January 12, 2000 11:45 AM PST

Can AOL Time Warner be Net music titan?

Gerald Levin On its face, America Online and Time Warner together have the resources to create a music monster--but questions remain whether AOL is at risk in putting its stamp on one of the five major record companies.

According to Time Warner chief executive Gerald Levin, the deal will turn the merged company into a promotional powerhouse, placing Time Warner's music properties in front of AOL's abundant user base.

Among Time Warner's powerful media properties is Warner Music, one of the so-called Big Five record companies. Ostensibly, the new AOL Time Warner will be able to take advantage of being both a content owner and a distributor, giving Warner Music new outlets for promoting music by popular artists such as Jewel, Metallica and REM. It also will give AOL access to copyright-protected content it can keep for its own users or license to other companies for a fee.

But counting Warner Music among its holdings doesn't guarantee AOL Time Warner greater success in the digital music market than either company enjoyed on its own. AOL has made forays into this market before, most recently with the June 1999 acquisitions of Net radio firm Spinner and Web music technology company Nullsoft, maker of the popular Winamp software.

Consumers tend to gravitate toward music by artists they like, not the record company that released the music. People who hear songs on the radio or see videos on television generally will seek out an artist's CD or other products in record stores or online, without consideration for whether the artist is signed to Warner, Universal Music, Sony Music, BMG, EMI, or any of the thousands of independent music labels.

With that in mind, a music site is more likely to be successful if it offers material from artists that span all the record companies, not just one or two. For example, a music fan who likes Warner artist Brandy might also like Monica, who is signed to the Arista label, which is part of Big Five record company BMG. If that fan went to a music site and found only music and information about Brandy and not other, similar artists, he or she might go elsewhere.

"If AOL and Time Warner were to make their music property for the distribution of Warner Music artists, then because Warner Music artists make up only 17 percent of all music sales in the U.S., it will not be a compelling offering to users," said Aram Sinnreich, an analyst at research firm Jupiter Communications.

AOL spokeswoman Regina Lewis said the company plans to offer music from other companies. "You'll see all of the Time Warner music labels on Spinner and Winamp just as you will see Universal and other labels," she said. "There aren't any exclusivities written into these things on the partnership side."

But the question remains what relationship AOL Time Warner will have with the other record companies. Before the merger, AOL was a potential distribution outlet, and Time Warner was a competitor. Now that the two plan to join forces, it is unclear whether the other companies will want to use AOL as a distributor when they can turn to any of a number of other music sites that do not also own a competing company.

The dilemma is one Sony has faced in the past. Although Sony operates one of the Big Five record companies, it also manufactures some of the most popular consumer electronics products.

Universal Music Group declined to comment, and Sony and EMI did not return calls seeking comment.

Strauss Zelnick Strauss Zelnick, chief executive of BMG entertainment, said there will be no hesitation in doing a deal with AOL Time Warner despite the competitive conflicts. BMG's relationship with AOL, which includes a minority stake in the company from parent company Bertelsmann and a joint venture in AOL Europe, will remain strong and open, he said.

"If executed properly and with the right approach, this will be something that will be good for AOL, good for Time Warner, and good for the industry as well," Zelnick said in an interview.

He added that co-optition is a mainstay in the recording industry. Entertainment and media companies need each other for distribution and content; the same will remain true with the AOL-Time Warner union.

"For an online service that's in the music business, they will need to cooperate," Zelnick said. "My guess is we'll find each other cooperating with each other with products."

AOL's clout in reaching consumers can't be easily discounted. The company is the largest dial-up ISP, with more than 20 million subscribers. And for many mainstream users, AOL and the Web are synonymous.

AOL Time Warner's music Net music waits for its cue (year in review) strategy now sits in the hands of a "transition team" staffed by slated co-chief operating officers Bob Pittman and Richard Parsons, AOL co-chairman Ken Novack, and Richard Bressler, chief executive of Time Warner Digital Media. Pittman, for one, is no stranger to the music world, having served as MTV's founding programmer and CEO.

In the meantime, competition abounds in the online music market. For example, the upcoming merger between Viacom and CBS potentially turns the company into an even stronger music distributor and promoter. Viacom owns MTV and VH1, two powerful brands in the music business, as well as SonicNet. And with the addition of CBS' television and radio properties, Viacom stands to be an even more formidable opponent to AOL Time Warner.

At the same time, Viacom and AOL Time Warner, despite being rivals, need each other to make their content more appealing to wider audiences. This notion of "co-opetition"--in which companies that compete also have to work together--is rampant among Internet firms.

You've got Time Warner AOL Time Warner needs Viacom's MTV to promote its artists, while MTV needs access to AOL Time Warner's popular recording artists, such as Madonna, analysts said.

The way for AOL Time Warner to succeed, according to Jupiter's Sinnreich, is to leverage its relationship with Warner Music in small doses.

"I think what they're going to do is try to have exclusive chats and discounted downloads (of Warner Music material) without excluding their existing or potential music partners completely," he said.

 

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