February 26, 2003 8:59 AM PST

Net music gets AOL audition

Legal online music services began their biggest test Wednesday, as America Online launched a long-awaited paid-subscription music plan aimed at competing with free services such as Kazaa.

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AOL's plans have been in the works for more than a year, but were delayed because of concerns about immature technology and the lack of available content for online distribution, company executives said. The service will continue to evolve, but the bulk of those concerns now appear to have been met, they said.

In features and content, AOL's version of the MusicNet service is roughly comparable to similar monthly subscription offers from Pressplay--distributed through Yahoo and Microsoft's media player--and Listen.com's Rhapsody. But it is deeply rooted in the broader AOL service and billing system, a marketing advantage that analysts say could considerably enhance its appeal to consumers.

"This is the biggest experiment yet, with 27 million reasons to watch," said P.J. McNealy, research director with GartnerG2, a division of the Gartner research firm, referring to AOL's millions of subscribers in the United States. "It's a big guinea pig that labels will all be closely watching for next six months."

It has been more than a year since authorized music subscription services first launched as a music industry counterbalance to the rise of file-swapping software such as Napster and Kazaa. None of the services has gained much traction in the marketplace, however. This hasn't been a surprise--most of the services spent most of 2002 fighting hard to win music licenses, and rights to offer services such as CD burning.

Record label executives welcomed AOL's release, calling it a big stride forward for MusicNet's technology, and for reaching new online audiences.

"This is really a step forward in terms of a consumer-friendly legal service," said Ted Cohen, vice president for new media at EMI Recorded Music. "This is prime time."

Ready for prime time
To a large extent, AOL's decision to offer the service for its mainstream membership is an indication that online music subscription business is finally ready--or almost ready--for prime time, McNealy said. It's also one of the first tangible instances in AOL's attempts to persuade subscribers to start paying for more premium services. Executives have recently said the company hopes to become more of a hub for premium content, like an Internet HBO.

AOL's hesitance in the face of earlier technology was in large part a reflection of its own subscribers' skepticism toward the first generation of offers, executives said. The company, which is a part owner of the MusicNet service, had looked at that technology beginning in late 2001, and had ultimately decided not to use it.

"AOL didn't really have large say in how that product was built," said Chamath Palihapitiya, executive director of product strategy for AOL Entertainment. "When we put it into usability testing, feedback wasn't very good. Ultimately we felt that the only way to do it is if we built it."

The company's software engineers have subsequently spent the past seven months working on the MusicNet technology to integrate it into other portions of the AOL service, as well as polling subscribers to see what features they wanted most out of a subscription service. While still limited by the licenses available from labels--a Kazaa-style free service is not an option, for example--the new service substantially reflects that subscriber feedback, Palihapitiya said.

Pricing and features of the new service will be similar to rivals. Subscribers will be offered three tiers. For $3.95 a month, subscribers will be able to download 20 songs and listen to 20 streams. An $8.95 tier will provide access to unlimited downloads and unlimited streams. For $17.95, subscribers will keep the unlimited access, but be able to burn 10 songs per month to CD.

Later in the year, the service will add a middle tier with five burns per month and the ability to pay by the burn. As with previous versions of MusicNet, the songs downloaded to a hard drive will be locked or "tethered" to that computer, and can be played only as long as the person continues to subscribe to the service.

In the first version released by AOL, music downloaded or ripped from other sources can not be played using the same software, but later releases will be tied into AOL's media player. AOL has licensed CD-audio, CD-ROM and DVD-ROM burning technologies from Sonic Solutions for the new service. It's also using search and recommendation technology from Savage Beast Technologies, the companies said Wednesday.

Perhaps the biggest limitations on the AOL service is that it is tied directly to AOL memberships, and searching and downloading content can be done only while logged into AOL. While that still can be done at the workplace, it will require having AOL software loaded and tapping into AOL's service, a step some corporate IT managers discourage or forbid.

Boost for MusicNet
AOL's long-delayed decision to launch the service is also good news for MusicNet, the technology company jointly owned by RealNetworks, AOL Time Warner, Bertelsmann and the EMI Group. After opening its doors with much hype in 2001, MusicNet has badly trailed the progress of its rivals.

The company's technology has been distributed only through RealNetworks' RealOne service, with offering 100 downloads and 100 burns for $4.95, or the same thing with Net radio services added for $9.95. With severe limitations on what could actually be done with the music, the service was criticized by reviewers and many listeners, and MusicNet itself has little good to say about it today.

"We feel like (the AOL launch) is the start of MusicNet in earnest," said MusicNet General Manager Ellie Hirschhorn. "This is first launch of our 2.0 software, which we think is a real improvement, a true debut in the marketplace with a big, sophisticated distributor."

RealNetworks is continuing to use the older version of the service for now, but is planning to upgrade to MusicNet's newer technology sometime over the next few months.

"What we really see is that services like radio are really popular," said RealNetworks spokeswoman Erica Shaffer. "We feel that the music services have a long way to go. They've come a long way, but they still have a long way to go."

The only tangible evidence of any of the subscription service's success so far has come from RealNetworks' quarterly financial statements. Real, which still owns 40 percent of MusicNet, said its share of MusicNet's fourth-quarter 2000 loss amounted to $1.19 million, and that its share of total MusicNet's total 2002 net loss was $6.32 million.

Schaffer said those numbers were not necessarily equivalent to 40 percent of MusicNet's total losses, however.

AOL and its rivals still have a steep hill to climb before persuading committed Kazaa users to move to a paid service, GartnerG2's McNealy said.

"(The first generation) missed on service and missed on licenses," McNealy said. "After all the hype, there was a backlash, and the early adopters who really wanted a music service walked right back to Kazaa."

 

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