Record Labels Prepare Their Online Assault

By JON HEALEY

July 23, 2001 12 AM PT

TIMES STAFF WRITER

The recording industry’s legal assault has floored Napster Inc., once the king of the Internet’s song-swapping services.

Now the major record labels are gearing up for Round 2, as the fight moves to the marketplace. Within the next few months, Net powerhouses America Online, Yahoo, MSN and RealNetworks are expected to launch subscription music services that are either backed or owned by the labels.

But they face a monumental challenge: convincing consumers to pay for something they can still get for free. Despite Napster’s doldrums, services such as MusicCity.com’s Morpheus continue to help users find thousands of free songs stored on other consumers’ computers, as do a host of other unauthorized services, including AudioGalaxy, Kazaa, Aimster and iMesh.

The free sites also offer users choices and flexibility that the label-backed services won’t match, at least not at first. “The illegal services are going to be way more compelling” than the two leading legitimate ones, MusicNet and Pressplay, said Dennis Mudd, chief executive of San Diego-based MusicMatch Inc.

Officials at MusicNet and Pressplay acknowledge that their offerings won’t attract hordes of subscribers right away. The technology is still being refined and can’t yet offer some of the features that the two services admit they must deliver.

That’s not a fatal flaw, they say, because the music business’ transformation from plastic products to online services will be a gradual one. “This is a marathon, not a sprint,” said Richard Wolpert, a MusicNet consultant.

But some say the label-backed efforts are getting off on the wrong foot.

“All they’re doing is having an electronic version of Tower Records,” said Roger Noll, a Stanford University professor of economics. “I suspect that they’re structured this way because they’re so dominated by the record companies . . . [which are] very much afraid of a world where the unit of production is not the CD.”

As a group, the major record labels and music publishers have been slow to support any online music services. Their main move online has been to form two joint ventures that provide content for other companies’ subscription music services: MusicNet, which is jointly owned by AOL Time Warner, Bertelsmann AG, EMI Group Ltd. and Webcasting pioneer RealNetworks, and Pressplay, which is jointly owned by Sony Music Entertainment and Universal Music Group.

MusicNet has deals with AOL, RealNetworks and Napster; Pressplay has lined up Yahoo, MSN and MP3.com.

The companies have revealed few details about their services, but this much is clear: They won’t be free, they won’t offer a comprehensive catalog of music, and they won’t let subscribers transfer songs from their computers to their cars or living-room CD players.

In other words, they won’t have the features that attracted more than 60 million registered users to Napster in its heyday. Those features now are drawing millions of consumers to the next generation of unauthorized online services, such as Morpheus.

Michael Weiss, MusicCity’s chief executive, doesn’t consider himself a pirate, or even an underground figure. Instead, he thinks he’s building a communications medium that’s more efficient than the World Wide Web.

Weiss has a long history of rattling the entertainment industry’s cages, starting in 1978 when he opened one of the country’s first video-rental stores. The Hollywood studios howled that new technology would kill the film industry, but they were dead wrong about the VCR--just as Weiss believes the music industry is wrong today.

MusicCity.com Inc. began late in 1997 in Nashville as Infinite Music, then was re-christened MusicCity in honor of its hometown. Over time, it has raised “well over seven figures” from investors, led by Timberline Venture Partners in Seattle, Weiss said.

The company’s latest software, released three months ago, enables users to assemble their own networks automatically. The software independently groups users into nodes, with the most powerful computers in each node assembling directories of the files that users choose to share.

The network “cannot be turned off,” Weiss said. “It’s 100% self-sustaining, self-organizing. It requires no intervention on our part.”

The main thing the company’s computers do, he added, is pump advertisements to users’ computers. That’s how MusicCity makes money--not from the music itself but from the eyeballs lured by the prospect of copying music, movies and other types of intellectual property.

The phenomenal spread of Morpheus’ software--more than a million people downloaded it last week alone--has translated into burgeoning advertising revenue, Weiss said, adding that MusicCity should reach profitability by the end of the year. The record companies also could profit from Morpheus’ power to promote and distribute music, Weiss said, if they “provide music in a way that consumers want it.”

“We’re providing users with a very powerful value proposition: what I want, when I want it and with whom I want it.”

But Weiss added that when it comes to how consumers use his service, “we are totally uninvolved in the searches for files or the process of swapping them. . . . We believe we are in full compliance with the current laws.”

The other leading file-swapping services take a similar see-no-evil approach, essentially letting users establish and police their own networks. The assumption is that by avoiding Napster’s centralized architecture, which gave that company a clear view of what its users were swapping, the next-generation file-swapping companies also can avoid Napster’s legal troubles.

Jeffrey Knowles, a San Francisco-based attorney representing music publishers, said this thinking misses the point of the preliminary rulings against Napster.

“The liability for Napster does not grow out of the fact that they have a database,” Knowles said. “If you’re implementing a technology . . . you need to do everything in your power to prevent it from being used by others to infringe copyrights. . . . It’s not OK to draw traffic based on someone else’s property that you haven’t gotten permission to use.”

Andy Schuon, president and chief executive of Pressplay, said his plan is to offer consumers something more compelling than the free services do. Not only will Pressplay-powered subscriptions be more reliable and easier to use, he said, they will have rarities, out-of-print songs and other material that “will not be available at other places, unless they’re pirated from us.”

Subscribers won’t be able to move songs off of their computers at first. But that’s just a temporary problem, he said, adding, “Portability’s going to come soon. Maybe not right at launch, but soon.”

The lack of portability is a major reason analysts and industry insiders predict the label-backed subscription services will get off to a slow start. It could take years before the companies can make enough from subscription revenues to support themselves.

Mark Mooradian, a music industry analyst at Jupiter Media Metrix, said a new survey by his company shows that consumers are attracted to the guaranteed sound quality, virus-free files and speedy transfers promised by the label-backed efforts. But it also found that the two features consumers wanted most were the ability to copy songs and to move them off the computer.

Said analyst P.J. McNealy of GartnerG2, a technology research and consulting group: “Is it better than . . . buying a CD? . . . The answer right now is no.”

To offer a really successful service, “you have to offer things that . . . smaller, underground companies are not able to offer,” said Mudd of MusicMatch. Given the restrictions that MusicNet and Pressplay are placing on their songs, that’s just not possible, he said.

“We think it’s actually a mistake, with the licenses that are available now, to attack those pirate services head-on,” Mudd said. “If you’re going to have a service that’s just like Napster except that it’s got less content, it’s more expensive [and more restrictive] . . . you’re going to lose.”

That’s why MusicMatch, which produces a leading software program for playing music on a computer, decided to offer something quite different. For $5 a month, MusicMatch delivers a personalized online radio service whose playlists are based on each listener’s tastes. Those preferences are divined by tracking all the CDs and music files the person plays on his or her computer.

Other new offerings also avoid a direct challenge to the free services, focusing instead on selling music-related activities online. Oakland-based Uplister, for example, plans to let subscribers download customized playlists created by musicians and fans. And FullAudio of Chicago plans a music-rental service that’s positioned as a way to sample songs before buying them on CD.

Uplister’s service is backed by several leading independent labels, including TVT Records--one of Napster’s earliest allies in the record industry.

“What it promises to the world . . . [is] new activities and new ways of dealing with information, or in our case, music,” TVT President Steve Gottlieb said.

Noll of Stanford said a “significant fraction” of the population won’t buy products that are unauthorized duplicates, which provides some hope for the label-backed services. But not too much.

“It’s almost always the case that radical technological change does not come from the people who dominated the old technology,” Noll said, explaining that the incumbents have trouble seeing the new business models made possible by newer technology. “I suspect that’s true of record companies today. They’re not likely to be the ones who succeed in figuring out the business models that will work.”

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File-Sharing Services

As Napster fades in popularity, a host of other software providers are rapidly spreading their file-sharing tools across the Internet. Here’s a look at the leading services, measured by number of users and number of downloads.

*--*

Application Users*

Napster 8,027,000

Bodetella 1,011,000

Audiogalaxy Satellite 978,000

IMesh 474,000

LimeWire 388,000

BearShare 382,000

Napigator 323,000

*--*

Application Downloads**

MusicCity Morpheus 1,107,161