The breakthrough came at 5 o’clock on Monday morning last week, when Glaser and three of the five big record labels–AOL Time Warner, Bertelsmann and EMI–clinched a digital-music deal. They formed MusicNet, a joint venture, to provide music to other firms seeking to distribute it digitally to consumers. “It’s been a long and winding road,” says Glaser. “But it’s also a historical moment.”
That would be easy to dismiss as hyperbole were it not for two other deals announced last week. Online music firm RioPort agreed to distribute music in digital form for all five of the big record companies. And Yahoo said it will carry the music of Sony Music and Vivendi Universal, the other two big labels, on its widely trafficked portal. (Pricing wasn’t revealed in any of the announcements.) “Everyone understands that content distribution is important for the future,” said Vivendi Universal CEO Jean-Marie Messier. “With the penetration of broadband, music is going to be important today, and then movies and books will be important tomorrow.” After two years of fighting Napster in court, the recording industry is finally taking steps to give music fans the digital music they so clearly want.
But a closer look at this flurry of dealmaking reveals fault lines in the music industry that digital music will only exacerbate. The labels’ relationships with retailers, publishers and the artists has never been easy. Now retailers are afraid that the record labels will sell digital music directly to consumers. The labels deny it, but the fear is well founded. Not only is the technology ideal for cutting out the middleman, but none of last week’s deals involved a music retailer. And artists, who often feel exploited by the record companies, now say that they don’t trust the labels to pay them fairly for the digital use of their music.
The biggest stumbling block, however, may prove to be the music publishers. The labels don’t own all the rights to the music they distribute but only rights to a particular recording of a song. When a songwriter pens a tune, it’s the music publisher who owns and administers the complete song rights. The publishers receive a royalty for each copy of a song sold on a CD (a mechanical royalty) or every time a song is played over the airwaves, in a bar or concert hall (a performance royalty). Here’s the sticking point: publishers are willing to treat downloadable music in the same way they do CDs, but streaming music, they claim, should receive both mechanical and performance royalties. Unsurprisingly, the labels have taken a dim view of this argument. In response, one publisher filed suit against Vivendi’s farmclub.com in December, prompting the labels in turn to ask the U.S. Congress to force publishers to grant licenses to stream music over the Internet. Congress has also heard from the retailers, who are trying to force the labels to grant licenses for the recordings the labels own. Ironically, the record companies say they would prefer to negotiate this case.
Some of these deals may not withstand the scrutiny of the U.S. Justice Department’s antitrust division. MusicNet is downright incestuous. The three labels each own 20 percent of the venture, and its first two licensees are–surprise–AOL Time Warner and RealNetworks. The joint venture between Sony and Universal doesn’t even have the fig leaf of a middleman. So no matter how excited you are about that ultimate jukebox in the sky, don’t whip out your credit card just yet.
