BUSINESSWEEK ONLINE : AUGUST 14, 2000 ISSUE
COVER STORY

At Atlantic, 'My Beef Is Not Getting Paid'


Val Azzoli gets the question at his tennis club, at industry cocktail sessions, and most recently, from his mailman. All of them want to know what he's going to do about that nasty little beast called Napster.

It has been just 13 months since Shawn Fanning first released his software into the ether. In short order, the scruffy kid with the crafty idea has been lionized on magazine covers, even feted in a one-hour MTV special. As conventional wisdom has it, the likes of Azzoli, the 45-year-old co-chairman and co-CEO of music-label powerhouse Atlantic Group, will soon be left for carrion. The music industry just doesn't get it, they say. It's moving too slowly. It must get with the program.

Azzoli throws up his arms and sends a small shriek across his corner office in midtown Manhattan. ''It's not that we're asleep at the wheel,'' says the executive, whose label now moves 6% of music sold in the U.S. ''It's that we're trying not to hurt anyone.'' While everybody seems to have an opinion on what the record business should do, he says, ''it's a lot more complicated than people know.'' It took American carmakers more than a decade to adapt to competition from more nimble, higher-quality Japanese rivals. Now, it seems, pundits and casual fans alike are demanding the overhaul of an 80-year-old industry in Internet time--just a few months.

Even without music-sharing site Napster Inc. hanging over him, Azzoli says his label ''is going that way anyway.'' It will soon distribute part of its catalog through the Web sites of traditional record sellers and online-only retailers. The impending merger of corporate parent Time Warner Inc. with America Online Inc. will no doubt hasten the label's online exposure. Eventually, he says, Napster and the record companies will make peace. Azzoli acknowledges that there were some earlier negotiations with the upstart company but will not comment on them. ''I think we can all work in harmony,'' he says. ''I would even pay Napster to be a distributor. But my beef is not getting paid.''

And there's the rub. Azzoli runs down a list of the different groups he must satisfy: First, the musicians. (Lately, Led Zeppelin's Jimmy Page has joined the grumbling about Napster.) To promote Atlantic's music on the Net, Azzoli will have to renegotiate contracts for each of Atlantic's artists. Then there's the technology, which, despite years of development, has yet to produce a copyright-secure, easy-to-use way of transferring music online. Looming largest are the retailers, who still sell 82% of music and will dominate for the foreseeable future. ''We don't want to bite the hand that feeds,'' says Azzoli. ''We need a slow transition to let these people retool to adapt to the new climate.''

TOUGH SPOT. Even critics of the major labels say the companies have been put in a tough spot: They've been publicly damned for not changing, but no one on either side of the Napster debate has created a realistic model for what they should change to. ''If Warner opened up its whole catalog online, Tower Records is going to be ticked off and penalize them in their stores. Then Warner's fourth-quarter profits go down, they fire more people, and they end up dropping more bands,'' says Jeff Smith, general manager at New York independent label spinART records, which has had its own legal scraps with Warner Music. ''They have to be cautious,'' says Smith.

For now, Azzoli doesn't predict a digital doomsday. ''This is the most exciting time to be in the music business. If we don't screw it up, this can make it a whole lot bigger.''

Still, Azzoli had better not get tired of those Napster questions. It looks as if he will be answering them for a long time.

By Dennis K. Berman in New York

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