December 4, 2001 4:20 AM PST

RealNetworks plugs in MusicNet

RealNetworks launched its much-anticipated subscription service for online music Tuesday, offering a major test of consumer demand for paid content on the Web.

Gartner analyst P.J. McNealy says that while the RealNetworks service gets things off to an interesting start, consumer behavior patterns don't change overnight.

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The service, known as RealOne Music, comes amid a flurry of similar announcements--and a chorus of skepticism about the prospects for paid subscriptions in the face of free songs available on file-swapping services popularized by Napster. As reported earlier, RealNetworks said it will charge $9.95 a month for the service on its own, or $19.95 a month as part of a larger package of content that includes exclusive sports, entertainment and news programming.

RealOne Music has drawn attention as the first service to license content from MusicNet, a joint venture between RealNetworks and record label owners AOL Time Warner, Bertelsmann and EMI Group. The deal gives RealNetworks one of the biggest legal collections of singles to peddle over the Internet, with access to some 100,000 tracks by major stars including Christina Aguilera, the Backstreet Boys, 'N Sync and Madonna.

Tacitly acknowledging the difficulties facing RealOne Music, RealNetworks also unveiled an upgrade to its popular media player aimed at making it easier for consumers to collect and organize music for the PC and other devices--its latest shot at rival Microsoft in a bitter battle for dominance in the online media market.

The new player, which is free, includes a browser built on Microsoft's Internet Explorer that helps people find music and video files on the Web. It incorporates features of RealNetworks' popular RealJukebox software, listing music copied from CDs or downloaded from the Web side by side with songs purchased through RealOne.

The new player also allows people to easily mix audio and video into custom playlists using a drag-and-drop feature.

Despite some shortcomings for consumers, RealNetworks has left a big role for non-subscription music files such as MP3s in its updated software package. Although the company is laying the groundwork for its paid music service, analysts said, it also appears to be seeking a balancing point between the desires of consumers and copyright holders as online music moves into its next major phase of development.

"I think it's the only way that music service providers can bridge the gap for consumers between their existing experience and services they'll pay for in future," said Aram Sinnreich, an analyst with Jupiter Media Metrix. "There is no way to get consumers interested in paid music unless it's smoothly integrated with music that consumers have access to in other channels."

Like RealOne Music, other services based on MusicNet are expected--including a product from AOL Time Warner's America Online division that has been promised by year's end. A reformed Napster has also licensed MusicNet's catalog as it seeks to patch things up with the record labels and offer a more legitimate service, although it is not expected to launch until sometime next year.

Although many services may eventually take root from MusicNet, each will differ in the details of presentation, according to Dave Richards, RealNetworks' vice president of consumer systems.

More services are expected through a joint venture between record-label owners Sony and Vivendi Universal, called Pressplay. That service will be built on software provided by Vivendi subsidiary MP3 Technologies, the technology arm of online music aggregator MP3.com, and is expected within weeks.

Despite differences between subscription services, most are expected to contain some basic features that will make them unpopular with consumers, including gaps in music listings left by artists signed to labels that aren't represented by the service.

Listen.com's Rhapsody, for example, which launched Monday, has not struck any deals to license major-label music. And even MusicNet only offers songs from three of the Big Five record companies: BMG Entertainment, EMI Recorded Music and Warner Music Group. The service says it is in negotiations with Sony Music Entertainment and Universal Music Group to expand its catalog, but an agreement has yet to be reached.

Another feature in most subscription services that may disappoint consumers is restrictions on how files may be used. In an effort to crack down on piracy, RealOne Music will incorporate so-called digital rights management technology. Significantly, the service's files can't be copied to portable MP3 players or burned onto CDs. In addition, consumers merely rent music from RealOne, gaining temporary access to 100 downloaded files and 100 streams per month, as long as they pay their monthly fee.

Building on GoldPass
RealOne Music is only the latest foray by RealNetworks into online subscriptions. In September of last year, it launched GoldPass--now renamed RealOne Membership--a service that has drawn more than 400,000 customers who pay $9.95 a month for access, according to RealNetworks.

With a decline in sales of its streaming media servers and online advertising, that business has become increasingly important for the company, which now eagerly embraces comparisons with cable TV networks.

"If GoldPass were a cable station, it would be the seventh largest in the country," Richards said.

RealNetworks has scored a few programming coups, such as live, exclusive Internet audio broadcasts of professional baseball and basketball games, as well as outtakes from CBS' "Big Brother" and "Survivor."

GoldPass produced $18.1 million for the first nine months of 2001, according to regulatory filings, accounting for more than a fifth of RealNetworks' revenue. That has provided a needed boost to RealNetworks' bottom line as its advertising, media hosting and software licensing revenues have plunged.

The company says that subscriber cancellations have remained low, despite its focus on seasonal sports and TV content. Research firm The Envisioneering Group, which has done interviews with GoldPass subscribers in California and the Northeast United States, said that cancellation rates appeared to be about 1.5 percent a month, or about half that of cable and satellite TV.

Those numbers, however, do not reflect cancellations at the end of baseball season, which closed a few weeks ago. RealNetworks itself does not break out churn rates.

The company recently announced several deals to expand the selection of content on the service, including an agreement with CNET Networks, the publisher of News.com. RealOne will also begin offering daily news from CNN, video clips from FoxSports, and an audio version of The Wall Street Journal.

"They're aggregating content and proving to the world you can charge for content on the Internet," said John Corcoran, an analyst with CIBC World Markets. "Up to now, few have done it successfully--adult content publishers and The Wall Street Journal, mostly."

Given the uphill battle with free music, however, other analysts said music subscriptions may still need to add incentives to win converts.

"The smartest music companies would throw you ancillary products like videos and concert tickets and then leave all that out for MP3s," said Jupiter's Sinnreich. "Then they'd say:,'This is what you're missing out on if you're using MP3s.'"

 

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