April 2, 2001 7:50 AM PDT

Net music breakthrough brewing

As Congress turns its spotlight on infighting in the online music world this week, companies on both sides of this digital divide are working to break the logjams that have kept much legal music offline.

Lawmakers have been increasingly vocal about their desire to see progress in the online music business, instead of a series of lawsuits and business failures. In part because they're leery of provoking Capitol Hill, the big record labels appear to be moving toward just the kind of licensing and music services pursued by ambitious online music companies for the last several years.

Going into the congressional hearings, RealNetworks on Monday formed a pact with media giants AOL Time Warner, Bertelsmann and EMI Group to establish a new music subscription service online, dubbed MusicNet.

The effort is one of first major subscription services to be operated outside of the labels' own stable of subsidiaries.

Under the agreement, AOL Time Warner, Bertelsmann and EMI will each own a minority stake in MusicNet, and the companies? record labels will each separately license their music to the new venture. MusicNet, which will operate as an independent company, will offer a wide collection of downloadable and streaming music backed by RealNetworks? core streaming-media technology.

RealNetworks' expertise has been in streaming media, although its software can play downloaded MP3 files, and it has struck deals with companies such as Hewlett-Packard involving downloadable music. To date, consumers have mostly shown an affinity for downloaded music that they can store on their computers or take elsewhere, as provided by services such as Napster. But even download services such as EMusic's, which charges a fee, have been slow to take off.

Still, this type of collaboration is precisely the kind of progress that legislators have been looking for, and which the Senate Judiciary Committee will be examining Tuesday. Called by committee Chairman Orrin Hatch, R-Utah, the hearing will look at copyright issues raised by music and video distribution online. No agenda is available, but representatives of Napster, artists, music labels and other digital music companies will attend.

Realizing the Holy Grail
The issue of who has rights to distribute music online has been a sticking point since the early days of the Net. A generation of digital music companies has been born, lived and died without ever persuading the major music labels--AOL Time Warner's Warner Music Group, Bertelsmann's BMG Entertainment, EMI Recorded Music, Universal Music Group and Sony Music Group--to give its members rights to distribute the popular songs that could have formed the foundation of business models. Most companies in the industry have tried and continue to try, however.

"Myplay, just like many other music companies, has been in negotiations with major labels to license their catalogs on fair terms" for Net consumers, said David Pakman, founder of online music company Myplay.com. "The technology has been here for some time to provide consumers with these compelling services; all that's missing is the licenses" from the record companies and the publishers.

File-swapping service Napster, with its tens of millions of members and its desire to create a legal subscription service, has been at the forefront of recent talks. The company has offered labels a guaranteed $1 billion over five years for the rights to distribute versions of their songs that have been protected against further redistribution.

The labels and their parent companies, with the exception of Napster partner Bertelsmann, have demurred, however. The music-swapping service hasn't proven that it can create a secure version of its system and still offers access to far too much pirated material, music executives have said.

As Napster's negotiations with labels have borne little fruit, the company is telling its fans that they need to make their concerns heard by lawmakers. It has called for fans to descend on Washington this week, and it will hold a "teach in" and free concert surrounding Tuesday's Senate hearing on digital copyright issues.

Although Napster has so far struck out, the big record companies have given limited licenses in other cases. MP3.com and Musicbank each have the right to maintain "storage lockers" for music that their subscribers have already purchased. Loudeye has won the rights to digitally encode and store much of the labels' catalogs but only limited rights to distribute portions of the songs themselves.

As a result, RealNetworks' MusicNet service appears to be a serious contender to become one of the first subscription service offering access to a large part of the major music labels' content.

The Net play
RealNetworks' plans, in one form or another, have been around for some time.

RealNetworks registered the "musicnet.com" domain name in late 1998. More tellingly, one music industry executive said that Warner Music has been referring music licensing calls to the entity called MusicNet for at least six months.

A big, outstanding question will be how much protection against further copying will be provided for songs on such a service. Technologies for recording online music streams are increasingly reaching consumers' hands, and record labels have been adamant that any subscription service maintains control of how the music is used.

Insiders stress that MusicNet will not be the only such service in the market, even if it is one of the first. Sony and Universal's Duet subscription service is also headed to market, and those companies are aiming to provide access to music outside their own catalogs.

Analysts say that companies such as Microsoft's MSN, Yahoo and AOL Time Warner will likely have their own brands. Yahoo, for example, recently registered the domain name "turbojukebox.com," raising speculation that the Web portal is planning a broadband music service.

"There are serious talks going on with all the logical players," said one record company executive. MusicNet "is not the end game."

News.com's Evan Hansen and Melanie Austria Farmer contributed to this report.

 

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