Internet Giants Plan Music Services

Some of the Internet’s biggest names are looking to take a bite out of Apple Computer Inc.’s novel online music venture.

Microsoft Corp., Yahoo Inc., Amazon.com Inc. and AOL Time Warner Inc.’s America Online unit are among the companies expected to launch services to compete with Apple’s 6-week-old iTunes store, which charges 99 cents to download a song onto a personal computer. Viacom Inc.’s MTV, another popular Web destination, is also exploring a download venture, according to sources.

The arrival of these Internet heavyweights marks a dramatic shift for the five major record companies. For more than a year, they have unsuccessfully tried to thwart widespread piracy by drawing fans to their own Web music services. Now they are placing their hopes in established Internet companies with their built-in audience of tens of millions.

Music executives hope the new players will help the industry reverse its sales slump.

“I think the whole thing is a revolution,” said Doug Morris, chairman of Vivendi Universal’s music operation, the world’s largest. “Yahoo has an enormous number of people coming through all the time. Amazon sells a ton of content. MTV certainly is an enormous bull’s-eye for people who like music. This is an amazing moment.”

Executives tracking the next generation of online music stores warn that obstacles remain, including potentially tough talks with the record companies over the licensing terms of songs.

Apple was given unusual latitude by the labels after providing assurances that its software would prevent wholesale copying of downloaded music. What’s more, the Internet companies and recording labels must convince skeptical top-selling artists that they will be fairly paid for allowing the new services to offer their music.

If the complexities can be overcome, industry sources predict that new music services could be online by the winter holidays, when the labels traditionally release albums by their biggest stars, which would provide a boost to fledgling services.

The possible foray by major Internet players into online music downloads is testimony to the vision of Apple chief Steve Jobs, who debuted his music service April 28. But it also signals that the Cupertino, Calif.-based computer company’s early lead may be short-lived.

Executives say Apple’s hot start -- it sold 1 million tracks in the first week, and now averages about 500,000 -- showed potential competitors that online music can draw paying customers, who might open their wallets for more than just 99-cent songs.

“There’s an opportunity for them to drive the sale of other products that are important to them,” said Andrew Lack, chairman of Sony Corp.’s Sony Music Entertainment. As an example, he cited Apple’s sale of iPods, the portable digital music players that can store thousands of songs.

Some Internet executives wonder whether Apple’s iTunes store generates more profits by promoting the company’s computers and portable music players than by selling songs.

“It shows that there’s consumer demand, and it shows they’ve built a great product, which they did,” said David Goldberg, vice president and general manager of music for Yahoo. “But what is the business model? I think we still have to figure that out.”

Apple’s quick success in the music business has underscored the lack of appeal of online services created by the record companies.

Sony Music and rival Universal launched the Pressplay subscription-music service late in 2001, before selling the money-losing operation to online firm Roxio Inc., which plans to re-launch the service under a better-known brand name: Napster. Warner Music Group, EMI Group and Bertelsmann similarly rolled out the MusicNet wholesale service with partner RealNetworks Inc. MusicNet, which also has struggled, is distributed primarily by America Online.

“They didn’t have the size and scope and ability to execute that a Microsoft and an Amazon will bring to the equation,” Lack said.

MusicNet and Pressplay place strict limits on their downloadable tunes. So far, songs that can be permanently owned are available only in packs and only to subscribers.

Music executives say Apple’s early success suggests that fans prefer systems that allow purchases of songs a la carte.

Microsoft has recently shown its version of a downloadable music store to executives at several record companies. Sources said Microsoft plans to give consumers more music-related information to guide their purchases than the iTunes Music Store does, and that its store might be accessible via Xbox game consoles as well as computers. Microsoft officials declined to comment.

Bill Wilson, general manager of AOL Music, said his company plans to launch a store “along the lines of what Apple has done” by the end of the year. He said the AOL Time Warner-owned Web service, which has 26 million subscribers, would integrate the sale of downloadable songs into the full range of music-related activities on the service.

America Online became interested in selling downloadable music long before it added the MusicNet subscription service in February. It did a test run with downloads last year, offering about 20 songs for 99 cents each. Five of those songs sold so well, Wilson said, they would have been ranked in the top 25 by Nielsen SoundScan, the company that tracks most retailers’ music sales.

The test songs were all in the MP3 format, which the major labels don’t support because it can be copied freely. The new store will offer songs in the copy-protected formats that the labels prefer, but buyers will be able to burn them to CDs and transfer them to portable devices in a similar fashion to the songs at Apple’s store, Wilson said.

Apple’s Music Store is built into software that runs only on certain Macintosh computers. The company has said that it plans to develop a version for Windows PCs by the end of 2003.

The record labels forced Apple to slap some restrictions on the Music Store’s songs -- for example, they can’t be transferred to more than two other computers, and the same group of songs can be recorded onto a CD only 10 times.

Still, that’s more flexibility than the record labels had previously granted for downloadable songs, and it boosted the Music Store’s appeal among Macintosh computer users. Senior music executives suggest the arrival of bigger Internet companies might speed the transition into the era of digital distribution.

“What we’ve got now are the biggest minds in the business working on digital music sales and solutions,” Sony’s Lack said. “That is going to increasingly be the lead story in the digital world.”