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Napster and Others Want To Sell
Music Online, But How?

By Ron Harris   Associated Press
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SAN FRANCISCO — Napster proved that giving away music over the Internet is a breeze. But major record labels still aren't willing to sell their top hits online, and dot-coms hoping to cash in on music downloads have business models fraught with uncertainty.

Napster's loss in appellate court this week means the end is near for its free-music giveaways, which rose to nearly 3 billion songs in January alone, according to Webnoize, a research firm that tracked the downloads.

The decision by the 9th U.S. Circuit Court of Appeals "represents a clear victory for the creative content community and the legitimate online marketplace," said Hilary Rosen, CEO of the Recording Industry Association of America.

But delivering songs over the Internet won't be a sure moneymaker until major record labels reach a consensus on new ways to sell distribution rights for popular music. "And without Napster keeping a pitchfork at their backside, they're probably less motivated than before," said Phil Leigh, an analyst with Raymond James & Associates.

One of every 10 U.S. home computer users have tried out Napster for themselves, tapping into seemingly limitless directories of popular music available for free, according to Jupiter Media Metrix.

Closing down this free-for-all won't immediately turn all those Napster users into paying customers for EMusic.com, which bills itself as "the premier source for legitimate MP3s," and pays artists a cut of the 99 cents it charges for each song download.

One reason is that the major record labels — BMG, Warner, EMI, Sony and Universal — have refused to sell song rights to EMusic, so less than 10 percent of popular music can be found on the site.

"The Big Five have the keys to the gate and to the kingdom. They control all of this," said P.J. McNealy, who follows online music for the Gartner Group.

Napster has shown the value in aggregating content from all major labels. What is needed is the online equivalent of a vast record store, where all sorts of music can be found, said McNealy.

"Consumers don't know music by label," McNealy said. "If you want the new Britney Spears song do you go to Sony dot-com or EMI music dot-com?"

Instead, Leigh and other analysts think the future lies in a universal licensing scheme that would allow online music aggregators to somehow compensate copyright holders.

One prominent Napster user is U.S. Sen. Orrin Hatch of Utah, himself a musician who posts his own gospel tunes on the service. Hatch plans Senate hearings on this issue.

Hatch warned that the appellate ruling, which favored an injunction ordering Napster to remove all copyright material, "may prove to be pyrrhic or short-sighted from a policy perspective," since millions of MP3 fans will find other free sources for their music.

Napster, meanwhile, hopes its alliance with German media giant Bertelsmann AG, which owns the BMG label, will help it turn loyal Napster users into paying subscribers later this year.

The Redwood City, Calif.-based company announced Friday that a Bertelsmann subsidiary had developed the technological framework — but no working prototype yet — for a system that would prevent Napster users from pirating music by copying shared MP3 files onto CDs.

"The real questions about Napster's future are economic, not technical or legal," Napster CEO Hank Barry said in a statement lauding the development. He called the move "further evidence of the seriousness of our effort to reach an agreement with the record companies that will keep Napster running, reliable and enjoyable."

Other players also are pursuing licensing deals with record labels.

After spending between $150 million and $200 million — the exact amount has never been disclosed — settling copyright infringement suits, MP3.com now has permission to run MyMP3.com, which allows subscribers to keep digital copies of CDs they already own, and listen to them over any Web-enabled device.

"I think people said `It's the end of free music' and that's not the case at all," Michael Robertson, chief executive of MP3.com, said in an interview this week. "It's the end of all music for free. I believe that's true."

But click MP3.com's "Top 40" button. You'll see that Emily Richards' song "To Love You" reigns supreme and is ready for downloading for paying customers.

Ever heard of Emily Richards? Neither has the Billboard's top 40 chart.

But it's not just BMG, Warner, EMI, Sony and Universal that are wary of selling online rights to their top hits. Each CD can include songs copyrighted by a variety of other smaller music publishers, all of which require their own online licensing deals.

The painstaking work of pursuing agreements with multiple publishers for every album will stunt the growth of digital music until Congress steps in with compulsory licensing legislation, agreed Robertson.

For now, online music companies offer only a smattering of promotional material from top artists, and in ways that don't require them to relinquish control. MP3.com partnered with Warner Music Group to stream Madonna's hit single "Music" for free, but not in a way that would allow music fans to download and share the song.

"The protagonists in this case see value in this. What they just don't like is seeing their profits being given away," said Clay Ryder, a senior analyst for Zona Research.

There's simply too much money at stake to risk giving away profits by placing Madonna's songs alongside Richards' to be zipped to millions of personal computers and music players.

Officials with Sony, BMG, EMI and Universal would not comment on the issue this week despite repeated telephone inquiries.

The recording industry sold 420 million full-length CDs in the first half of last year, a 6 percent increase over the first half of 1999. Evidence, Napster supporters say, that the free trading of MP3 files actually improved the market for legitimate CD sales.

Record labels claim they've lost hundreds of millions of dollars in profits since computer programmer Shawn Fanning unleashed the Napster software in May 1999 and they're ill-disposed to make deals with dot-coms, Leigh said.

"EMusic — they're great people, but they're not in the fraternity," he said. "I think the labels will attempt to do it themselves. But they won't have as much motivation as they would have with Napster being a constant force, indoctrinating consumers to the possibilities."

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