E-Biz Powerhouses Come Together Right Now Over Music

"Napster is alone in being a recognized [digital download] service," Webnoize analyst Matt Bailey told the E-Commerce Times.

That singleton status will not last much longer if the media giants have a say, however.

Earlier this week, three of the major labels -- AOL Time Warner, Bertelsmann AG, and EMI Group -- announced that they were partnering with Internet music and video streaming company RealNetworks to form an independent Internet music distribution service called MusicNet.com.

Microsoft (Nasdaq: MSFT) has also entered the online music fray. On Wednesday, the software giant launched a beta version of its free streaming radio service on the MSN network . The new service allows users to pick the types of songs they like to listen to and inserts ads after every fourth song. Microsoft, however, is avoiding the copyright issue by not allowing users to download songs.

Also on Wednesday, MTVi Group and RioPort.com announced that they have signed licensing agreements with all five major labels and were partnering to allow consumers to purchase digital downloads of their favorite songs.

With so many players and game plans afloat in the online music business, the question becomes, which offering has the best chance of succeeding Napster as the King of Digital Downloads.

Collaboration Is King

According to Bailey, the model that has the best chance of succeeding -- and making money -- as a subscription-based download service is one that combines "a lot of technical expertise, with a lot of consumer reach."

To reach that goal, collaboration will be required, Bailey said.

The analyst said that no single company will be able to go it alone in the competitive world of digital music downloads. Bailey believes that the future will see collaborative efforts between established music retailers, such as Best Buy, with technically savvy companies such as MP3.com and eMusic, for example.

Hit Parade?

One model that is almost sure to fail would involve the recording labels selling directly to consumers, according to Bailey.

"The record labels don't have much experience dealing directly with consumers," Bailey said.

He likened direct sales by the major labels to a business-to-business (B2B) firm deciding to sell direct to end users instead of other companies.

"The labels may dabble in [direct distribution], but I don't think they will be successful," Bailey said.

Licensing Success

A better way for the labels to cash in on the digital downloading phenomenon is for them to license their content to distribution partners, Bailey said.

Indeed, Napster tried to force that very issue this week when the music swapping service asked Congress to make it mandatory for the major labels to license their catalogs to online content providers. Napster interim chief executive officer Hank Barry said compulsory licenses, such as those used in the radio broadcast industry, would establish a system of fair compensation for the recording industry and its artists -- and ensure that consumers could find what they wanted online.

Bailey believes that Napster's request was an attempt to compel the recording industry to offer its own licensing proposal. He said that compulsory online licensing would be the "worst possible solution" for the recording industry, because they could be forced to give content away cheaply.

Staying Alive

Despite -- or perhaps because of -- the publicity it has received in a very public battle with the Recording Industry Association of America (RIAA), Napster is still the most popular online music service.

"Napster has huge brand recognition with consumers," Bailey said.

The latest research from Cambridge, Massachusetts-based Webnoize shows that after falling off in February, Napster usage has rebounded as downloaders find ways to work around the court-imposed filtering system.

Webnoize found that the number of downloads using the Napster system rose to a total of 593 million songs during the last week of March, 25 percent more than the 473 million files downloaded during the previous week.

"Napster's filtering effort is cutting the total number of files being shared," said Bailey. "But whether it stops users from getting access to the songs or artists they want is far more questionable."

Open Road

No matter who ends up on top of the digital download industry, it is an industry that is here to stay and continuing to boom. Within three years, the digital download industry could realize revenues of US$2.8 million annually, Webnoize said.

According to Bailey, that market is expected to keep on growing for years to come.