Music giants gear up to slam dance on the internet

The big record labels are dividing into two rival factions for their cyberspace launch. But will they succeed or fail?
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Less than a year ago it was thought that the arrival of the internet would herald a new era in music and content distribution. Digital files would whiz over the web, making music and video available to anyone anywhere in the world. Fuddy-duddy products such as the CD would soon be dead.

It also seemed that these digital wonders would be available for free. Services like Napster, which allowed computer users to share their digital music, showed online distribution could be extremely popular, just as long as users weren't paying for it. They became so successful that the large music companies got worried about the revenue they were missing out on. Lawsuits started flying and succeeded, with Napster closed down by the courts and settling with the record labels over a $100m (£70m) action.

Now the five music giants, long criticised for being slow to recognise the potential of the internet, are to launch in cyberspace themselves. They are not, however, working in harmony as the industry has divided into two rival camps.

The battle lines are drawn for the next great product war – following the tradition of VHS vs Betamax, PlayStation vs Nintendo, and Windows vs Apple.

On one side of the line are EMI (see story on the right), BMG and AOL Time Warner. The music on their record labels will be available through their grand offering, MusicNet. This will be a distribution service, licensing the music to other internet portals such as Napster, which is signed up and will now offer an authorised, paid-for service. Many different websites will be able to use the music on the service, and it's a major step in internet strategy for the music companies. BMG seems particularly keen on internet ventures. This week it will announce it is partnering with iobox to provide mobile ringtones of its record label's tunes.

On the other side, Sony and Universal have joined together to develop music distribution service PressPlay. As Universal is the largest music group in the world, the fact that it is three against two does not make it an unequal battle. And this service, called PressPlay, has also roped in Microsoft as a helper, as well as But PressPlay will be fully in-house, and it will be dealing with the consumer directly rather than through licensing to other parties, so it is a different beast to MusicNet. And the two groups will not be sharing their music content at all. So if you are a fan of Eminem, signed to a Universal label, and Robbie Williams, signed to an EMI label, you'll have to buy from both PressPlay and MusicNet – or choose between the two. The subscription services are expected to launch in September. It is one of the biggest events in the music industry since the launch of the CD, and everyone is asking who will win. Or could both fail?

At the moment MusicNet seems to have the upper hand. Its coup was signing the privately held and secretive firm Zomba. But PressPlay, keeping its cards close to its chest, has a winner in its association with Microsoft as it means Hotmail and will link to the service.

Both services, however, still have fundamental problems. One crucial hold-up may even lead to the launches being delayed. At present it seems that neither service has done deals with the music publishers, which handle the copyright of groups and artists. The large companies have music publishing businesses, so when an artist has a foot on both sides of the battle line, there could be a hitch. It is conceivable that an artist like Jamiroquai, signed to Sony and so intended for PressPlay, might not be available as Sony has to agree terms with the music publishing division of EMI, involved in rival service MusicNet. EMI also has the contract for Sony's Aerosmith, and Universal's Sting and Scottish band Texas.

There is also the question of whether consumers will ever want to use the services. After years of downloading for free, are they really willing to pay up? Research by Forrester found that of those who have downloaded music on the internet, three-quarters would not pay for the service. Another turn-off is that security software will prevent songs being downloaded on to portable players. Consumers might not like paying for songs that they cannot take anywhere other than their computer.

And the business models, of paying a monthly fee to download music at will, have not been tried on consumers.

"Who will win? Neither. I think both efforts are going to fail," says Rob Batchelder, a research director at Gartner. "People don't subscribe to labels, they subscribe to bands. People are too used to buying music and owning it, and I think [record companies] are mistaken if they think people will rent it."

"Consumers can get better services for free, such as Audiogalaxy and those on the Fasttrack network," says Matt Bailey, an analyst at research group Webnoize. "[The record industry is] fighting a losing battle. It takes a long time to shut down these networks but then another one will start within a few months."

Mr Batchelder predicts that by 2005, a fifth of all music will be distributed by unauthorised networks.

However, recent research suggests music fans are already keen to buy CDs on the web – now the second-most popular online purchase in the UK. So some are positive that the authorised music download services will be successful.

Meanwhile, says Marcus Anselm, a music expert at corporate finance house Longacre Partners, the unauthorised services are nothing to worry about. "There will always be free services which provide content that falls outside legitimate regimes. These schemes will be the equivalent of buying a bootleg CD at a market. No doubt the majors will continue to litigate against these services."

There are complaints that the big five music companies have too much control over the market. Yet they don't control radio, TV and record stores, the music outlets. If they did, they would have control over the market as the means of distribution is a powerful force.

So if they have control over internet distribution, it gives them more power. Mario Monti, the feared European competition regulator, has already expressed an interest in MusicNet and PressPlay, and the US authorities are also understood to have launched an investigation.

Some think that the business model will have to be changed to avoid regulatory clampdowns. "They are going to have to cross-license their content to each other and potentially license their material to other independent distributors," says Mr Anselm.

It could be that in order for the regulators to leave the record companies alone, both sides will have to wave the white flag and work together.

EMI forced to pursue solo career in America

The UK's only major music company, EMI, has floundered. As chairman of the company, Eric Nicoli has spent a large proportion of his time tied up in merger discussions ­ first with Warner Music and later with Bertelsmann's BMG. But competition regulators scuppered those plans and as the other two "big five" companies, Sony and Universal, are very big indeed, it is unlikely that the watchdogs will ever allow the five to become four.

This was a disappointment for all, but particularly galling for EMI, which had very publicly been searching for a merger partner. It had spent £43m on the proposed merger with Time Warner last year and when the BMG plans were shelved three months ago, it seemed that EMI was desperate.

So where now for the UK's only real music force? First, it seems that the company may be moving further away from its homeland. Its recorded music division, which provides 85 per cent of sales, is increasingly driven by the US.

In fact the company's obsession with the States has ruled its strategy for the past two years. And for good reason. City analysts think it does not have enough strength in what is the biggest market in the world ­ a factor in attempts to find a merger partner.

But an EMI on its own may find few large independent record labels available to buy in the US, and even if it did, the company's debt levels would hinder significant acquisitions.

The other option ­ organic growth ­ would require a sophisticated understanding of the industry.

"It's a tough market to crack because music tastes have changed ­ it's hard to get a mass-market act in the US. That's why they spent so much on Mariah Carey," says Alex de Groote, an analyst at Crédit Agricole.

The Carey deal is now a particularly sore point. The rumoured $80m four-album deal with the squeaky-clean singer would have helped the company make inroads into the US market, and the singer does have true mass-market appeal. But only weeks after the deal was done, Ms Carey appears to have suffered some form of nervous breakdown.

A rather dramatic tale, if true.

It looks like EMI is not destined for a dramatic future, with only steady, organic growth to look forward to. Even that will be hard, with a declining market for music worldwide.

There are few companies which could theoretically buy up EMI. The only potential suitors are media giants like Rupert Murdoch's News Corp, Disney and Viacom. More likely is that EMI will stay in its present form.

But one thing is for sure: the company's ties to Britain are becoming looser and looser.