BW ONLINE DAILY BRIEFING

News Flash	February 12, 1999

A PLEDGE BY THE MAJORS. But all these pros are convinced that the Internet will force a major transformation of the record industry. They think online retailing and digital downloading will erode the importance of traditional manufacturing and marketing operations. And artists will gain more independence and leverage to negotiate sweeter deals. "The current structure of the business won't survive," says Teller, who predicts that the online competitors will cut the market share of the five major record companies, now about 80%, in the same way cable competitors snared the audience held by the major TV networks.

Although it'll take years for upstarts to make major inroads, the big music labels are preparing to meet the newcomers head-on. On Feb. 8, they announced backing of an IBM trial that will deliver more than 1,000 full-length albums via cable modems to 1,000 homes in San Diego. The music can be recorded onto rewriteable CDs.

The announcement followed a pledge in December by the five majors (Bertelsmann, EMI-Capitol, Universal, Sony Music, and Warner Music) to develop a digital format for secure transmission of music over the Internet by this autumn.

"There's the appearance of being slow, but we've been working on this project for close to three years," says Al Smith, senior vice-president of Sony Music Entertainment. "We're looking to make the Net one aspect of how the music business operates," he says.

LOW ENTRY BARRIERS. Still, the advent of a secure transmission format for Internet music won't diminish the Web's long-term challenge to record companies' traditional business model. Nor will it stem the flow of pirated MP3s -- audio files offering near-CD-quality audio that can be downloaded in a few minutes and stored on a PC's hard drive or portable player.

In fact, MP3 is rapidly becoming a de facto standard. On Feb. 1, Lycos, the fourth-most-popular Web portal, introduced a search function for more than a half-million MP3 files. On Feb. 3, GoodNoise Corp., a Palo Alto (Calif.) seller of downloadable music, announced it would sell MP3 files from Rykodisc's catalog for 99 per track. The independent label's catalog includes Frank Zappa, Bruce Cockburn, and Morphine. Mark Mooridian, an analyst at Jupiter Communications, projects digital downloading of music will grow tenfold, from $3.29 million in 1999 to nearly $35 million in 2002.

The Internet dramatically lowers entry barriers into the record business because it can perform two key functions -- distribution and marketing -- more cheaply. Online labels, for instance, are spared the massive costs major labels face in keeping a sprawling manufacturing, distribution, and retail chain filled with products. With all sales booked over the Net, even physical CDs -- which will make up the bulk of sales at first -- can be sold for about $10, compared with a typical $16 list price. Digitally downloaded albums would be significantly less.

Of course, the big problem for any upstart label is attracting major talent. But Teller's lower overhead allows him to entice artists with royalties in excess of 50% of revenues, compared with the 21%-22% traditional labels typically offer. Moreover, whereas major labels often lock in acts to contracts covering five to seven albums over a span of years, for Teller "no deal is off limits." That could mean a contract for two singles, or any number of releases over a given number of years.

That could be attractive to musicians. For if a band should make it big, the group would be in a position to market music directly over the Web -- a course already taken by Todd Rundgren, David Bowie, Prince, and others.

RICH MEGAPORTALS. Next to signing major artists, the biggest challenge for Teller and other upstarts will be attracting eyeballs to their Web sites. Teller has cut a deal to gain visibility on the entertainment zone of the AltaVista portal. Atomic Pop's Web site also will have its own radio station, music video clips, and online interactive games. Jim Evans, a graphic artist who did album covers for the Beastie Boys, Beck, and Neil Young, is giving the site a vibrant feel.

Still, building a music portal that can compete for eyeballs against Yahoo!, Amazon.com, and other richly capitalized companies will be daunting. Teller is starting with less than $10 million in capital, he says, invested by himself and another investment group. He plans to raise an additional $10 million later in the year. That may be enough to support his Web site, market, promote, and distribute music over the Internet. But it's a pittance compared with the assets major portals have.

"Al Teller has the credibility to get something started but won't be able to build something of scale," says Marc Geiger, Co-CEO and founder of ARTISTdirect, a company that builds E-commerce sites for the Rolling Stones and other bands. Still, don't count Teller out yet. As in the traditional music business, the knack for finding and breaking big acts is what it's all about.

By Steven V. Brull in Santa Monica, Calif.

EDITED BY DOUGLAS HARBRECHT _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _

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