Record Labels, RealNetworks Consider Online Music Service

Three major record companies--EMI, BMG and Warner Music Group--are close to a deal with Seattle-based RealNetworks Inc. that would make their music available through the Internet on a subscription basis, sources said Sunday.

The deal, if it’s struck, would be the first time multiple record labels have granted a third party the rights to their catalogs for on-demand services. To date, only one such deal has been announced, involving EMI and a small online music company in Dallas.

Reports of the deal came as the influential Senate Judiciary Committee was gearing up for a hearing Tuesday on online music distribution. Chairman Orrin G. Hatch (R-Utah) has been scrutinizing the labels’ failure to work with companies eager to launch industry-sanctioned alternatives to Napster Inc.’s popular song-swapping service.

An announcement from the record companies could come as early as today, the sources said.

The three label groups are discussing creating a company with RealNetworks called MusicNet that would supply music services to major Web sites and online music companies, that in turn would sell them to the public as paid subscriptions. MusicNet also may offer services directly to consumers, sources close to the discussions said.

The sources said about 60% of MusicNet would be controlled by the three record companies, with RealNetworks owning the remaining 40%. The deal would not be exclusive; BMG’s parent company, Bertelsmann, for example, is working on a rival subscription service with Napster.

MusicNet would be a complement to Duet, the music distribution service of the two other major record labels, Universal Music Group and Sony. If an online music company could strike deals with MusicNet and Duet, it could give consumers access to the vast majority of popular music.

Officials at the three MusicNet labels and RealNetworks could not be reached for comment Sunday. The talks were first reported by the Wall Street Journal.

The subscription services would be based on RealNetworks’ technology for delivering music. According to one source, the companies are discussing two types of service: an online jukebox that would let subscribers hear songs from the EMI, BMG and Warner catalogs on demand, and a downloading service for retrieving and storing encrypted songs.

Even if the MusicNet deal is announced this week, the new company still may have to negotiate with music publishers who hold copyrights to many of the labels’ songs.