Internet Giants Plan Music Services
Microsoft, Yahoo, AOL and others may follow Apple's lead by offering downloads a la carte.

By Jeff Leeds and Jon Healey, Times Staff Writers

Some of the Internet's biggest names are looking to take a bite out of Apple Computer Inc.'s novel online music venture.

Microsoft Corp., Yahoo Inc., Amazon.com Inc. and AOL Time Warner Inc.'s America Online unit are among the companies expected to launch services to compete with Apple's 6-week-old iTunes store, which charges 99 cents to download a song onto a personal computer. Viacom Inc.'s MTV, another popular Web destination, is also exploring a download venture, according to sources.

The arrival of these Internet heavyweights marks a dramatic shift for the five major record companies. For more than a year, they have unsuccessfully tried to thwart widespread piracy by drawing fans to their own Web music services. Now they are placing their hopes in established Internet companies with their built-in audience of tens of millions.

Music executives hope the new players will help the industry reverse its sales slump.

"I think the whole thing is a revolution," said Doug Morris, chairman of Vivendi Universal's music operation, the world's largest. "Yahoo has an enormous number of people coming through all the time. Amazon sells a ton of content. MTV certainly is an enormous bull's-eye for people who like music. This is an amazing moment."

Executives tracking the next generation of online music stores warn that obstacles remain, including potentially tough talks with the record companies over the licensing terms of songs.

Apple was given unusual latitude by the labels after providing assurances that its software would prevent wholesale copying of downloaded music. What's more, the Internet companies and recording labels must convince skeptical top-selling artists that they will be fairly paid for allowing the new services to offer their music.

If the complexities can be overcome, industry sources predict that new music services could be online by the winter holidays, when the labels traditionally release albums by their biggest stars, which would provide a boost to fledgling services.

The possible foray by major Internet players into online music downloads is testimony to the vision of Apple chief Steve Jobs, who debuted his music service April 28. But it also signals that the Cupertino, Calif.-based computer company's early lead may be short-lived.

Executives say Apple's hot start — it sold 1 million tracks in the first week, and now averages about 500,000 — showed potential competitors that online music can draw paying customers, who might open their wallets for more than just 99-cent songs.

"There's an opportunity for them to drive the sale of other products that are important to them," said Andrew Lack, chairman of Sony Corp.'s Sony Music Entertainment. As an example, he cited Apple's sale of iPods, the portable digital music players that can store thousands of songs.

Some Internet executives wonder whether Apple's iTunes store generates more profits by promoting the company's computers and portable music players than by selling songs.

"It shows that there's consumer demand, and it shows they've built a great product, which they did," said David Goldberg, vice president and general manager of music for Yahoo. "But what is the business model? I think we still have to figure that out."

Apple's quick success in the music business has underscored the lack of appeal of online services created by the record companies.

Sony Music and rival Universal launched the Pressplay subscription-music service late in 2001, before selling the money-losing operation to online firm Roxio Inc., which plans to re-launch the service under a better-known brand name: Napster. Warner Music Group, EMI Group and Bertelsmann similarly rolled out the MusicNet wholesale service with partner RealNetworks Inc. MusicNet, which also has struggled, is distributed primarily by America Online.

"They didn't have the size and scope and ability to execute that a Microsoft and an Amazon will bring to the equation," Lack said.

MusicNet and Pressplay place strict limits on their downloadable tunes. So far, songs that can be permanently owned are available only in packs and only to subscribers.

Music executives say Apple's early success suggests that fans prefer systems that allow purchases of songs a la carte.

Microsoft has recently shown its version of a downloadable music store to executives at several record companies. Sources said Microsoft plans to give consumers more music-related information to guide their purchases than the iTunes Music Store does, and that its store might be accessible via Xbox game consoles as well as computers. Microsoft officials declined to comment.

Bill Wilson, general manager of AOL Music, said his company plans to launch a store "along the lines of what Apple has done" by the end of the year. He said the AOL Time Warner-owned Web service, which has 26 million subscribers, would integrate the sale of downloadable songs into the full range of music-related activities on the service.

America Online became interested in selling downloadable music long before it added the MusicNet subscription service in February. It did a test run with downloads last year, offering about 20 songs for 99 cents each. Five of those songs sold so well, Wilson said, they would have been ranked in the top 25 by Nielsen SoundScan, the company that tracks most retailers' music sales.

The test songs were all in the MP3 format, which the major labels don't support because it can be copied freely. The new store will offer songs in the copy-protected formats that the labels prefer, but buyers will be able to burn them to CDs and transfer them to portable devices in a similar fashion to the songs at Apple's store, Wilson said.

Apple's Music Store is built into software that runs only on certain Macintosh computers. The company has said that it plans to develop a version for Windows PCs by the end of 2003.

The record labels forced Apple to slap some restrictions on the Music Store's songs — for example, they can't be transferred to more than two other computers, and the same group of songs can be recorded onto a CD only 10 times.

Still, that's more flexibility than the record labels had previously granted for downloadable songs, and it boosted the Music Store's appeal among Macintosh computer users. Senior music executives suggest the arrival of bigger Internet companies might speed the transition into the era of digital distribution.

"What we've got now are the biggest minds in the business working on digital music sales and solutions," Sony's Lack said. "That is going to increasingly be the lead story in the digital world."

As long as they can keep the independent unsigned artist OUT of the equation and spoon feed the average consumer with 99 cent slightly more usable (but STILL DRMed songs) and by scaring the hell out of P2P users, (or even worse, outlawing any P2P use/application) they will consider it a win... and guess what? They WILL have won.

The internet will go the way of TV, Radio, etc. unless we do something about it.

Keep the internet an OPEN SOURCE media!

it's gonna be the same old BULL. Limited catlog, none of the out of print stuff (like most of the 60's 70's)they will ram britney down your throat or what ever the band d'jour is...

dmradio: "it's gonna be the same old BULL. Limited catlog, none of the out of print stuff (like most of the 60's 70's)they will ram britney down your throat or what ever the band d'jour is..."

Yep. It doesn't matter how RIAA and its companies distribute their music. They still have control.

"The internet will go the way of TV, Radio, etc. unless we do something about it.

Keep the internet an OPEN SOURCE media!"

Well I'm not sure what you mean by an "OPEN SOURCE media" (open source usually refers to software), but as long as sites that distribute non-RIAA music (like dmusic), we do have a choice.

"The record labels forced Apple to slap some restrictions on the Music Store's songs"

Three words -- Restraint of trade.

I didn't think that sounded like Apple mentality when I first heard it. The Wicked Witch and Big Brother Bill are poisoning Apple.

Along with the entire U.S. Constitution, to which they appear to have acquired content rights.

someone correct me if i'm wrong, but doesn't amazon.com own what was cdnow.com ? and didn't or doesn't cdnow.com offer mp3 songs for sale at the insane price of u.s. $2.49 each?

this whole thing is getting ridiculous, though. really it is.

George,
i was gone in EL SALVADOR for the last week, can u please update me on the major happenings in the past week. i have read about the verizon issue, but that is pretty much what i have read.
Thanks

It all comes down to a basic debate about the use of the internet. Should it be interactive like this forum, with anyone contributing their own content? Or should it be a TV-like medium where a few companies produce information and then effectively broadcast it to a huge number of people, who watch it like the "consumers" they are labeled?

Wait George, how did Big Brother Bill force Apple to use DRM? I'm not understanding your post. Are you talking about Bill Gates? I'm confused.

I think george is confused

Apples music site uses DRM, because theres no way they would be able to license music without it. They also use DRM for DVDs because the CPSA license requires it. Asside from those they use very little. The only other piece of apple DRM I can think of is a missing feature. iPods are write-only, cant transfer music back to the mac because apple thought they could be used to exchange MP3 collections. There is a utility available to get round that through

"It all comes down to a basic debate about the use of the internet. Should it be interactive like this forum, with anyone contributing their own content? Or should it be a TV-like medium where a few companies produce information and then effectively broadcast it to a huge number of people, who watch it like the "consumers" they are labeled?"

What about the way it is now?
It's sort of both.
There are big companies out there with content.
But then there's also other things to.

the internet is for now kinda both, but they are attempting to take those "other things" away. All this is about control. The internet belongs to the people, let's keep it that way.

How hard would it be to get listed with apple's site, or one of the others, as an independent offering non drm files? Seems a great workaround would be for a small flood of indie artists to get added to their database offering mp3/ogg (ie, non drm) releases, making a few bucks and having a clear advantage over the Spears family. If they don't want to deal with a ton of small fries, maybe dmusic could act on the behalf of a larger group.

There's no way this won't be big, why not hijack it?

... come to think of it...

There's a lot of potential for this to go horribly wrong. With M$ hopping on board, we're a hop-step away from a major anti-open source, anti-open format smear campaign that could easily lead to the internet-as-tv scenario mentioned before. Something like "pirates only use mp3 or gnu/linux because everything else has working drm, therefore mp3 and gnu/linux users are all pirates."

The hijacking solution has a beautiful method of kicking in the door. Thank Apple for solving the problem of micropayments, and get their music store turned into an outpost for selling any kind of file (as in .pdf or whatever) that can be verified as the "property" of the seller. The next Corey Doctrow doesn't have to worry whether paper books will become obsolete, everybody has an "in," and enough potential remains for non-drm information to be useful that it can't be branded illegal and wiped out by 2005. What does Apple get out of it? If they're quick enough, they get to be the ebay of the digital realm, at least until the paradigm finishes shifting and college kids can go back to writing code without worrying about their life savings.

independentmusician: "the internet is for now kinda both, but they are attempting to take those "other things" away. All this is about control. The internet belongs to the people, let's keep it that way."

Yes

viscix: 'Something like "pirates only use mp3 or gnu/linux because everything else has working drm, therefore mp3 and gnu/linux users are all pirates."'

Anyone have any ideas on a counter-statement?

Microsofts been ploting to kill open media standards for years. They have their own containers (WMA/WMV) and codecs, and have often tried to unfairly push these over other formats. Examples:

1. Media player, bundled with windows, will rip CDs but only to WMA files.

2. Windows Movie Maker, also bundled with windows ME and XP, will automaticially load when a firewire camera is connected. It saves only in WMV format.

3. The devloper licenses for WMA, WMV and ASF have a condition saying that noone may write software capable of converting these formats into open standards, even when the files are not protected by any form of DRM. The microsoft utilities have the same limit, makeing it very difficult (but not impossible) to convert WM formats to open standards.

4. The decoders for the Microsoft video codecs are deliberately programed to refuse to decode any stream unless its in a Microsoft-propritary container, preventing people using these codecs in AVI files. Note that when these codecs were first introduced they were the best on the market by a long margin and everyone wanted to use them, through they have now been surpassed by divx.

well so maybe a counter statement could be "Anyone who uses Windows is against open standards"??? Just an idea. Probably stupid.

To heck with countering the statement by argument. Do anything possible to ensure that "non-pirate" uses of open formats grow in popularity, as GZ constantly points out. Getting sharable content in open formats hosted through one of those up-coming mainstream download services would be a huge step.

Unfortunatly thats impossible. Open formats cannot support strong DRM. Mainstream sites need DRM, or they wont be able to license any music.

Im ripping all the content I can get hold of in open media formats, primarily ogg vorbis. Its slow.