Online Song Sales, Though Rising Fast, Are at Most a Hopeful Blip

John Mayer is basking in a new kind of stardom: The Grammy-winning troubadour is one of the most popular acts on Apple Computer Inc.’s iTunes music service.

In December, the 26-year-old singer captured all top three spots on the service’s chart with live songs he released exclusively to Apple. And in the last nine months, the online versions of Mayer’s singles have sold 161,000 copies.

But even with such popularity, Mayer’s download sales equate to only about 16,000 albums -- or a fraction of the 1.3 million copies that his latest CD, “Heavier Things,” has sold for Sony Corp.’s Columbia Records, according to Nielsen SoundScan data.

It all goes to show that record companies looking for paid downloads to fill the void left by dwindling CD sales may be in for a long wait.

Global record sales dropped to an estimated $28 billion last year from a 1999 peak of roughly $40 billion. Paid downloads are rising on services such as iTunes, Roxio’s Napster and Real Networks’ Rhapsody but have barely begun to cover the shortfall. Industry analysts estimate that total U.S. sales from online music stores and subscription services were only about $60 million last year.

So label executives are trying to turn online sales into an everyday practice among consumers. The unofficial kick-off of the effort comes today, when PepsiCo Inc. is expected to air a 45-second ad during the Super Bowl inviting an expected 90 million viewers to redeem soda caps for free songs at the Apple service.

As many as 100 million songs will be given away in the promotion, and executives are expecting a redemption rate of 10% to 20%.

Upbeat executives are projecting that the U.S. online music business could generate $400 million or more this year. That would mean, of course, luring fans away from file-sharing networks, where piracy flourishes.Industry officials are hoping a massive legal assault against digital pirates and more Pepsi-style promotions will help turn the tide.

“When it came to downloading illegally, that was a slow process. It took a while to hit big, and I think it’s the same thing with the turnaround” and a shift to legal online buying, said Mayer, who counsels patience for artists and executives alike.

“It might take another five years to get back in the other direction,” he said. “The best we can do is put music out there, point people to where it is and hope they find it.”

Industry leader Universal Music Group recorded CD sales last year of more than $5 billion with hits from such acts as 50 Cent and 3 Doors Down. The Vivendi Univeral unit’s U.S. online sales were $8 million to $10 million, sources said.

British music giant EMI Group, home to Norah Jones and Coldplay, said it generated about $3.8 million in worldwide digital sales for the six months through Sept. 30, up from about $1.3 million for the prior six months.

No Bonanza Yet

Such modest figures are a reality check for executives who first ignored the power of the Internet, and then suddenly envisioned a digital bonanza reaped from fans who would buy music on their cellphones and zap them to a computer or TV set-top box. In 1999, Forrester Research was predicting U.S. sales of song downloads alone would reach $1.1 billion by 2003.

Today, online for-pay services continue to face stiff competition from unauthorized file-sharing networks, where the bulk of the history of recorded music is floating around free for the taking. And a thicket of legal and logistical troubles continue to hamper expansion.

Some artists have slowed the process by insisting that their albums not be broken up into singles available for individual sale. (Indeed, such concerns prevented Mayer’s “Heavier Things” from becoming available on iTunes until Dec. 17, more than three months after it was released in stores.)

Record labels, music publishers and artists are still bickering about how much money each of them should receive from the sale of a digital track. As a result, the catalogs of the industry services are lacking the works of such acts as the Beatles and Led Zeppelin.

Complaining that too many people “are at the table and they’re all competitors,” Marc Geiger, veteran music talent agent and co-founder of online music firm Artistdirect Inc. said: “They’d rather kill each other half the time than win.”

Indeed, even the early commerce rests on a series of temporary truces between warring factions. A two-year settlement designed to put off a fight over how fees from online subscription services would be divvied up, for example, expired in October, with music publishers’ pay rates still undetermined.

Meanwhile, some of the hottest artists have limited the amount of time their record companies can sell digital downloads, waiting to see how the royalties will flow from online sales.

Punk band the Offspring, for example, agreed to sell their music on iTunes for only six months, sources said.

Such core issues may not be resolved for years.

“We all want to encourage online services, because we think it’s a major part of the future. But we’re going to have to sort out the rights,” said music attorney Jay Cooper, who represents such acts as Sheryl Crow. “There’s going to have to be a complete reformation of the contracts, if you want to know the truth. The battle may continue while records are being sold.”

The conflicts are likely to be amplified as the labels seek to expand online services beyond the U.S. to foreign markets, where the industry earns two-thirds of its revenue.

Outside the U.S., the services will confront a web of different licensing procedures and copyright rules.

In Europe, for example, the services may have to secure rights from music publishers and set up payment systems in each nation individually. And while the major labels are happily licensing U.S. online services, iTunes and other services will have to start from scratch in Japan, where artist management firms -- not the labels -- control many artists’ master recordings.

Global expansion probably will be hampered by more disputes with artists, some of whom are likely to challenge the customarily lower royalties they receive for foreign CD sales. Executives also say the payoff may be smaller abroad, because most international territories have far fewer Internet-wired homes.

“All of a sudden I have to look at the different copyright laws, I have to put everything in a different language and the market opportunity is smaller,” said Sean Ryan, vice president of RealNetworks music services.

Still, the initial burst of sales has prompted many in the industry to raise their estimates of how big the market will be.

Alain Levy, chairman of EMI Group’s recorded-music division, said that six months ago, he believed online sales would account for as little as 5% of his company’s sales in five years. Now, he says, it will be at least 10% -- and as much as 25%.

“We’ve learned that the consumer wants their music in a different form and they’re ready to pay for it,” Levy said. “The perception has gone from doom and gloom, to, ‘Now, it’s a new world and everybody’s going to pay for music and use music all the time.’ The truth is somewhere in the middle.”