Mp3s: If You Can't Lick 'Em, License 'Em

The MP3 deal gives record companies a new revenue source

They're the latest odd couple. Michael Robertson, 33, who started the music Web site Inc. three years ago, has been calling for revolution in the music industry. The record companies have called him a pirate, and in April, they won a suit charging him with massive copyright infringement.

Yet on June 9, two of the Big Five record companies--Warner Music Group and BMG Entertainment--buried the hatchet. They refrained from demanding the hundreds of millions they were entitled to under the law and licensed to continue its service that lets customers listen to music over the Net--as long as they can prove they own the CD.

The rapprochement reflects a new strategy by record-industry execs. The basic idea is to combat the threat of music piracy by creating ways for people to use the Web as a customized, on-demand radio service instead of a downloaded virtual library. Such services, which involve "streaming" music over the Net, are harder to pirate than downloads because no copies are stored on users' hard drives. They also offer the possibility of new revenues from selling subscriptions to music. "Some companies are beginning to see that streaming is going to be a better model," explains David B. Goldberg, CEO of Launch Media Inc., which streams music videos.

Still, the June 9 agreement was more like a shotgun marriage than a happy joining of forces. If, as expected, the other three major record companies settle on similar terms, San Diego-based would have forked over just $100 million for having created, without permission, a database of more than 45,000 CDs. But in return, the majors demanded high licensing fees. will pay record companies about 1.5 cents each time it copies a track, and about 0.3 cents when a customer listens to the song.

FLOWING STREAM. For the labels, the fees lay the groundwork for subscription services that could yield something unknown in the topsy-turvy music biz: a predictable revenue stream. Today, and MusicBank Ltd., a San Francisco startup, have licenses only to stream music to those who already own the CD. By yearend, these could broaden to let consumers listen to music they haven't purchased. A first step could be "bonus tracks" offered by CD retailers.

The next phase would be subscription services based on genre, label, or artist. Packages of music that cut across labels could command $10 to $15 a month. To dissuade people from pirating tracks, "it has to be a level where the convenience factor outweighs the cost factor," says Goldberg. If 100 million active users subscribe in the U.S., the record industry could pull in $18 billion --nearly double their take now, he says.

Still, it will take years--if ever--to reach such levels. And although such services could go partway toward neutralizing the threat of download piracy, they'll hardly wipe it out altogether. To do that, streaming services will have to offer increased content, new ways to access and store music, and fidelity comparable to digital downloads. "If streaming can give similar quality, many would prefer it to downloading," says Ric Dube, an analyst at market researchers Webnoize.

That's why similar deals are sprouting up. On June 8, BMG licensed its music catalog to MusicBank. Pierce Ledbetter, MusicBank's chairman, says deals with Universal Music Group and Warner are "extremely close."

But don't expect the majors to license too many streaming outfits. The fewer they allow, the easier it will be to control security. Besides, Myplay, and MusicBank, the likely candidates are, America Online, and Yahoo! (which may snap up, says Nitsan Hargil, senior Internet analyst at the New York brokers Kaufman Brothers. Adds Malcolm Maclachlan, analyst at International Data Corp.: "Online, they're keeping all the different pieces of the process a lot closer to the vest than they traditionally have." Still, they've been forced to make some strange bedfellows.

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