July 9, 2001 5:00 AM PDT

Music stores wary of labels' rise online

One of the most intense battles for the soul of the online music business may not involve Internet companies.

As the big record labels move toward offering online music-subscription services, tension is increasing in their relationships with powerful retail giants. Stores such as Tower Records, Wherehouse Music and Best Buy are fearful of being cut off from the consumer as people listen to music via Yahoo, RealNetworks or America Online.

The retailers, which maintain an influential lobbying presence in Washington, are making their dissatisfaction known in public and--for the labels--potentially uncomfortable ways. They're even raising the specter of antitrust concerns in the context of the planned subscription services jointly owned by the major music companies.

What's not yet clear is whether this will help shoehorn them into a future where the shelves and stores that gave them their power diminish in importance to consumers.

Retailers "can and they should" help shape the future of online music, said Aram Sinnreich, an analyst with Jupiter Research. "Whether they will is largely at the discretion of Washington and the labels."

Never quite in harmony
Record labels and the big music stores have been locked in an uncomfortable embrace, as much like prisoners shackled to each other as like true partners.

The labels have depended on the stores to push their releases and paid for the privilege of prime placement--posters in stores, CDs in listening stations, even name cards in the racks of albums. These "fees" are lumped into marketing budgets that can be astronomical for big albums and a considerable drain for independent music labels.

Big chains such as Wal-Mart have been able to exert considerable influence on label decisions up to and including censoring lyrics of some "offensive" releases.

But this balance of power has begun to shift in the past few years. According to Jupiter, about 9 percent of CDs will be sold online this year, up from 6 percent in 2000. Although many of these were from traditional retailers' Web sites, such as TowerRecords.com or BestBuy.com, a large proportion were from companies that didn't exist several years ago, such as Amazon.com or Bertelsmann-owned CDNow.

Plans for subscription services such as MusicNet, a venture linking RealNetworks, EMI Recorded Music, Warner Music Group and BMG Entertainment, and Pressplay, backed by Universal Music Group and Sony Music Entertainment, threaten to tip the scales further toward the labels' side.

Each of these services is designed as the primary way for member labels to distribute their music to other Web sites, although actual deals have been slow to materialize. MusicNet has signed up RealNetworks, AOL and Napster as distribution sites, while Pressplay has signed just Yahoo.

The retailers' concerns are similar to those raging in the travel industry, where online agencies have opposed the launch of Orbitz, which is backed by five of the top airlines--United Airlines, Delta Air Lines, Continental Airlines, Northwest Airlines and American Airlines.

Critics charge that the Chicago-based company would have unfair access to the airlines' lowest fares. By owning ticket supply, Orbitz could undercut competition until it drove the competition out of business, critics charge. Less competition means consumers eventually could pay higher prices, according to online travel agencies such as Expedia and Travelocity.

Orbitz responds that it is promoting competition in a category dominated by two powerful players: Travelocity and Expedia. In April, the U.S. Department of Transportation said that while it would monitor Orbitz's operations, it had no reason to prevent the site from launching.

In the case of the recording industry's online plans, each of the major labels says it is theoretically willing to license music to many others sites, including those operated by retailers. Some retailers have been talking with the services, although no deals have been announced yet.

Analysts say the Pressplay and MusicNet services offer different terms for retailers. Although neither would allow a site such as TowerRecords.com total control over catalog and pricing, MusicNet does leave the pricing and much of the way the information is presented up to the licensee. Pressplay, at least for now, locks its licensees into specific pricing and controls much of the presentation, analysts note.

"Pressplay is death on retailers," Sinnreich said. "It reduces participation to little more than the most powerless affiliate--little more than Joe's Website.com would have looked like as an Amazon affiliate three years ago."

Labels, however, say their services are the best way for the retailers to move into the new world. Consumers are as likely or more likely to go to brands they already associate with music for the subscription services.

Retailers are "not going to get cut out if they embrace other models," said Ted Cohen, new media vice president for EMI. "I don't see any conflict. There are ways to be inclusive."

Eye on fairness
Even if the retailers are privately talking to the services, they're publicly on guard. An executive from Tower Records testified in front of a Senate committee several months ago, stopping just short of saying that labels had deliberately muddled previous digital distribution deals to set the stage for the labels' own services.

Since that time, the National Association of Recording Merchandisers (NARM), the music stores' trade association, says it has sent letters asking for assurances that its members won't be discriminated against in favor of sites associated with the services, such as RealNetworks or AOL. They received no answer from two labels and a perfunctory acknowledgment from a Warner executive, says NARM President Pam Horovitz.

In addition, the association suggests the labels' efforts should be scrutinized for antitrust issues, a point also made by Internet music companies bitter about the record labels' reluctance to license their products for new types of digital distribution.

"I think we need to be very concerned when a handful of companies control the copyrights and increasingly control the (distribution) pipes as well," Horovitz said, making pointed reference to the merger between AOL and Time Warner. "It does need to color the way that government looks at this market."

At this point, however, retailers may need to scramble in the market before depending on government action. Pressplay and MusicNet each are slated to launch this summer, and policy-makers in Congress have shown little desire to do anything but exert some stern rhetorical pressure, warning the labels that they need to allow others into the market.

Analysts say the subscription services aren't likely to take the music world by storm at first, particularly if each offers only two or three of the five major labels' music. But ultimately the model will grow, and retailers need a place there if they are to survive, market watchers say.

"The year 2001 could be the peak year of CD sales, or maybe even 2000 was," said Phil Leigh, an analyst who covers retailing for brokerage house Raymond James. "If (retailers) let someone else displace them online, they'll lose their market share."

 

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