BMG Gives FullAudio License for Net Service

BMG Music has granted the first publishing license for a subscription-based Internet music delivery service, a precedent-setting deal that could speed the arrival of paid alternatives to Napster Inc.

The deal, to be announced today, is with Chicago start-up FullAudio Corp., which plans to offer downloadable songs for a flat monthly fee of $5 to $15. The encrypted songs can’t be duplicated or recorded onto CD, and they expire after a month unless the subscriber decides to renew them electronically.

BMG granted its first license to FullAudio because it liked the security of temporary downloads, said BMG spokeswoman Jennifer L. Press. The deal, whose terms were not disclosed, is not exclusive, Press said.

BMG is one of the music industry’s four publishing giants, with more than 700,000 copyrighted compositions from the likes of Nelly, Elvis Costello and the Bee Gees.

In addition to offering service directly to consumers, FullAudio also plans to distribute music through other online companies. But it can’t launch its service until it wins licenses from at least a few major record labels and additional music publishers, a process that will take several more months, said James Glicker, president of music services for FullAudio.

Nevertheless, the deal could provide a template for BMG and other publishers to follow with other online music companies that have similar services. That would include MusicNet, an effort backed by three of the five major record companies, and Pressplay, which is backed by the other two.

Industry experts said the deal could be a breakthrough, but they added that much depends on the terms FullAudio agreed to pay.

“I’m not sure whether this publishing license . . . is one which others will want to adopt or not. But certainly it shows that there can be a meeting of the minds,” said Jonathan Potter of the Digital Media Assn., a trade group for online music and video companies.

Analyst Mark Mooradian of Jupiter Media Metrix noted that previous attempts by the labels to cut precedent-setting licensing agreements had produced a number of deals few companies were willing to follow. But he added, “If this one publisher is opening up to a subscription licenser, the odds are that they’ve established a royalty rate that’s relevant for everyone.”

Because the downloads are temporary, Glicker said that FullAudio’s service shouldn’t interfere with CD sales--the music industry’s cash cow. Instead, it represents a new way to generate revenue from recordings, he said, just as videotape rentals provided another revenue stream for the film industry.

In a new approach to royalties, FullAudio will pay BMG not only when a song is downloaded, but also when a subscriber decides to keep it on his or her computer for another month, Glicker said. Although FullAudio’s initial royalty is less than the 7.55 cents that BMG receives when a CD single is sold, the publisher could collect a larger royalty over time if subscribers repeatedly renewed their songs.

Subscribers will be able to download 100 or more songs per month, depending on how much they pay.

FullAudio spent months explaining its business model and technology to BMG before the deal was finalized. “I think we convinced them that what we’re giving them is a fair percentage of what we’re getting on an ongoing basis,” Glicker said.

Significantly, the deal bypassed the agencies that traditionally issue licenses for the music publishers: the Harry Fox Agency, which collects royalties when songs are reproduced, and ASCAP, BMI and Sesac, which collect royalties when songs are performed publicly.

“Certainly we’re interested in anything Harry Fox would be doing with all the publishers,” said BMG’s Press, but she added that BMG didn’t want to wait before signing its first deal.

One unanswered question is whether ASCAP and BMI will try to collect performance royalties from FullAudio when BMG songs are downloaded. The agencies argue that downloads trigger royalties, but “We don’t think there’s a performance right because there is no public performance,” Glicker said.

The music industry has been slow to embrace the Internet as a way to deliver its products and create new relationships with consumers, with the publishers being the last major holdouts. Even the online ventures backed by the labels, such as MusicNet and Pressplay, haven’t been able to win licenses yet from the publishers that are part of the labels’ corporate families.

Negotiations with the publishers have been so fruitless, executives at some top record companies and online music services called on Congress last month to create mandatory licenses to the songwriters’ catalogs. The problems stemmed from the complex array of rights and royalties invoked by online services, along with the publishers’ efforts to collect higher royalties from online sales than they had from CDs.

Meanwhile, services that let consumers make unauthorized copies of songs for free, such as Napster, have attracted millions of users on the Net despite the music industry’s efforts to crush them in court. Numerous online companies have tried to launch alternatives that would pay copyright holders for their works, but they’ve been stalled by the labels and the publishers.

FullAudio hopes to compete with MusicNet and Pressplay as an independent distributor of licensed music, but it hasn’t obtained any licenses yet from the major labels--not even BMG’s corporate sibling, BMG Entertainment, where Glicker used to work as a marketing executive. Glicker said the company has an agreement in principle with one record company, and expects to announce a second licensing deal with a major publisher later this month.