Exec: Net music a boon for major labels

NEW YORK--Internet technology will benefit the major record companies tremendously in the next ten years as more consumers turn to the Web to buy and listen to music, Strauss Zelnick, head of entertainment giant Bertelsmann's North America division, said today.

During a keynote address at the Jupiter Communications Plug.In conference here, Zelnick said new music distribution technologies will be a boon for major labels, which thus far have been slow to warm up to the Internet as more than simply a medium for marketing and CD sales.

His speech seemed to be a reversal of major record companies' previous fears that the Internet stands to cripple their businesses as the unsecure MP3 format has taken off in popularity.

"The record industry has been around for a hundred years," he said. "What we found in music and entertainment broadly is that new formats will generate explosive growth."

But some are not as optimistic about what the major record labels stand to gain from the Net, given their notorious slowness to embrace the medium. Music sold by direct downloading off the Internet will achieve just $147 million in sales by 2003 as music companies fail to tap into the medium's distribution potential, according to research released by Jupiter today.

Still, the study said downloading of music from the Net will help drive Internet sales of physical CDs, which is expected to surpass $2.6 billion by 2003. To help realize the medium's full potential, however, the Jupiter study said the music industry must adopt a less defensive posture toward digital distribution. Instead, it should use downloads as a sales and marketing tool.

"Industry players have been so eager to dampen any momentum MP3 had as a format that the great benefits of digital distribution, including use of MP3, remain vastly underexploited," Mark Mooradian, senior analyst at Jupiter, said as part of the forecast.

The conference and Zelnick's comments come a week after the Secure Digital Music Initiative (SDMI) published its specifications for secure music downloading onto portable devices. SDMI is a consortium formed by music industry trade group the Recording Industry Association of America that includes music and technology companies and is charged with creating security specifications for all music downloads online to curb the illegal distribution of copyrighted music on the Internet.

Zelnick said the major record companies should not be worried by the spate of upstart Web music firms, such as EMusic.com, Atomic Pop, and MP3.com, which is set to go public this week. Major record companies will take advantage of the Internet's power for promotion, e-commerce, and digital music distribution, he said.

But for all players, mass-market acceptance of the Internet as a distribution channel for music is hindered by several factors, the Jupiter study said, including the presence of the free MP3 alternative, bandwidth constraints, lack of popular music availability, and relatively low portable player consumer penetration.

Record companies need to adopt classic direct-marketing practices, gathering consumer data on their different artists' audiences to maximize merchandising and touring marketing opportunities, the study said.

Online music sales last year represented about 1.1 percent of the total $13.7 billion U.S. market for recorded music sales, Jupiter said, adding that by 2003, online sales of $2.6 billion will represent 14 percent of the total U.S. retail music market.

Zelnick added that because the Internet allows unsigned bands to distribute their music inexpensively, consumers will be faced with seemingly limitless new choices, which will add to their sense of confusion and information overload online. That will be a boon to the major record labels, he said, because consumers will want to go to sources they already know and trust to wade through all the noise.

Bloomberg contributed to this report.