Labels racing for download dollars

Digital distrib models expected within year

Vivendi Universal’s $372-million purchase of former adversary MP3.com last week raised a few eyebrows, considering that just last fall the conglom was walloping the lowly Netco in court for copyright infringement. But the turnabout mirrors an equally dramatic shift in attitudes at all five major labels in recent months toward online music — a shift that insiders say will result in the rollout of viable, digital distribution models before the year is out, and a fundamental shift in overall distribution within 18 months.

“We will begin to see a real change in the way consumers think about purchasing their music by the end of next year,” says Jupiter Media Metrix senior analyst Aram Sinnerich.

And the labels are going to be looking for that shift to yield some sort of payoff, says a high-placed industry source.

“When you look at 2002, there had better be some revenues coming out of this,” he says. “There will be targets that managers will have to hit.”

For Vivendi-U, the MP3 buy is only the latest move in a series of dramatic investments aimed at fulfilling those ambitions.

Last March, Universal Music Group bought 50% of music content Netco GetMusic from partner BMG Entertainment, with an eye toward folding the portal in with its Farmclub.com unit. And in April, UMG inked to buy troubled download site EMusic.

But the linchpin of Vivendi-U’s push is the digital music subscription service Duet.

Formed last summer as a partnership with Sony Music, Duet lingered on the back-burner until this spring, when Sony and UMG announced that the service would be up and running before fall, and that mega-portal Yahoo! would be its first retail licensee.

Sub patrol

Sony and UMG aren’t the only labels at work on a subscription service. Even before the Duet-Yahoo! deal was unveiled, BMG, EMI and Warner Music teamed for MusicNet, a partnership with media software maker RealNetworks that plans to offer streamed and downloaded music for a monthly fee. Its first customers are, no surprise, Warner parent America Online and RealNetworks.

In some ways, MusicNet is already further along than Duet. The first generation of software for the service is written and due to be shipped to its retail partners within weeks, with a consumer rollout expected before the end of summer, says MusicNet spokesman Michael Collins.

During a recent Senate hearing, RealNetworks topper Rob Glaser demonstrated the service for lawmakers. The exec said users will pay a monthly fee, currently estimated at about $10, to download tracks for 30 days. At the end of the period, they’ll get a prompt asking them if they want to keep the song for an additional fee.

Duet’s plans are a bit more amorphous so far, but the partners say the service will roll out initially with on-demand music streams only. However, Duet may be able to capitalize on Vivendi-U’s recent buying spree, says Bruce Hack, the conglom’s exec VP for Strategic Planning and Business Development.

“The first use of MP3 technology under consideration is inside Duet, where it could give us a jump start,” Hack says.

Even with rapid progress from both parties, virtually all industry watchers agree that consumers aren’t going to embrace online distribution wholeheartedly until they can get all the music they want in one spot.

“People are couching this as a horse race” between Duet and MusicNet, notes one music exec. “But the truth is that by the time either of these things launch, everybody will license to everybody.”

Looking further out, Jupiter Media Metrix predicts that the online music market will be worth $5.4 billion within four years. Digital music subscription services will make up a sizable chunk of that revenue — nearly $1 billion by 2005. Compare that to the roughly $16 billion in total music industry revenue for 2000 and it’s easy to see why the labels have finally gotten on the bandwagon.

For now, however, consumers can expect a lot more trial and error as the industry fine-tunes its models, says Sinnerich.

“They won’t seriously start marketing until Christmas season,” he says. “It won’t be until the end of Q1, after they’ve taken stock, that everybody starts to figure out whether this was a success or a failure.”