Crave

At first blush, Qtrax seemed like a good idea.

Executives there wooed reporters by promising to corral illegal file sharing. They built an interface on top of the Gnutella network where millions of songs are pirated. They pledged to offer users a legal way to download and share music.

Qtrax managers said they had convinced the big record labels that it could turn file sharing into a cash cow for them. They said all four of the most powerful labels were on board.

But on Monday, Qtrax was more than 12 hours late launching its music service. A day earlier, the big record companies made news by contradicting Qtrax. They said the company was not authorized to sell their music.

What was once an eagerly awaited debut is turning into a fiasco for the New York-based start-up, which has tried for more than a year to get off the ground.

The issues with Qtrax illustrate two things. First, the labels have clearly signaled that they are willing to give ad-supported music a try--just not with downloads. Secondly, Qtrax executives should know better than to announce deals when they don't have ink. Qtrax CEO Allan Klepfisz told CNET News.com on Sunday that the company had agreements, but acknowledged that they just weren't signed.

But everybody knows that without signed contracts, there is no deal.

Perhaps actress Kelly Preston said it best in the movie Jerry McGuire: "It's not 'Trust my handshake.' It's make the sale. Get it signed. There shouldn't be confusion about that."

As Qtrax struggles with licensing deals, the big record companies are partnering with a growing number of ad-supported sites that stream songs to listeners but don't allow the music to be downloaded to computers or digital music players.

Services, such as Imeem and Last.fm, which only stream songs, offer music from all four major labels, Universal Music Group, Warner Music Group, The EMI Group, and Sony BMG Music Entertainment.

Meanwhile, SpiralFrog, one of the best-known services and one that enables people to download to a PC and a handful of portable devices (but not the iPod), has been toiling in the sector for nearly two years and has managed to land a music deal with only one top label: Universal.

But how did Qtrax get mired in this mix up? Is the company a victim of a misunderstanding? Were executives overly confident when boasting to reporters that they had signed the top labels?

After interviews with managers at Qtrax and the record labels, it appears that a bit of both occurred.

Previously, Qtrax had succeeded in striking agreements with at least two of the record companies as the start-up was preparing to ramp up. But sources with knowledge of the deals said those deals have expired.

Qtrax is close to getting signatures from Universal and EMI, said the source but, "Qtrax spoke too soon."

How this public relations nightmare affects Qtrax's prospects for the future is unclear. But don't believe the old adage that all publicity is good publicity. As it stands, the debacle undermines Qtrax's competence, if not its integrity.

UPDATE: 7:12 A.M. (1-28-08): Qtrax continues to delay the launch of its much awaited legal file-sharing site as more record labels confirm that the startup doesn't have permission to sell their music.

For weeks, Qtrax, an ad-supported P2P site, had promised to offer free and legal music downloads from all four of the major record labels when it opened for business.

But despite earlier reports, Qtrax's Web site will apparently not feature legal downloads from any of the majors when it debuts. On the eve of the site's launch, Warner Music Group and Universal Music Group said that Qtrax was not authorized to offer their music.

Both companies said they continue to negotiate with Qtrax, but emphasized that they don't have a done deal. A spokesman from Sony BMG echoed the other two companies by confirming on Monday morning that the label has not signed on to Qtrax either.

The Los Angeles Times reported on Sunday that New York-based Qtrax is also without a final agreement with the EMI Group. The blog, Silicon Alley Insider, was first to report on Qtrax's troubles.

Meanwhile, Qtrax has missed it's launch time of midnight Monday morning ET. More than eight hours later, visitors were still not allowed to download music. Robin Kent, a Qtrax marketing executive said that it might be another 24 hours before the company can enable downloads.

Qtrax CEO Allan Klepfisz acknowledged in an interview with CNET News.com late Sunday evening that his company may not possess agreements "written in stone," but that it doesn't mean Qtrax is without the labels' consent to feature their music.

"This is a tempest in a tea cup," Klepfisz said from the Midem music conference in Cannes, France. "It's true, some of the deals may not be locked in ink, but it's also true that we had understandings. In some cases, we had endorsements."

Klepfisz said it was likely the Qtrax Web site would debut featuring music from all four labels despite the public comments by UMG and Warner. Is he worried about a lawsuit?

"The answer is nobody has threatened us with a thing," Klepfisz said. "We plan to release music the way we said we were."

Qtrax's business model is based on offering people an attractive and legal file-sharing site.

The company's music offering sits on top of the Gnutella file-sharing network. Once a user downloads Qtrax's software client, they can look for songs with the help of the company's finger-printing technology.

Qtrax guarantees to protect customers from spyware or viruses that plague illegal sites. The way Qtrax makes money is by placing ads on its Web pages. The company then splits the ad revenue with the labels.

Recently, the labels have embraced ad-supported models. What they don't seem keen on are ad-supported sites that offer downloads.

For example, services such as Imeem and Last.fm, which stream music to listeners but don't allow them to download it to a computer or portable device, offer songs from all four top labels.

SpiralFrog, one of the best known services and one that enables people to download to a PC and some portable devices, has been toiling in the sector for nearly two years and has only managed to land one of the biggie labels: Universal Music Group.

Call it a mix-and-match approach to music retailing.

Sony BMG's Platinum MusicPass

Sony BMG Music Entertainment, one of the top four music labels, is the latest to meld an offline-online sales strategy. The record company said in a press release it will soon offer gift cards through brick-and-mortar stores that can be used to redeem music from the Web.

The best part of the offering is that the music is available in unprotected MP3s, more proof that Sony BMG is easing away from copy-protection software. Citing unnamed sources, BusinessWeek reported last week that the label is preparing to strip digital rights management software from at least part of its catalog. The other three large record companies have already begun dropping DRM.

The gift cards, called Platinum MusicPass, can be purchased at Best Buy, Target, and other retail stores starting Jan. 15. The way they work is this: fans of Alicia Keys, Bruce Springsteen, or other Sony artists can purchase the cards, scratch the back off to reveal a PIN and then punch that number into Musicpass.com to retrieve full-length albums. Initially, 37 titles will be offered.

It's important to note that the music is "anonymously watermarked," which means that it can't be used to identify users or where the music was purchased, according to the company. The watermarking is intended to help the label learn whether songs are being shared on peer-to-peer networks.

Considering Sony's history with privacy, it's likely that some users might get spooked.

Sony ignited a major controversy two years ago when it was discovered that the company had used "rootkit" technology to embed copy protection software in its CDs.

The gift cards feature artist images and album information and represent the latest effort by a record company to spur people to buy complete digital albums. The Internet has rung the death knell for albums but the labels continue to look for ways to boost sales.

Other efforts by some of the company's competitors include music-loaded USB drives. Warner Music Group, which recently reported that it's the only major record company to grow unit sales in 2007, released an album by the band Matchbox Twenty on a USB drive fitted into a bracelet.

A nice idea, but the public has yet to show much interest in buying digital music attached to physical packages. Why not just buy a CD and rip the music later?

Wow. Just, wow.

(Credit: Warner Music Group)

Warner Music Group--a company that originally took Apple and its iTunes service to task for not allowing it to sell music at a premium--has changed its entire outlook on the music downloading business and has praised Apple for knowing what is best for everyone involved.

"You need to look no further than Apple's iPhone to see how fast brilliantly written software presented on a beautifully designed device with a spectacular user interface will throw all the accepted notions about pricing, billing platforms and brand loyalty right out the window. And let me remind you, the genesis of the iPhone is the iPod and iTunes--a music device and music service that consumers love," Warner Music Group's CEO Edgar Bronfman gushed, according to a blog post by Simon Aughton on MacUser.

Am I the only one that enjoyed a hearty laugh after reading this clown wax poetic on how wonderful Apple is? If you look closely at what he said, you can almost see him kneeling at Steve Jobs' altar begging for forgiveness. Now that is what I call comedy.

But why has Warner Music seen the light all of a sudden? After months of claiming that his company knew what was best for consumers, Bronfman finally found out the hard way that the music industry knows nothing about consumers.

Wall Street is taking record labels to task for lackluster Web sales, spiraling CD revenue, and the defections of marquee acts such as Madonna and Radiohead.

Nine Inch Nails' Trent Reznor

(Credit: Rob Sheridan)

Two analysts downgraded Warner Music Group last week, leading to a sharp drop in the company's stock price. One of the analysts, Richard Greenfield of Pali Research, penned a gloomy report about why he thinks the sector is headed for even greater losses.

"No matter how many people the RIAA sues, no matter how many times music executives point to the growth of digital music, we believe an increasing majority of worldwide consumers simply view recorded music as free," Greenfield wrote.

Proof of this was provided last month by Radiohead fans. The British supergroup offered the digital version of In Rainbows, the band's latest album, for whatever fans wanted to pay. According to research firm ComScore, which conducted a study of the groundbreaking promotion, 62 percent of those who downloaded the album paid nothing.

To Greenfield, what's more disturbing is that Radiohead and a growing number of top acts perceive the Internet as an attractive alternative to record labels. Nine Inch Nails front man Trent Reznor has indicated that he plans to distribute his music online. Madonna announced last month that she was leaving Warner Music for Live Nation, a music promotion company.

"The paradigm in the music business has shifted," Madonna said in a statement announcing the switch. "For the first time in my career, the way that my music can reach my fans is unlimited."

Like Greenfield, Merrill Lynch analyst Jessica Cohen downgraded Warner Music's stock from "neutral" to "sell." Both also reduced next year's earnings estimates for the company.

Following the reports, Warner Music's stock hit a 52-week low ($8.78) on Friday. The company's shares, which were trading above $27 a year ago, closed Tuesday at $9.50.

What could be unsettling to those in the music business is that Warner Music was supposed to be faring better than the other three majors--Universal Music Group, Sony BMG Music Entertainment and EMI Group--according to Greenfield. Earlier in the year, his view on the stock was slightly rosier.

"Over the past couple of years," Greenfield wrote in his report, "(Warner Music) has done an impressive job, outperforming the industry weakness."

The main cause for concern continues to be spiraling CD sales. Download revenues are growing--but not fast enough to ease the pain. Greenfield expects CD revenue to drop 22 percent in the fourth quarter of 2007. He said retailers such as Wal-Mart Stores, Target, and Best Buy are rapidly reducing the floor space dedicated to discs.

How vulnerable is the music industry?

Consider that the sector generated revenues of $14.3 billion in 2000, according to the Recording Industry Association of America, or RIAA. This year, it's expected to report revenue of $10.3 billion. Had sales growth only kept pace with the U.S. economy, it now would be worth $17 billion, Greenfield wrote.

This illustrates "how dramatically the music industry is continuing to underperform," Greenfield said in the report.

Greenfield urges music executives to embrace a new ad-supported business model, one that dramatically scales back the size of record companies and doesn't saddle songs with digital rights management. He doubts that this will happen any time soon.

The industry is "not ready to endorse such a move at this point" Greenfield wrote. "Even if it was, the...transition will be incredibly painful."