Music labels tune into Net sales market

While lawsuits against illegal downloaders continue, big record labels are now eager to capitalise on legal music services, writes Jim Colgan.

Seven years ago executives at Musicmatch, a legal online music service, could barely get a meeting with US record labels.

Now, says Mr Bob Ohlweiler, the company's vice-president of business development, the labels complain when they don't see their releases on the online store.

His is one of a dozen such services vying to take the place of illegal MP3 networks in the US and, more recently, in Europe.

Users and labels alike are signing up in droves as the record industry continues a spate of lawsuits against illegal downloaders.

The services entered the mainstream last year when Apple launched its iTunes store, selling more than 70 million songs since then.

As the labels move from filing lawsuits to collaborating with these services, analysts are wondering if the online pay model can rival its free counterpart.

With traditional CD sales still dwarfing digital sales, some say the hype might be overblown. And as iTunes expects to multiply its success with its European launch this week, how will such services fare outside the US?

Last month, the Recording Industry Association of America, the US trade group for record labels, filed its three thousandth lawsuit against an Internet user. The industry had seen sales plummet from $40 billion to $28 billion in just three years and the labels have taken a tough line on the question of legal remedies, suing everyone from college students to unwitting parents.

Initially the labels lumped legitimate services with the illegal networks and spurned digital services altogether. But now, analysts say, they are finally embracing the businesses, viewing companies like iTunes as a much-needed revenue stream.

"They finally woke up and it's going to make them a lot of money," says Ms Diane Cabell a director at Harvard University's Berkman Centre for Internet and Society.

The largest record labels are licensing more of their catalogues, even offering new releases before they hit CD shelves. In fact, the EMI music group singled out the digital component as helping to end its earnings slump in its most recent earnings statement.

Though Apple is stealing most of the headlines, the field of players is expanding as the popularity grows. Eager to get on board, Sony announced it's Connect software a month ago. Real Networks started its Rhapsody service a year ago.

Even Napster, the former bastion of illegal file sharing, has returned in a legal form (though the brand is now owned by a different company). And recently Microsoft announced plans for a service later this year.

All of the services offer music files for money, but they differ when it comes to their models. ITunes makes use of the so-called à la carte model, for instance, charging 99 US cents a track.

Napster espouses a subscription service, where users listen to unlimited music for the period they pay. Napster sees this as the best way to emulate the free peer-to-peer service, but some analysts aren't convinced.

"What a lot of people don't understand is that, after you've created, say, a 60,000 song play list with the subscription model, when you stop paying for that, you can't listen to it anymore," says Mr Mike McGuire, an analyst with Gartner.

The 99-cent system has worked well for Apple, but the model's success has some music industry veterans worrying. Since users have the freedom to pick individual tracks instead of purchasing an entire album, the artist could lose out.

Mr Jay Cooper, an entertainment attorney in California who represents artists like Sheryl Crowe, says it's reminiscent of the 1950s and 1960s when singles were the norm.

"If it means going back to that singles model, the business will be in lot of trouble," Mr Cooper says, "but they don't have any choice but to embrace downloads."

Despite the success of the new alternatives, illegal downloading continues to thrive.

According to Big Champagne, a company that tracks this activity, the number of people trading MP3s in the US, using programs like Kazaa and Limewire, is about 60 million.

Given the vast amount of music available illegally, a limited, paid for service is a tough sell - especially when the competition is free. Executives say sales of MP3 devices are also fuelling demand, and, with four million iPods alone expected to be sold this year, they expect this to make an impact.

But Mr Eric Garland, president of Big Champagne, says MP3 players are still viewed as the tool of the free downloader. With any iPod owner, he says, "the chances you are a straight-walking, law-abiding user of the Apple service are preposterously slim".

But analysts say the job for services like iTunes is to convince file sharers to buy their products in addition to illegal downloading. They must highlight the benefits, says Gartner's Mr McGuire. "Lots of people make moonshine for free, but the compelling alternatives won't make you go blind," he adds.

If anything, the illegal MP3 user base makes up a large part of the target market. Mr Garland says that only users sophisticated enough to download music at all will find the pay services appealing.

"I think there are two camps out there: people who have discovered online music and those that have not," he says.

As other countries forge ahead with their own file sharing lawsuits, the services expect to extend beyond the US. But companies rolling out European services face the copyright hurdles of each individual country.

In May, Napster started its Europe service in Britain and iTunes expects positive interest from its own British offering. The firms say they have no immediate plans to set up an Irish service, leaving Eircom the sole provider with a service it operates in conjunction with Peter Gabriel's OD2 download business.

The increase in online music sales is heartening for the labels as well as the download companies, but the sector's revenues are still just a fraction of CD sales. Forrester research estimated revenues of $86 million for 2003, but this made up about 0.8 per cent of the total music market.

But, Gartner's Mr McGuire says, the industry has yet to mature. "To be honest, companies like iTunes and Napster are spending very little money to promote their existence right now," he says.

In the meantime, record labels continue to license more of their catalogues online, seemingly converted to the digital format.