Former Microsoft Foe To Head Bertelsmann Unit

In another move that could have a ripple effect on the online music business, German media giant Bertelsmann AG has named Joel Klein, the former U.S. Justice Department antitrust chief, to head its U.S. operations.

Klein, who lead the government's antitrust case against Microsoft (Nasdaq: MSFT), will be a "key strategic adviser" to Bertelsmann chief executive officer Thomas Middelhoff as the company expands its Internet music operations, the company said.

Among other things, Klein will help develop the company's strategy for e-commerce and Internet file-sharing systems.

"Joel embodies the highest standards of integrity, corporate citizenship and fair competition," Middelhoff said. "We are delighted to secure a leader of his caliber and magnitude."

Klein's hiring "demonstrates Bertelsmann's continuing commitment to expanding its role in U.S. media markets," Middelhoff added.

Tap Dance

Bertelsmann has been taking strides in the online music business for several months. In July, the company acquired CDNow for about US$117 million, as part of a plan to beef up its Internet operations.

Before the acquisition, CDNow was teetering on the brink of failure as it searched for financing. The company lost $212 million between its 1994 inception and the Bertelsmann agreement. Before the sale, its auditors had expressed doubt about its ability to continue on its own.

In an even bigger step into the Web music area, earlier this month Bertelsmann announced an agreement with Napster that links the file-swapping service to CDNow. Bertelsmann had previously agreed to drop its copyright suit against Napster as part of the pact.

Once the high-flying bad boy of online music, Napster faced copyright lawsuits from the record companies, who objected to its free music download service. Napster announced earlier this week that it will become a paid subscription service this summer.

Music Meltdown?

The new year has seen more than one online music seller announce setbacks. On Tuesday, Web retailer Amazon.com (Nasdaq: AMZN) said it would lay off 13,000 workers, or 15 percent of its total workforce, as it moves to cut costs.

Amazon's fourth-quarter earnings report, also released Tuesday, showed that sales at the company's core business of books, music and videos grew 11 percent, while other businesses posted triple-digit sales increases. Amazon has been trying to emphasize its newer divisions, to some extent at the expense of the book-and-music operations.

Likewise, eMusic.com (Nasdaq: EMUS) announced a round of layoffs earlier this month, saying it would cut a third of its workers as part of a restructuring.

eMusic blamed its troubles in part on what chief executive officer Gene Hoffman called "the widespread illegal distribution of digital music." In December, eMusic sued MP3.com (Nasdaq: MPPP) for copyright infringement, and also said it would track its downloads and ask Napster to shut down the accounts of users who pirated eMusic files.

Final Note

Despite the problems at companies that sell music over the Internet, analysts are optimistic about the future of the industry. Jupiter Communications predicts U.S. Internet users will spend $5.4 billion buying music online in 2005.

The research firm has also predicted the market will move to subscription-based sales, rather than a la carte purchases.