Faster Than the Speed of Software

It’s fashionable in high-tech circles to belittle record labels as dinosaurs. Rather than blaming the Internet for killing CD sales, the argument goes, the labels should embrace new technology that could bring the music industry out of its slump.

But on one important front, the five major record companies are ahead of the technologists -- Microsoft Corp. and RealNetworks Inc. in particular.

In a little-known move, the major record firms have agreed to let consumers download an unlimited number of songs and listen to them wherever they go, for less than the price of one CD a month. As long as they keep paying subscription fees, users can have thousands of songs at their fingertips.

That could transform what it means to “buy” music. Instead of paying for prepackaged collections on plastic discs, consumers would pay to access an enormous and growing online catalog of individual songs.

The problem: A new generation of portable players designed for music that’s rented, not owned, needs new software to function -- something programmers at Microsoft and Real haven’t been able to design.

The labels, which have seen CD sales drop in the last two years, need radical new ideas as they fight the proliferation of online file-sharing services that allow users to copy music for free. The pressure increased Friday, when a federal judge ruled that two such services -- Morpheus and Grokster -- don’t violate copyright law.

Morpheus and Grokster attract millions of users, but the online services sanctioned by the record labels have signed up a fraction of that number. One reason is that the label-backed services don’t offer the freedom to move a song easily and cheaply from a computer to wherever someone might want to hear it.

That’s because of the labels’ conflicted attitude about selling music online: They want to take advantage of the market but are so concerned about piracy that they demand electronic locks on their song files.

To work with the unlimited-music services the labels endorse, a device has to be able to unlock files for listening, then lock them back up when a subscriber stops paying the monthly fee. A computer can do that, but today’s portable music players can’t. They are not smart enough to know which songs came from the subscription service, when their licenses expire or are renewed and how to keep their internal clocks running when their batteries die.

Software Delays

Microsoft was supposed to deliver software to power such devices at the end of last year, but the company now is telling customers it won’t be ready for months. At Real, an executive says the company is making progress but is hindered by “pages and pages” of demands by some of the labels regarding “how this stuff has to behave.”

The missing software is crucial to what may be the most dramatically different business model yet for online music, one that’s truly about services, not products -- a concept that consumers have yet to embrace, said analyst P.J. McNealy of research firm GartnerG2.

If it works, the new model could be a key weapon in the industry’s battle against online piracy and slumping revenue.

“Those services, as they evolve, are really going to change music,” said Greg Ballard, chief executive of Sonicblue Inc., a consumer electronics manufacturer that recently sold its audio devices unit to D&M; Holdings Inc. of Tokyo.

As free music has proliferated on the Internet and CD sales have plummeted, the record companies have responded on three fronts:

* They have brought multiple lawsuits against the companies behind the free music services, particularly file-sharing networks that let consumers copy music from one another’s computers.

* They have mounted campaigns to educate the public and lawmakers about copyrights and piracy.

* And they have given an increasing amount of support to legitimate sources of online music -- most recently, licensing a downloadable music service that Apple Computer Inc. is expected to announce Monday.

Two other legitimate outlets are owned at least in part by the labels: Pressplay, a joint venture by Sony Corp.’s Sony Music Entertainment and Vivendi Universal’s Universal Music Group; and MusicNet Inc., whose main shareholders are AOL Time Warner, Bertelsmann, EMI Group’s EMI Recorded Music and Real.

So far, the only authorized online service to attract more than 100,000 subscribers has been the customized radio offering from San Diego-based MusicMatch Inc. Pressplay, MusicNet and other companies trying to compete directly with the file-sharing networks have made much slower progress, partly because their services offer less flexibility and fewer songs than the most popular sites for pirates.

Portability Problem

The most significant restriction imposed by the authorized services is that the music they supply for a flat monthly fee must be played by a computer. It can’t be moved to a car, a living room stereo or a portable CD player -- the devices consumers typically use to listen to most of their music.

To overcome the portability problem, these services charge subscribers about $1 a track to record permanent copies of songs onto a disc that can be played on devices other than the computer. That amounts to about the same price as music on a CD, so the only advantage is being able to buy single songs instead of complete albums.

At least three online music distributors -- Pressplay, MusicNet and Chicago-based FullAudio Corp. -- want to ease restrictions and let subscribers move an unlimited supply of “tethered” downloads to portable devices without extra fees. Executives say they have the major record companies’ permission to do so, provided that the devices stop playing those songs once the subscription lapses.

That’s not as easy as it might sound.

“It’s far easier to implement that on a PC that has a lot of power, has a lot of memory, has clocks that can be dealt with,” said Michael Maia of PortalPlayer Inc. of Santa Clara, Calif., which makes software for microchips. “On a portable device, when the battery goes out, your clock goes away. That’s the big problem they’ve had to face.”

Nevertheless, Microsoft told customers it would deliver by the end of 2002 a new version of its Windows Media digital rights management software that met the requirements for tethered downloads.

Pressplay planned to announce the feature at the International Consumer Electronics Show in January, joined by Sonicblue, which planned to add the new Windows capability to its Rio portable music players. The two companies had even talked about bundling a free player with Pressplay’s service for subscribers who made a long-term commitment, similar to the approach taken by mobile phone companies.

But the announcement was called off after Microsoft told the companies that it couldn’t get the work done, said Jeff Hastings, vice president of engineering at Sonicblue. Microsoft put a completely new team of engineers on the project and changed its name from Mercury to Janus, but it still hasn’t surmounted all the technical hurdles.

Jonathan Usher, director of the Windows digital media division, couldn’t say when the project would bear fruit.

“It is an interesting engineering challenge,” he said, adding: “You can’t just take the code and push it into devices. It has to be slimmed down.”

‘Fantasy’ Requirements

FullAudio also relies on Windows Media software; MusicNet uses rights management technology from Real. Erik Flannigan, vice president of programming for Real, offered a different explanation than Usher, saying Real’s task was complicated by the “fantasy” requirements that some of the labels imposed in MusicNet’s licensing deals.

One sticking point, he said, is the protection some labels want against songs being transferred from one computer to another via a portable device.

A potentially larger problem for MusicNet is that no portable device uses Real’s rights management technology. By contrast, numerous portable players use the current version of Windows Media technology, which can play files that are copyright protected but don’t expire.

Pressplay already has integrated the current Windows rights management software into its service, making it well-positioned to offer expanded portability as soon as it becomes available.

In fact, the original vision for Pressplay was to provide un- limited music that subscribers could play on a variety of devices but not copy, said Lawrence Kenswil, president of Universal Music Group’s ELabs. However, Pressplay ended up allowing subscribers to copy songs onto CDs for an extra fee “because there was no other portability solution.”

“That was a compromise,” he said. “Now it’s taken on a life of its own because they’re selling a lot of those downloads.”

Kenswil added: “No one has ever expected the subscription services to take off to the millions of subscribers” until the music could be moved off the computer. Offering downloads that can be played only on a PC appeals to few consumers, he said, but with “$10 a month for all the music you want wherever you go, then people go, ‘That’s pretty good.’ ”

Not everyone at Universal shared Kenswil’s enthusiasm for that kind of offer, at least not at first.

“Early on there was a question whether the usage should be limited because of fear of cannibalizing the CD,” he said. “It quickly became apparent that the competition for online music wasn’t physical music, it was other online music. And the other online music was free.... We got past that [issue] a couple of years ago.”

To Pressplay Chief Executive Mike Bebel, the goal is to let subscribers play any song at any time in any place. Once every digital device and car stereo is connected to the Internet, he said, nobody will download music; users instead will subscribe to an online jukebox that lets them play whatever they want on demand.

But it will take years for that kind of ubiquitous Internet access to be available.

The short-term solution, Bebel said, is to offer unlimited downloads that can be copied to a high-capacity portable player, enabling subscribers to play virtually anything they want wherever they go.

Compared with packaged CDs, Bebel said, “that kind of freedom and that kind of flexibility will be recognized as superior by the consumer in the long run.”