Apple's iTunes helped digital music go mainstream
(Credit: Apple.com)Some of you out there can pat yourselves on the back. You've been shouting for years on Web sites, message boards, and blogs that the music industry would one day bow to technology.
That day has most certainly arrived.
Take a second to gaze out over the music landscape. Technology reigns supreme. Not only have the four largest record companies begun killing off digital rights management and adopting unprotected MP3s, but this week they sidled up to file sharing like never before. There isn't any question that the labels have raised a white flag after being overwhelmed by the digital age and the desire of fans to share songs.
Consider that this week the EMI Group hired Douglas Merrill, Google's former Chief of Information, to run the label's digital unit. He is a self-described geek and former file sharer. He has no previous music-biz experience. "There's a set of data that shows that file sharing is actually good for artists," Merrill told me on Wednesday during a phone interview.
A year ago, you would have never heard a music exec utter such a thing.
On Thursday, MySpace Music was announced. This is the music service that the big record companies started with News Corp. to allow fans to buy downloads, listen to streaming music, and yes, by God, share music. MySpace users won't be sharing files, but they will be passing music to one another a la social networking.
And which retailer is sovereign over music sales? I'll give you a hint. It's not Tower Records or Sam Goody (both defunct). It's not Target, Amazon, or Wal-Mart. Not anymore.
The No. 1 music retailer in the land is Apple's iTunes, an online store and dealer of digital music. How do you like them apples?
But this isn't the time to gloat. The digital music revolution is in its infancy. Nobody knows what works yet.
In our an interview, Merrill said that a winning business model hasn't been found, and that's what he's after.
"I think there are going to be a lot of different models," said Merrill, who starts his job as president of EMI's digital arm on April 28. "You can imagine supporting music through relevant targeted ads, the Google model. There are a dozen other things... We should try them all. We should see what the data says and whatever it says, we should follow the data, and follow our users, and let them help guide us. We should engage in a broad conversation about art."
How this plays out is anybody's guess. In the near term, we're likely to see more job cuts and shrinking revenue in the sector as we transition into what Forrester Research analyst James McQuivey calls Music 2.0. The reality is that recorded music will probably never produce the kind of revenue it once did. Digital technology has degraded the value.
There's nothing that says the labels will be part of the final equation, but I wouldn't bet against them--especially if they continue to embrace new technologies and business models. They've got lots of money. They still know how to find and create stars.
But the record companies are going to have to morph into smaller entities that represent fewer acts and then oversee their total output: music, video, concerts, and merchandise. This is the model that Live Nation is using to attract major artists, including Madonna, U2, and Jay-Z.
I say long live Music 2.0.
The company that owns the rights to a vast majority of The Beatles music catalog has questioned reports that the Fab Four have cut a deal with Steve Jobs.
Sony/ATV Music Publishing, the joint venture owned by Sony and singer Michael Jackson, has thrown cold water on newspaper stories out of London that The Beatles catalog would soon be available on iTunes. A spokeswoman for Sony/ATV Music Publishing told CNET News.com that the reports are "untrue."
Sony/ATV is a pretty good source. While EMI Group owns the recording rights to The Beatles catalog, Sony and Jackson own the rights to the vast majority of the catalog's publishing rights. Had a deal been cut, Sony/ATV would "absolutely be informed," the Sony/ATV spokeswoman said.
The Beatles' official Web site
(Credit: Apple Corps)Stories about the Fab Four heading to iTunes crop up every few months, it seems, and rumors and unconfirmed reports have been circulating for years. This time, the story appeared to have legs as it was reported by three large British newspapers. They all cited unnamed sources.
Under media scrutiny, the stories began showing cracks on Sunday. One of the newspapers reported that Apple was willing to pay the Beatles about $600 million. The blog Silicon Alley Insider noted that Apple, which grosses about 33 cents for every song sale, would have to sell 1.8 billion Beatles songs to break even.
A high-level music industry source said an agreement between The Beatles and Apple could still get inked in 2008. They emphasized, however, that the British papers were wrong to say the deal was finalized.
Representatives for EMI and Apple declined to comment for the story.
Beatles-iTunes partnership would make sense
One has to wonder why these rumors and unconfirmed reports continue to crop up. Is it a case of wishful thinking on the part of Beatles fans or Apple?
The availability of The Beatles, the best-selling band of all time, on iTunes would send the most dramatic signal to date that digital downloads are an integral part of mainstream music, said Susan Kevorkian, a music analyst with research group IDC.
"It's important for iTunes and online music services in general because it legitimizes IP-based music services," Kevorkian said. "It also points to the fact that digital music services are maturing when important groups that have been high-profile holdouts come onboard."
In the last several years, Madonna, Led Zeppelin, and Metallica--artists who once spurned Internet sales of their music--reversed themselves and embraced iTunes.
Earlier Monday, Chris Castle, a music lawyer and former record label executive predicted that a Web-based Beatlemania would be big for iTunes and Beatles fans alike.
He said The Beatles could release formerly unreleased music "that they might have lying around," and the offering could also include some kind of video element. Even though The Beatles broke up nearly 40 years ago, Castle said Apple Corps, the band's media company, would find a way to "dress up the offering" so that it would create excitement even among longtime Beatles fans.
Jeff Jones, the new head of Apple Corps, "is known as a catalog genius," Castle said. "If there is anybody that can figure out how to make this work it's him. I would expect to see some pleasant surprises from Jeff."
Castle said that what fans likely won't find with a Beatles offering on iTunes is a discount.
"This is a band that has sold music at premium prices for four decades," Castle said. "They've never been discounted. I would be shocked to see any competition on price. Think about it. The Beatles have kept (their brand) precious and popular for a long time. They've done this by knowing how to treat their fans and knowing what didn't work for them."
The Beatles were unlikely candidates to join iTunes. Apple Corps had a series of trademark disputes with Apple Inc. going back to 1976 when Beatle guitarist George Harrison saw an ad for the then Apple Computer. The band thought the new company had infringed on their trademark and sued. The case was settled out of court.
There were other legal skirmishes along the way but last year, Paul McCartney told reporters in Great Britain that he thought a deal with Apple CEO Steve Jobs was close to being finalized.
If and when The Beatles arrive at iTunes, there'll be plenty of people who will ask, "Why all the fuss?" The music has been available for free on peer-to-peer sites for years.
According to Castle, The Beatles were an unprecedented combination of talent and timing, and even after all this time, still possess an enormous following of people who will be willing to pay.
"You had the musical genius, business genius, and extraordinary popularity that crossed all genres and formats," Castle said. "You've never had that before or since."
In this ranking of top-selling music acts of all time, Madonna and Barbara Streisand were tied for eighth place.
U.S. law often comes down hard on price fixing. That's why a magazine story in October about efforts to create a music subscription site potentially backed by the top four music labels may have sounded alarms in Washington.
Universal Music Group and Sony BMG Music Entertainment have received requests for information from the U.S. Department of Justice about a proposed music site called Total Music. The DOJ interest comes after an October BusinessWeek story that said Doug Morris, Universal's CEO, pitched an idea for a subscription site to at least two of his three main competitors, Sony BMG and Warner Music Group. A source with knowledge of the discussions told CNET News.com that Universal Music also went to The EMI Group with the plan. This, say antitrust attorneys, was sure to raise eyebrows at the DOJ.
"Let's say Ford and GM decide to get together to sell cars," said Bob Lande, a professor at the University of Baltimore Law School. "We would blink a couple of times and then we'd say, 'Hey, that's a cartel. You can go to jail for that.'"
So why would Universal Music risk backing an idea that might have the appearance of a price-fixing scheme, right in the middle of a feud with Apple? That feud with Apple could well be the answer.
In July, Universal Music considered not renewing a long-term contract that enabled it to sell digital music through Apple's iTunes, according to a story in the The Wall Street Journal. The record companies have long asked Apple CEO Steve Jobs for the ability to set their own song prices on iTunes. Jobs has refused, and the price for most songs remains 99 cents.
The music industry has been forced to wait for an attractive iTunes alternative to show up. Morris may have grown tired of waiting.
Besides talking to his competitors, Morris also approached Google, Microsoft, Facebook, and MySpace to gauge their interest in the subscription site, according to a source with knowledge of the discussions.
There isn't enough information available to determine whether any laws were broken in Universal's meetings with its competitors, said Lande, but he also added that his "gut instinct says that it sounds fishy."
Perhaps the biggest problem for Universal and Sony BMG is that BusinessWeek reported Total Music would offer an all-you-can-eat music service for $5. The mention of a price, if accurate, indicates that the music labels may have discussed price. And that sounds like a potential violation of the Sherman Antitrust Act, Lande said.
The Sherman Antitrust Act makes it illegal for anyone to make deals to limit competition. Violations of the Act are felonies that can land someone in jail for up to 10 years, Lande said.
Lande said that in some cases even attempting to fix prices violates the law.
One source close to Total Music, who asked to remain anonymous because of the pending DOJ investigation, disputed BusinessWeek's assertion that prices have ever been mentioned.
What hasn't been answered yet is why Morris would attempt something that would definitely run into a legal roadblock. Is there any scenario whereby the record labels could partner to sell music together?
Lande said he could think of only one scenario: The music industry was allowed to form a body called the Broadcast Music Inc. BMI is a performing-rights organization that collects license fees on behalf of musicians, composers and other music artists from radio stations across the nation.
The group was allowed to form because it's impossible for a single music artist to police hundreds of broadcasters that might be playing his or her music. It also isn't an anti-competitive practice, Lande said. "I don't think the same application would apply (in the Total Music scenario)."
Dominick Armentano is a research fellow and free-market advocate at the Independent Institute, a think tank in Oakland, Calif. He believes companies should be allowed to do what they want in a truly free market--that includes price fixing. But even Armentano said that under current U.S. law, there's no way competitors can gather to discuss price. He could think of only one way that the music labels could legally go into business together.
"They could try to merge," Armentano said. "Mergers have been allowed to go through in the past and the companies have then been allowed to fix prices. But I doubt that the DOJ would allow them to do that either. That would violate Section 7 of the Clayton Act." That part of the Clayton Act, passed in 1914, is designed to regulate mergers and acquisitions whenever they might diminish competition.
Armentano, who has written books backing the idea that price-fixing companies would still compete with each other in other areas of their business, said charging higher rates also typically invites other competitors into the market.
What if competitors fix prices that are lower than anywhere else? Would the government smile on that?
Not a chance.
"The offense is fixing the price," Lande said. "You never get into high price or low price. If you fix the price you're violating the law. Judges don't want to get into what the price is now. The price might be $5 today but next month it might be $8 and the next month $10. All they want to know is whether this is price fixing."
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.
The U.K.-based EMI Group continues its campaign to provide its digital music library free of DRM restrictions: it just announced that it has licensed the entire catalog to PassAlong Networks, which operates the StoreBlocks music retail technology used in online stores like F.Y.E. and BreakthruRadio.
The songs will be sold in MP3 format at a 320 kilobit rate--more than typical digital music bitrates of 128 to 192kb, and more than the 256kb premium songs offered by Apple's iTunes Store--but pricing has not yet been determined.
In April, EMI announced in conjunction with Apple that it would be providing its entire digital music catalog with improved sound quality and no digital rights management to the company's iTunes Store. EMI simultaneously announced plans to offer the "naked" catalog to other music sales outlets. The iTunes Store began selling the DRM-free songs late last month, and also in May, Amazon announced plans for DRM-free music downloads with EMI as the first major partner.
Currently, PassAlong Networks has access to almost 3 million songs, about 2 million of which are independent-label tracks in MP3 format. A PassAlong Networks spokesman confirmed to CNET News.com that the company is also exploring similar DRM-free opportunities with other labels.
A side note: The rest of PassAlong Networks' songs are sold in a Windows Media DRM format that is incompatible with Apple computers, and as a result, many PassAlong-powered stores would not load on this reporter's Mac laptop. It's unclear as to whether or not the stores will be opened up to Mac buyers now--we'll update this post when PassAlong representatives e-mail us back with an answer to the question.
UPDATE: A PassAlong representative answered my question on Wednesday morning. The EMI tracks will indeed be Mac-compatible, and a Mac-friendly relaunch of PassAlong stores like F.Y.E. is on track for mid-July.
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