Messier said the company plans to start a joint service with Sony
Music Entertainment this summer.

A service needs content from all labels

"There's no way a service will float unless it has content from all
major labels," said Jupiter Research analyst Aram Sinnreich. "There's
no way that BMG is going to license their music to Sony and Universal, unless
Sony and Universal contribute to Napster."

Even if the labels come to some kind of agreement - and getting fierce
competitors to agree on anything is challenging enough - such a deal could still
face antitrust scrutiny from the US Justice Department.

Another option for the labels is to license their catalogs to other
technology companies, as they have to http://www.MP3.com Inc., which offers a
service that allows users to register compact discs they already own and listen
to them on any computer via the Internet.

The labels granted those licenses after successfully suing MP3.com for
copyright infringement. They have yet to offer broad licenses to Internet
companies that want to sell subscription services. The labels say they are open
to issuing such licenses, but the companies have to offer a service that
complies with copyright law and pays a reasonable fee.

"No one has yet designed a broad subscription service that complies with
the law," said one label executive who requested anonymity. "Napster
has talked about it. They've issued press releases. But they haven't shown any
technology that isn't piracy."

The issue of valuing the licenses is more complex. The labels argue that they
have spent millions of dollars developing acts and building catalogs. "We
want to receive fair value," the label executive said.

Internet services say they need better terms

But smaller Internet companies say they can't make any money with the licensing
terms offered by the labels. "The terms that the labels have been offering
are not economical," said David Goldberg, chief executive of Launch Media
Inc., designer of a Webcasting service that tailors play-lists to the tastes of
individual users.

It's in the labels' interest to act sooner rather than later, he said,
because it's only a matter of time before Napster's user base of nearly 50
million starts looking for another service.

And if the labels don't provide an economical service or offer licenses that
allow other companies to offer economical services, those users will simply look
for another illegal free service.

"Shutting down Napster isn't going to stop people from downloading music
illegally," Goldberg said. "All it's going to do is spread it out to
lots of other places. You have to create a reason for the consumer not to use
illegal services. And that reason has to be a real simple, easy-to-use system
with all of the music they want."

Goldberg envisions a happy division of labor, in which the labels find and
develop talent, and then license their catalogs to technology companies that
would develop different services to provide to consumers.

He reasons that the labels' customers are currently retailers, not consumers,
and that other companies are more consumer-driven. "My fondest hope is that
the labels create standardized licenses and grant them to everyone under the
sun," Goldberg said. "That would let companies experiment and figure
out what the consumers want at the right price.

"Let AOL offer music subscription as part of its Internet service,"
he continued. "Let cable companies offer it as an add-on to their
high-speed services. Let each company figure it out themselves. And the labels
could just sit back and collect the money."

Answers to music quiz: The Beatles - Capitol, Apple (EMI). Bonnie Raitt -
Warner Brothers, Capitol. Toni Braxton - LaFace (BMG). The Replacements - Twin
Tone, Sire (Warner).

(C) Reuters Limited 2001.