Labels Begin Inching Their Way Into Subscription Music

As chairman and chief executive of RealNetworks, Rob Glaser has been a pioneering force in bringing free music and video to the Web.

Earlier this month, Glaser pulled off something that no other new-media CEO has been able to do: He convinced three of the five major record companies to trust him with their precious music catalogs. But they don’t plan to give away those songs.

The three label groups--EMI, BMG and Warner Music Group--formed MusicNet with RealNetworks, with Glaser serving as chairman. The new venture will supply the labels’ songs to other companies’ subscription music services, starting with RealNetworks and America Online.

The deal, which was announced April 2, marked the first significant Internet foray by a group of labels with an online partner. But it was just the first of a spate of Internet announcements involving the record companies, online players and major music brands, including Yahoo and MTV.

Not coincidentally, the announcements came as the Senate Judiciary Committee was holding the first in a new series of hearings on the slow development of online music services.

It may be months before any of these services materialize, yet Glaser pledges that his venture, at least, will deliver the goods. Glaser recently talked about the labels’ new enthusiasm for the Net and the shape of MusicNet’s services.

Question: The wave of announcements suggests that the labels are really starting to get in gear about music online. Is that what you see?

Answer: Yeah. It definitely felt like two weeks ago, or a little over two weeks ago, the dam broke.

It didn’t go unnoticed, on the day after the MusicNet announcement was the Senate hearing on Napster, although I don’t think the Senate hearings were the reason the dam broke. I think they certainly provided a timing impetus for some of the particular activities.

Q: One of the complaints that online music companies often make is that the record labels are trying to control everything and squeeze out online retailers.

A: Well, I think if you look at the five majors, there’s substantial diversity in whether each of them is trying to do that. I don’t believe any of the three that are in MusicNet are trying to do that. In fact, if you look at our structure, where MusicNet and the MusicNet affiliates set prices rather than the labels, you would actually say that in this new world, they’ve taken something that they tried to control, which is the [suggested retail price] of the individual album, and they provided a lot of flexibility out into the industry in order to enable new models.

Q: How is an online music service going to survive charging a flat monthly subscription when the labels are asking to be paid for each song?

A: It’ll play out one of two ways. One way is that retailers won’t provide absolutely all you can eat with regard to how many songs you can download. But it will be all you can eat with regard to once you download a song, how many times you can listen to it.

Some of the retailers may take a probabilistic view and say, “Heck, people aren’t going to download a thousand songs, so I’ll give you an all-you-can-eat price and I’ll just be like Sizzler, where I know that some guy is going to come in and just cram all this steak down. I’m going to lose money on that guy, but probabilistically, the average person is not going to eat so much.”

I think there will be a lot of experimentation.

Q: Are consumers sacrificing some rights with these subscription music services? Under the MusicNet approach, you lose the right to play songs you bought when you stop being a subscriber, right?

A: I think it’s fair to say that if you don’t pay your electricity bill, you don’t get electricity anymore. If you don’t pay your water bill, you don’t get water anymore. If you don’t pay your cable bill, you don’t get cable anymore.

Suffice it to say the labels didn’t enter into MusicNet to get people, instead of paying $15 an album, [to pay just] $3 an album, because the labels are good at math.

Q: Napster certainly has proved that people like the idea of getting their music online, but has anybody proved that consumers are willing to pay? The labels tried to charge up to $3.50 to download singles, but consumers don’t seem to be buying.

A: Yeah, we’ve learned that bricks don’t float. That’s been a really, really important thing. If you give people opportunities to download a single and pay more than they pay at the store, and get less flexibility . . . most people passed that IQ test just fine.

We’re going to learn in the next period here whether or not the promise of online music subscriptions [can be fulfilled].

I’m personally optimistic. We just announced earlier this month that we passed 200,000 paid subscribers [for Real GoldPass, a paid Internet audio and video service].

Q: Any other evidence?

A: The absolute level of usage of services like Napster is very, very encouraging. And the survey data says about half the users, generally speaking, say that they will pay.

As we have incredibly rich, easy-to-use subscription services out there, I think that half will turn into 60%, 70%. There’ll always be a demographic, you know, the younger audience that has less discretionary income, that is more willing to spend their time rooting around, finding stuff [for free]. But if you look at the broad base of consumers out there, then I think there is a vast market with a predisposition to pay.