A battle for the future of digital music

The big record labels are taking sides with rival software companies as they fight to determine whose technology will be used to sell music online

Think of digital music and most internet users probably think of MP3, the file format that has allowed millions of music fans to download their favourite songs for free. Now a number of new services and technologies are emerging that promise radically to alter the way digital music is obtained.

Until now, MP3 has managed to remain the ubiquitous format because it offers a simple solution for digital music fans. "Consumers drive what formats are accepted," says Greg Wilfahrt, MP3.com's head of PR. "All they ask is that the replacement be superior to its predecessor."

While consumers are concerned with functionality, the record industry's main concern has been with proprietary issues and ensuring that its content remains secure when trading on the internet. So, while the MP3 format has reigned supreme in the era of Napster and other file-trading systems, now that the days of free file-sharing are all but over, the future of MP3 is looking less certain. The fact that every major record label looks set to exclude MP3 from their new subscription services could place a time limit on the format.

Indeed, other formats have already been developed that tackle the copyright concerns of the recording industry. Both Real Networks and Microsoft are offering file formats with strong anti-piracy measures and improved playback quality.

Microsoft's Windows Media file format, which comes with the new Windows Media Player, has been touted by the software giant as the natural successor to MP3. And as the player is going to be bundled with the forthcoming Windows XP operating system, the format stands a good chance of reaching ubiquitous status.

While Windows Media has many of the features familiar to MP3 users, Microsoft has something apparently unattainable to MP3 – record industry support. Kevin Unangst, group manager of Microsoft's Digital Media Division, claims record companies choose the format because it "offers CD-quality sound, supports twice the compression of MP3 files and uses digital rights management".

However, the interesting thing about Microsoft's strategy with the Windows Media Player is that the company is clearly not writing off MP3 altogether. From October, consumers will be able to purchase an MP3 encoding plug-in for the Windows Media Player. Users will then be able to choose whether to record their music in either the Windows Media format or the MP3 format. Although the consumer will inevitably have to pay a small fee for the plug-in, it marks the first time that Microsoft users will be able to encode in the MP3 format.

But perhaps the biggest threat to the MP3 format comes from Napster itself. For Napster, a name synonymous with the free-for-all ethos of anonymous file trading, has bowed to legal and commercial pressure by unveiling plans for its own proprietary digital music format.

Last month, the file-trading service announced the development of a digital music player that will be used with its new subscription service, which is set to launch before the end of summer. In conjunction with Play Media Systems, Napster intends to deploy customised playback, encryption, decryption and specialised security technologies that enable the Napster software to remain fully secure.

According to Napster's interim chief executive, Hank Barry, the service is not simply coming round to the idea of secure digital music, but is leading the way. "Napster is at the forefront of using some extremely advanced rights management and security technologies in a file-sharing environment," he says. "Play Media's technologies and consulting services for playback and advanced file security have been instrumental in helping us build a new Napster service that will give our users a satisfying experience for discovery and listening to new music."

However, the new secure service will not allow users to move their downloaded tracks away from Napster to Windows Media Player or any other media player.

Real Networks is another company trying to balance the needs of the consumer with the security requirements of the recording industry. Its Real Jukebox Media Player, which is positioned as the main competitor to Microsoft's Windows Media Player, is intended to provide users with a complete solution for enjoying digital music on their PC.

As with Microsoft's Windows Media Player, users will not necessarily be confined to using the company's own secure format. "Unlike other digital music software, our Real Jukebox gives users the benefit of a simple intuitive design while offering the features and power to grow as their needs increase," says Sonja Weiss, Real Networks' European marketing communication manager. "It is the only software capable of playing all popular music formats."

In other words, rather than making it compulsory, Real Jukebox incorporates security as an option. Files recorded in Real Jukebox with the security option on can only be played using the machine on which they were recorded. If a user decides to turn security off, a window appears asking them to accept the potential legal implications if copyright laws are violated by improper use. Real Jukebox therefore offers users the freedom to choose, while also acknowledging the piracy concerns expressed by the music industry.

"At the end of the day, users will make their choice depending on quality, size of files and also what content is available," Weiss says. "On the other hand, content providers are looking for the best security,to provide revenue making opportunities."

Real Networks is also working with three of the "big five" record labels in helping to set up MusicNet, the world's first legal digital distribution platform for streaming and downloading music.

MusicNet was officially announced as a joint venture between Real Networks, AOL Time Warner, Bertelsmann AG, and EMI Recorded Music in April. It combines Real Networks' technology with the music catalogues of the three record labels. As both a technology provider and a music clearing house, MusicNet intends to license its "private label" platform to companies seeking to sell music subscription services under their own brands.

"MusicNet is focused on providing a platform that will help consumers to enjoy music in a manner that's legal, reliable, secure and supportive of artists and rights holders," says Rob Glaser, chairman and chief executive of Real Networks and acting chief executive of MusicNet. "This partnership will give consumers access to thousands of big-name artists, including Madonna, Robbie Williams and Eric Clapton." Eric Scheierer, an analyst with Forrester Research, says the partnership ushers in a new era in online music, showing a "willingness by the labels to let somebody aggregate their content".

However, not long after the MusicNet announcement, a flurry of rival ventures became public. PressPlay, the Universal/ Sony subscription service, will launch later this summer using the Windows Media format through Yahoo!

But as the new services prepare to launch, they have become the subject of anti-trust inquiries. Earlier this month the US Department of Justice said it was undertaking a preliminary investigation of MusicNet and PressPlay. The European Union announced its own anti-trust investigation in June.

Although the outcome of the battles, legal and otherwise, involving Microsoft, Real Networks, MusicNet, PressPlay and others remains uncertain, there is little doubt that now the record companies are on board, the era of digital music has entered a new phase.

But the arrival of comprehensive payment-based services and secure trading formats does not necessarily mean consumers are prepared to pay. As Mark Mulligan, an analyst at Jupiter MMXI, points out, there are "a number of significant stumbling blocks".

First and foremost, Mulligan says, there are technological factors. Microsoft's and Real Networks' focus on streaming audio does not take into account the lack of broadband penetration in Europe. Because "paid content goes against how the internet has been built, consumers will still be able to get hold of free music from decentralised services such as Gnutella".

Mulligan also argues that online music services may be underestimating the challenges they face when it comes to changing the mindset of people accustomed to buying CDs. He observes that the shift from music as product to music as service is going to take a lot of getting used to for some people. "While they may have been won over when the music came for free, when it is paid for it is a whole different story," he says.

The real battle, therefore, may not be between software companies and service providers, or even between MP3 and the newer secure trading formats. Ultimately, it could prove to be between the technology that is making secure digital music a reality and a population of music fans who are used to their albums coming packaged as a physical product.