Music Industry Taking Cues From File Sharing

Having condemned file-sharing for five years, the music industry is now trying to co-opt it.

Online music businesses are adding features once found only in file-sharing networks, such as the ability to send free songs to friends and to listen to them on a variety of portable players. And a handful of companies are developing hybrid peer-to-peer networks that encourage sharing but prevent users from violating copyright law.

One example is Mercora Inc. of Santa Clara, Calif., a fast-growing start-up that lets people listen to songs from other users’ computers. Mercora’s software turns each user’s computer into an Internet radio station that any other Mercora user can tune in, enabling them to hear -- but not download -- a wide array of tracks.

Meanwhile, one of the leading peer-to-peer networks has agreed to transform itself from a hotbed for piracy into a haven for legal file-sharing. IMesh.com Inc., which struck a truce with the major record companies last week, pledged to revamp its network by the end of the year.

It remains to be seen whether any of these efforts can compete effectively with popular file-sharing networks such as Kazaa and EDonkey, which are used by millions of people around the world.

“You can’t displace piracy with legal services by being as good as a pirate service, because pirate services have no restrictions,” analyst Josh Bernoff of Forrester Research said. Instead, Bernoff said, legitimate outlets should compete by providing more innovative, reliable and easy-to-use services.

Unlike the songs offered by legitimate outlets, which are wrapped in electronic locks to deter piracy, the music on file-sharing networks can be shared freely and played on any device without regard to copyright law.

Some legal services are hoping to win over customers by offering the same features -- to the extent they can.

MusicMatch Inc. of San Diego, which operates a downloadable music store and an online radio service, is planning a $10-a-month offering that will let subscribers play as many songs as they wish from the company’s online jukebox. They will also be able to make songs available to their friends for free.

There’s a catch, of course -- non-subscribing friends can only play each track three times. If they want to hear a song again, they’ll be invited to subscribe to the monthly service.

For Mercora, sharing songs is fundamental to the business.

Like Kazaa and EDonkey, the start-up relies on users to provide the free songs that are the lifeblood of its network. As more users sign on, more songs become available, attracting more music fans.

To keep everyone on the right side of the law, Mercora doesn’t let users copy songs from each other. Instead, they merely listen to tracks from other users’ collections. The tracks are chosen by Mercora’s software, which tailors playlists to meet restrictions that Congress imposed on Internet radio stations. That way, the service qualifies automatically for a broadcasting license.

“Our whole premise was based on the fact that the reason people went to peer-to-peer networks was the unlimited discovery of music,” said founder Srivats Sampath, who previously served as chief executive of computer security software maker McAfee.com.

The 2-month-old Mercora service is free today, but the company may decide to charge its most active users a small monthly fee to cover the royalties it pays to labels, artists and music publishers. Sampath said the company also planned to generate fees by selling advertisements and running an online marketplace for Mercora members to buy and sell music-related goods.

Bridgemar Services Ltd., which owns IMesh, could bring the music industry even closer to embracing peer-to-peer technology. But it has yet to reveal how its users will find and share songs legally, and the major record companies have not said how they will support the new service.

The most likely approach for IMesh, according to music-industry executives, is to use technology that manages what users share and download to prevent them from copying songs without permission. That sort of technology is being pitched by several companies, including Audible Magic Corp. of Los Gatos, Calif., Kokopelli Networks Inc. of Ottawa and Snocap Inc. of San Francisco, which was launched by former Napster creator Shawn Fanning.

Of course, clamping down on what users can share would rob IMesh of one of the most compelling features of today’s file-sharing networks: the virtually unlimited selection of songs, including bootlegged and homemade versions of songs that were never officially released.

Nevertheless, Audible Magic Chief Executive Vance Ikezoye said he was encouraged by the labels’ and IMesh’s stated wish to blaze a trail to new business models.

“The industry I think has gotten some criticism for not supporting digital media and new models,” he said, “and I think this is a positive direction.”

In the meantime, RealNetworks Inc. is trying to chip away at another advantage of the pirate networks by making it easier to play legally downloaded songs on any device the consumer chooses, provided it uses anti-piracy technology from Real, Apple Computer Inc. or Microsoft Corp.

On Tuesday, the Seattle company is expected to unveil software that can transfer songs bought from Real’s store to any MP3 player or other gadget. Other stores support only one kind of anti-piracy technology; for example, Apple’s iTunes Music Store works only with Apple’s iPods.

Real’s “Harmony” technology will give people who buy music the same flexibility as those who download it illegally, said Richard Wolpert, Real’s chief strategy officer.

Harmony will initially be available only with RealPlayer software, and the company is hoping to persuade rivals to use it with their music services as well, Wolpert said.

In the short term, analyst Michael Gartenberg of Jupiter Research said, the primary beneficiary of the new technology is Real, whose store lags far behind Apple’s.

“It solves a huge problem for Real, which is the fact that there simply aren’t that many devices on the market that support Real’s music store,” he said, adding that the success of Apple store has been driven by the popularity of the iPod.

Musicmatch and at least three other online music outlets -- Roxio Inc.’s Napster, MusicNet Inc. and Circuit City Stores Inc.’s MusicNow -- also plan to add more flexibility to their subscription services. Starting this year, their subscribers will be able to take hundreds of songs with them wherever they go for about the price of one CD a month.

The key is new software from Microsoft that enables subscribers to move the songs they rent to portable music players. Microsoft found a way to satisfy the major record companies, which insisted that portable players be able to disable songs if the user’s subscription lapsed.