Working in Harmony With the Net

TIMES STAFF WRITER

For those who want to get their music sooner, easier and perhaps even cheaper, this may be your year.

After running scared from the Internet for several years, the music industry is now rushing headlong into the technology-driven future.

Time Warner Inc.'s back-to-back deals with America Online Inc. and music giant EMI Group--an accord expected to be announced today--signal the rising conviction in the music industry that its future hinges on a medium that so far has mainly threatened it.

Record companies that until now have spent much of their energies fighting online piracy and fretting about the Net's ability to undermine their business model now are planning to distribute at least some of their music online as early as this year, industry executives said Sunday.

There are still significant obstacles in the industry's path, but insiders say they have seen a reversal over the last year in record companies' willingness to embrace changes that the high-tech community has long considered inevitable.

"All of the major labels are now focused on the Internet in a big way," said Dick Wingate, senior vice president of label relations at Liquidaudio.com, which makes software to download music online. "A year ago, things were very different."

For consumers, the changes in store promise more choice, immediacy and control. Downloaded songs can be stored on recordable CDs, or loaded into a growing array of solid-state devices that play back with CD-like quality. Consumers probably won't have to buy entire albums or pay CD prices, let alone go to the store.

While that may upset the traditional structure of album-based music sales and entail a great deal of short-term turmoil, record companies now see opportunity where they once felt only panic. The Internet, in theory at least, cuts virtually the entire cost structure out of record company distribution, raising the prospect of more sales and higher profits.

Record executives see a world in which CDs are still bought in retail stores, though that portion of the business will gradually be eroded by online delivery systems.

For the moment, industry executives are still trying to assess the effect of Time Warner's two deals. In two weeks, Time Warner has undergone a breathtaking transformation from a company grounded in the 20th century businesses of cable, movies and magazines to one poised to add to its portfolio the most popular Internet service in the world and the second-largest music conglomerate.

Under terms of the EMI deal, reported in The Times on Sunday, Time Warner's music division would merge with British-based EMI in a $20-billion deal. The transaction, which still requires regulatory and shareholder approval, would combine a vast array of stars ranging from the late Frank Sinatra to the Red Hot Chili Peppers.

Many industry executives see the deal as an endorsement of their product's importance in the Internet age.

"It confirms the value of music as content," said Jay Boberg, president of MCA Records, a unit of Seagram/Polygram, the only record conglomerate that would be larger than Warner Bros.-EMI. "It shows just how important music is if you want to be a viable player in entertainment in the next century."

Many analysts say the company that would be most hurt by the deal is BMG, a division of German media giant Bertelsmann, which could be trapped at the bottom of the rankings because its prospects for acquiring another company are considered bleak.

But now all of Time Warner's rivals must consider not only how they would compete with its bulk--commanding roughly 20% of global music sales--but also its access to AOL's 20 million subscribers.

AOL has already proven to be effective in music marketing. A recent promotion with Britney Spears, for instance, attracted more than 100,000 people to a chat session--one of the largest ever on the Net--with the teenage pop star.

In the short term, merely alluding to that Internet audience may help Warner Bros. and EMI recruit both artists and executives, analysts said. Over the long term, it may become an enormous source of revenue if Warner Bros. and EMI artists receive prominent placement on AOL when subscribers are able to purchase digital downloads.

There are still serious issues the industry has to overcome before the Net becomes a viable means of delivering music for profit.

The most nettlesome issue is still piracy. Even though no major label yet distributes music on the Internet, vast chunks of their music libraries are available illegally thanks to the surging popularity of MP3, a compression format that turns CD recordings into computer files that can be swapped online.

The Recording Industry Assn. has been engaged in what many consider a futile effort to stamp out illegal MP3 copying and trading, mainly by enlisting college administrators to punish students who distribute MP3 files.

"There are already a lot of people who have proved they will download music," said Wingate, the Liquidaudio.com executive. "The challenge is turning them into paid downloads."

In grappling with these challenges, the music industry is playing the role of guinea pig for the entertainment business. The movie and television industries are likely to confront many of the same problems. But music is the first form to find a wide online audience because songs can take minutes to download, while movies can take days.

Some analysts have suggested that the rise of downloadable music threatens the very existence of music labels because, theoretically, artists will be able to share their works directly with consumers on the Net.

But there is growing optimism in the music business that its role will only grow because its skills at spotting and promoting talent will be essential to helping acts rise above the thousands of garage bands already flooding the Internet with digital recordings.

"The major labels will only get more powerful," said Steve Rennie, an executive at Artistdirect.com, a Web site where consumers can buy music and band merchandise. "The music industry is bigger today than it was five years ago, and five years from now it will be bigger still."

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Times staff writers P.J. Huffstutter and Chuck Philips contributed to this report.

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