Few Alternatives to Napster in Play

A federal appeals court is expected to decide today the fate of Napster Inc., the free online song-swapping service that has threatened the traditional business of peddling music to consumers.

But no matter what the ruling, the very forces that want to see Napster brought to heel--the major record companies--are in no position to respond to the demand Napster stoked, industry analysts say. The record labels haven’t cleared the way for any comparable alternatives that would pay them for the use of their music, nor have they produced one themselves.

What’s more, some of their would-be allies in the online music world complain that the labels’ negotiating tactics have been anti-competitive. These complaints have drawn the attention of Justice Department antitrust officials and influential members of Congress.

If the three-judge panel of the U.S. 9th Circuit Court of Appeals in San Francisco rules that consumers have the right to copy songs from one another via the Internet, as Napster’s lawyers have argued, the record companies will have no ready answer for Napster and the many rogue Web services that suddenly will be legitimized.

Even if the panel decides that Napster violates copyright law, as the music industry contends, the record labels will have won a temporary victory at best. As many as 61 million registered users of Napster will be looking for another source of online music. Thus far, the few ventures authorized by the labels don’t offer the convenience, ease and breadth of the free rogue services.

Executives at the labels respond that providing a copyright-friendly alternative to Napster has been technically complex and financially unproved, but that their efforts soon will bear fruit.

“We plan that, by the end of the year, our music will be available on demand in a secure, easy-to-use and compelling way,” said David Ring, a vice president at Universal Music Group’s ELabs. “Up to this point, the proposals submitted to us for music-on-demand services have either not sufficiently protected our content or didn’t properly compensate our artists.”

The upshot: The labels are keeping a tight grip on the songs that could power new music businesses on the Internet. As a result, consumers aren’t yet benefiting from the new services those businesses want to offer.

Copyright law gives the labels tremendous latitude over which outfits to do business with and on what terms. What the labels cannot do, antitrust experts say, is agree on license terms or conditions as a group.

The five major label groups--Universal, Sony, Warner, BMG and EMI--control the rights to about 90% of the most popular music in the world. Companies that want to give consumers access to digital copies of those songs--either to download them or just to listen to them--need to obtain a license from each of the labels and the music publishers.

The labels have offered a small portion of their catalogs in downloadable form, but the prices and restrictions on copying make the authorized downloads unattractive to most consumers. The challenge for the labels is to match the convenience and selection of Napster and other file-sharing services that, although they may be stopped in court, have still won huge audiences.

U.S. District Judge Marilyn Hall Patel in San Francisco granted a preliminary injunction against Napster in July, ruling that the company violated copyright law. But Napster’s lawyers convinced the 9th Circuit Court to put Patel’s ruling on hold and review the case. A ruling on the appeal is due today, and further appeals are likely.

Rather than take their chances in court, a bevy of online music companies have tried to win permission from the labels to launch services that would deliver songs electronically. These include services that simply aren’t possible in the world of record stores and CD clubs.

The proposals include “celestial jukeboxes” that let users play virtually any song they want to hear, subscription-based ventures that let users collect music for a monthly fee, and sophisticated search tools to help music fans discover new artists and download their songs.

To lure consumers away from the free services on the Net, these companies need licenses from all or most of the major labels, as well as from the publishers. Two online services have gotten this far, but they’re authorized merely to let people play music they’ve already bought.

Only Atlanta-based Streamwaves, a start-up with no customers, has been licensed to let consumers listen online to any song from a label’s catalog. That license covers only artists signed by EMI, the smallest of the major labels and the most active deal maker.

Meanwhile, the largest label group--Universal, an arm of the Vivendi Universal media conglomerate--is preparing an online jukebox service that, like Streamwaves’ proposal, would let subscribers hear songs on demand. Universal executives want the service to include all the labels’ songs, but only Sony has publicly committed to the effort.

In defense of the labels, executives at half a dozen online music companies still negotiating for licenses say they’ve not encountered any unreasonable demands. What the labels want, they say, is a fully developed business model that can deliver new revenue, not take away from compact disc sales.

“There’s nothing unusual going on here. It’s just the big, huge, bet-the-company decision,” said Chris Gladwin, chief executive of Chicago-based FullAudio, which wants to deliver music by subscription.

But representatives of several other online music companies said the labels are trying to impose conditions so unappealing and expensive that it makes it impossible for them to build a viable online business. They also complained about a number of negotiating tactics used by the labels, including:

* Striking deals first with the companies in the weakest negotiating positions, then claiming those terms are the market rate.

* Seeking an ownership stake, or the right to buy a stake at a discount, in exchange for licenses. While some start-ups welcome the investment, more established companies aren’t so eager.

* Asking for “most favored nation” treatment, which effectively forces companies to pay all the labels the same for licenses. Under a typical MFN clause, the amount that a music dot-com pays one label for its songs rises to match what the dot-com agrees to pay any other label.

“The wording of the MFN clause and other language in the contracts is identical. It doesn’t matter which label the contract is coming from,” said a top executive at a music dot-com who spoke on condition of anonymity. “If the labels aren’t talking to one another, then the language shouldn’t be this similar.”

David Benjamin of ClickRadio, which has won licenses from the major labels to do a computer-based radio service, said such clauses long have been a standard feature of the deals between the companies that create content and the ones that aggregate and deliver it. “It just says, ‘Hey, you want my content. My content is as good as anybody else’s content,’ ” Benjamin said.

The MFN clause is one of the issues that has attracted the attention of some Justice Department attorneys. Government antitrust lawyers have approached representatives of Listen.com and at least three other online music entities since late 1999, and the interviews are continuing.

Justice has not launched a formal investigation, a department source said. Such questions may simply be preliminary fact-gathering, or could be tied to an inquiry into a proposed merger in the industry, antitrust experts said.

Also watching the licensing process is Senate Judiciary Committee Chairman Orrin G. Hatch, a Republican from Utah who sings and records gospel songs, and Sen. Patrick J. Leahy of Vermont, the committee’s top Democrat.

“I expect to see the market provide fair, nondiscriminatory licensing of music, not just cross-licensing among major labels,” Hatch said recently. “I intend to do what I can to see that happen.”

Any blame should rest squarely on Napster and other unauthorized free music services, said Hilary Rosen, president of the Recording Industry Assn. of America, the labels’ trade group.

“I am confident that any inquiry into the digital space would show that there is plenty of music available to the consumer,” Rosen said. “The question is whether or not illegitimate sites like Napster have prevented more accelerated progress in the emerging legitimate marketplace.”

Representatives of the labels say antitrust law actually is preventing them from working out the technical differences that impede the launch of a comprehensive online music service. They also say they’re eager to strike deals, but that most of the online companies simply aren’t willing to pay them enough to justify a license.

“It’s in our interests, as a commercial proposition, to be out there as quickly as possible,” said Paul Vidich, executive vice president for strategic planning and business development at Warner Music Group. “Because if we don’t, all we’ve done is continue to open the opportunity for all those unsanctioned, illegitimate file-sharing services, and that’s bad for us in the long run.

“It’s not just a [public relations] issue. It’s a bad commercial decision.”