[RealMoney.com] Warner Gets In Line on Downloadable Music Sales

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From: Linda (joelinda1@home.com)
Date: Mon Sep 11 2000 - 19:23:49 PDT


Warner Finally Gets in Line on Downloadable Music Sales
By Jim Seymour
Special to TheStreet.com
9/11/00 12:37 PM ET

Can you hear the sound of the other shoe -- actually, the fifth shoe
-- dropping? Today Warner Music (TWX:NYSE - news - boards) will
announce a scheme to allow PC users to download tunes from among an
initial selection of 100 cuts by Warner artists, from Madonna to
Tori Amos.

Warner thus becomes the fifth of the dominant Big Five record companies
to announce (but not necessarily implement yet) downloadable,
pay-per-song music programs. Sony (SNE:NYSE ADR - news - boards),
Seagram (VO:NYSE - news boards), Universal Music Group, EMI and the
BMG unit of Bertelsmann have previously announced download efforts.

Much will be made today of support by major music retailers such as
Amazon.com (AMZN:NYSE - news - boards) and Wal-Mart (WMT:NYSE - news -
boards) for Warner efforts. (Though details of the Warner distribution
system haven't yet leaked, perhaps delivery through the Web sites of
Amazon.com and Wal-Mart.com bought some peace?) That support is
important -- or at least, it looks important -- to Warner, since
proposals to sell music directly from record companies to consumers
have previously drawn sharp complaints from retailers, who see this
as little more than a way of cutting them out of the distribution

A note to Warner and to the other four of the Big Five: Guys, it isn't
going to work.

As I've written here often, the pricing and the copy-protection glued
onto these downloadable files (the music industry likes to call that
DRM, for Digital Rights Management), are both deal killers.
Indeed, each meets the "necessary and sufficient" test beloved by
logicians: Either flaw, alone, would be enough to sink the
downloadable-music ship. Together, they just do the job faster.

It's so clear that the only thing that will work on a continuing basis
is going to be a subscription system -- and not just a one-label, or
label-by-label, subscription system. Offer consumers a $10 per month
flat-rate download-pretty-much-everything-ever-recorded deal, and
you've got a winner. Maybe you can even stretch that to $20 a month,
with a steep discount for signing up for a year. But I'm skeptical.

Can anyone make money on a $10 per month charge? If not, the music
business is in even more trouble than we know, because that's likely
to be the threshold of pain for "music consumers."

Why am I pessimistic about the workability of that DRM software?
After all, there are lots of companies trying to claw up to the top
of that hill. Surely someone's system will work. And surely the music
meisters at the record companies will catch on, and flock to that
company's wares. And surely analysts and columnists and investors
will spot that winning DRM company, and make a bundle as its stock
shoots skyward.

I don't think so, for exactly the same reason I've been writing for
two years that DRM schemes won't endure: Whatever your guy can create,
my guy can break.

And this isn't your ordinary gun-for-hire copy-protection busting.
The overlap between the universe of skilled coders who know how to
break copy-protection schemes, and the universe of people who live
and die by their downloadable-music caches, is very high. There's
real motivation here -- break the DRM flavor of the week, get famous
among your peers -- rather than the hired-gun mentality that led
coders a decade and a half ago to go after, and break, the copy-pro
schemes used for Lotus's 1-2-3, etc.

So welcome aboard, Warner. Nice to see all five of the big companies
finally in the game. Maybe nothing but experience will teach them.

For me, for now, these destined-to-fail download programs are big sell
signals. Problem is, all these labels are embedded in much larger
companies, so their continuing failure at selling music over the Net
will have only a small effect on their parent companies' bottom lines.
So what's to sell?

It's interesting that while Wall Street and most of the press have
been distracted by the soap operas at MP3.com (MPPP:Nasdaq - news -
boards) and Napster, the record companies' failure to "get it" about
the dynamics of the downloadable-music market have gotten a lot less

If there is a buy signal hidden somewhere in all this, it is that while
the record companies keep demonstrating their skill at
head-in-the-sand strategies, at least two major Net companies already
have in place the reach, tech know-how, clout, and in at least one case,
the billing system, to put together workable subscription-downloads
systems, in cooperation with a soon-to-be chastened Big Five.

They are, of course, Yahoo! (YHOO:Nasdaq - news - boards) and America
Online (AOL:NYSE - news - boards). Especially with AOL's pending union
with Time Warner, AOL might seem to have the inside track to emerge as
the coordinator/vendor of an integrated download subscription service.

I think Yahoo! would be a better choice for all concerned. Worries
among always-paranoid record-company execs at the other four of the
Big Five that AOL-Time Warner's in-house label, Warner Music, might be
getting a better deal, would disappear. Also, there's the question of
an AOL "membership." Would this service be available only to AOL

If so, that $21.95 per month "tax" for an
otherwise-perhaps-not-much-used AOL membership could kill the deal for
consumers. If AOL is to become the central downloadable-music
subscription site, it has to be through its free-to-all aol.com

By contrast, adding a download-music item to Yahoo's home page would
be clean, easy and welcome. The billing back-end would take some time
to construct -- the 30-to-40-million users I think would sign up for
a service such as this over the first few years represent a
considerable billing problem -- but that can be handled.

On the revenue side, sign-up 40 million users at $10 per month, and you
have a $5 billion a year business. However you split that, it's a tidy

Either way, I think that in a few months it will be clear that the only
way downloadable-music sales can really work will be through an
independent site, selling cross-label flat-fee subscriptions. And that
won't, I think, be MP3.com, after its battles with the record labels.

In case you missed it, I want to heartily endorse a wonderful,
reality-based OpEd-page piece in last Wednesday's Wall Street Journal
on the inevitable failure of these silly schemes (and of DRM, for
that matter).

Holman Jenkins' piece outlines just why the record companies keep
missing the boat, why copy protection will never work, and why nothing
short of a subscription system can work.

Highly recommended; not to be missed.

{Jim Seymour is president of Seymour Group, an information-strategies
consulting firm working with corporate clients in the U.S., Europe
and Asia, and a longtime columnist for PC Magazine.]

[WSJ article referred to above]


September 6, 2000

Business World

How to Survive a Post-Napster Copyright Holocaust


We hope somebody is taking notes for a future case study. Five years
after we started hearing about MP3, and a year after Napster appeared
on the scene, the major music companies still haven't figured out the
secret: Music fans want to hear what they want to hear, when they
want to hear it.

Napster is not the stumbling block to their future success. Their
problem is each other. The Big Five record companies (Sony,
Universal, Warner, Bertelsmann and EMI) could turn their music rights
into a subscription business that millions of customers would pay for,
but they need to put their heads together and license their catalogs
to each other. Until they figure this out, they're just flailing.

There is no way to effectively copy-protect recorded music. Digital
pirates will always get a clean copy and soon it will be everywhere.
But that doesn't mean Napster's main attraction is that it's free.

Online distribution is not merely a more efficient means of delivery;
it also changes the way music is used and enjoyed. Simply put, it's
like radio that plays whatever you want, whenever you want. With real
radio you're stuck with the DJ's choices; with your own collection
you're stuck with upfront costs for a limited selection and even then
you're bound to wear out your own tastes pretty quickly (not to mention
the hassle of putting CDs back in their cases).

With a Napster-like service, if listening to Eminem somehow makes you
want to hear Hank Williams singing "Jambalaya," it's there.

Fans, having taken a bite of this apple, aren't going to give it back.
The record companies have to offer a service that's better than
stealing: that means a price where an individual download seems more
or less free to the user. Hence a flat-rate subscription model. And it
means a comprehensive selection.

Take a lesson from the television networks, which toyed with the idea
that they were "brands." Wrong. Viewers watch shows, not networks. They
wouldn't buy a TV that showed only NBC programming. And they won't pay
to subscribe to a Web site that plays only, say, Sony artists. That's
why, fantasy life notwithstanding, no major service will be successful
unless it can offer a complete library.

Is it already too late? The Big Five could, in theory, establish
competing subscriber services if they move fast enough to get access to
each other's playlists. But the likelihood of them all succeeding is

Right now, they're practicing strategies of denial, such as offering
single downloads for exorbitant prices or putting limited selections
online for a flat fee. Even more dismally, they are toying with
licensing their music inventories to third-party sites, turning
themselves into mere suppliers, and eminently end-runnable ones at

As with most industries, the problem isn't that the way ahead is
particularly unclear. Its leaders are just paralyzed by fear and their
own bombast, as in Edgar Bronfman's "We'll fight them in the streets"
diatribe at an industry confab against the pirates.

Yet piracy is a big deal only because the industry is letting it be.
When broadband is universal, the difference between downloading and
streaming will effectively evaporate. People will want access from
multiple devices. They won't want to store music. They'll want it as
a service. And the only way to screw up this opportunity is not to
provide that service.

We might be willing to bet on AOL Time Warner. AOL already operates
in a business where, to sell your own content, you have to offer
access to everybody else's. AOL woke up to reality in 1995, when it
began,connecting subscribers to the World Wide Web despite fears
that users would tire of paying a premium for AOL's own proprietary
content. If Warner Music wants to be around a decade from now, it
needs to learn this lesson from its new parent.

Then there's Seagram's Universal Music Group (Mr. Bronfman's
company), which has just been sold to Vivendi, a French melange with
aspirations in the wireless world. The thinking here seems to be that
owning a big piece of content can give you a leg up in trying to carve
out a space in the distribution business. Sony seems to believe it can
do the same, based on its Playstation game console.

We'd say the leverage runs the other way, with distribution first. Give
us Yahoo's business and we'd happily add an online music portal to it.
And why AT&T doesn't strike a deal for comprehensive music rights beats
us. AT&T will own one of two big broadband delivery systems (along with
AOL Time Warner). If there's a killer application already visible for a
broadband world, it's a Napster-like music service.

This would also address AT&T's immediate problem in the marketplace.
Lately, investors have finally woken up to the fact that the
long-distance business is going extinct. Having gotten their attention
with a few bad quarters in the legacy business, AT&T's job now is to
bash them with a two-by-four to remind them that the Hail Mary to the
future is still in play.

An ear-catching move into music content to stream over AT&T's broadband
infrastructure would show that the company understands that its
opportunity lies not just in owning a broadband pipe, but in
leveraging it as a marketing advantage for services of higher value.
(At least we hope Mike Armstrong understands this.)

Of course there's another idea, though our Pleistocene antitrust laws
would get in the way: We figure Napster would easily be worth
$20 billion to the Big Five if they bought it jointly. They could use
it as their common portal, agreeing to offer their combined catalogs
to users for a single subscription price. And it would relieve them of
the distasteful job of negotiating directly with each other for mutual
access to their inventories.

What price? Who knows? Ten or 20 bucks a month, with a dime-a-download
surcharge or maybe no surcharge at all. Last year, the industry sold a
meager $13 billion worth of CDs, mostly to avid music fans. Companies
that play their cards right will multiply their serious customer base
by several times at least, and the revenue flows will be much larger
and more reliable than when they depended on motivating fickle teens
to go out and plop down 15 bucks for the latest record.

If the industry couldn't double its existing CD revenues in a year or
two, we'd give our hat to someone to eat.

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