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You couldn't blame Michael Robertson for playing a victory march right about now. The CEO of online-music company MP3.com, Robertson announced on May 18 that MP3 will be sold to French entertainment conglomerate Vivendi for $372 million. Parent company of the largest record label, Universal Music Group, and a partner with Sony in the Duet online-music subscription service, Vivendi hailed the deal for giving it the brand recognition and distribution technology it needs to storm into cyberspace.
Surprised? Many music insiders were. MP3.com had been a thorn in the side of UMG chief Edgar Bronfman. UMG and four other music distributors had even sued the online provider for alleged copyright infringement at one point. But the deal marks a watershed of sorts for the digital-music industry. With virtually every digital distributor now owned by a major label, the era of rapid consolidation is entering the digestion phase. Given the clash of cultures and business models, it will be tricky. But the labels have come to the conclusion they have no choice.
NO PITTANCE. After years of half-hearted attempts at online-music launches, the big labels have all decided to buy what they haven't been able to create on their own. "Even if they decided to try to build this, it would take a long time. We have been working on this for three years," says Robertson, who managed to snag a 67% premium on MP3.com's stock price in the deal. That's no pittance in a seriously dilapidated market for dot-coms. It's a sign of recognition by the music establishment that its best interests will be served by moving ahead quickly with subscription services. No more replays of the Napster imbroglio.
The big labels certainly took their time coming to this conclusion. In fall, 2000, Napster burst into the public eye and quickly became the fastest-growing music service in history. The numbers of people trading free music in the peer-to-peer community quickly soared from the hundreds of thousands to the tens of millions in early 2001.
Until April, however, the big labels seemed more set on suing to suppress new technologies than developing their own initiatives. They trotted notional "vaporware" in front of an already angry Senator Orrin Hatch and touted bogus deals that were merely sound and fury. AOL Time Warner, EMI Group, and Bertelsmann announced formation of online-subscription service MusicNet, while Vivendi's Universal Music Group and Sony Music Entertainment came up with a similar service called Duet.
IRONIC DEVELOPMENT. Neither appeared to be very promising. Then on April 2, MusicNet signed on with streaming company Real Networks to distribute its massive music catalog. After many analysts questioned where Duet would get the technological know-how to consummate its service, Vivendi chair Bernard Messier answered back with the MP3.com purchase, a slightly ironic development considering that the upstart online service had labored for the past year to fight off lawsuits from UMG and the other four major labels. If you can't beat them, swallow them up. Last week, Vivendi also finalized a $23 million deal for subscription-music site eMusic.
As the dust settles on the online-music landscape, there appears to be little left that the big labels haven't bought -- or broken. Napster traffic is plummeting as the court-mandated filtering systems have made it significantly harder to find music that consumers want. Among the top-10 music sites only two don't belong to the big labels, according to traffic measurements by online-research firm Jupiter Media Metrix.
Only one of these, Launch.com, isn't owned by a big corporation, but it doesn't distribute music digitally, and thus skirts many of the legal and technological hurdles. "Independent pure plays have serious problems. What this deal does for MP3 is it gets them into the fraternity. They can't party until they get into the fraternity," says Phil Leigh, an analyst at Raymond James.
VALIDATION EFFECT. In retrospect, the labels probably owe a debt of gratitude to Napster for corroborating online music in a rapid and conclusive fashion. "You had such a big player with consumer success. It validated and accelerated what the labels were continuing doing. Imagine if six years ago, Wal-Mart had a picture of what Amazon would be -- how much faster would they have tried to get into this space?" says Heath Terry, an analyst at investment bank Credit Suisse First Boston (CSFB had an advisory role in the MP3.com sale).
Big obstacles remain before the labels can turn this consolidation into a serious business. Music publishers and artists have their own legal bones to pick with the labels over royalty and payment rights. They must also reconcile an obvious conflict between running a distribution business and a content business. "That's why record labels don't own radio stations," says Dave Goldberg, CEO of Launch. The two big subscription alliances must now scale up their infrastructures to accommodate hundreds of millions of downloads and many millions more visitors to their sites.
It finally appears that the hard work has begun in earnest after months of empty promises. And the MP3.com deal looks like a starter's gun for what consumers can only hope will be a lively race. Both Duet and MusicNet swear they will launch sometime this year. Analysts question whether either service will make that deadline. But they need to move fast, as consumers continue to look for better ways to listen to music online and the digital underground fine-tunes file-swapping programs that will be far harder than Napster to pin down in court.
Copyright 2001 , by The McGraw-Hill Companies Inc. All rights reserved.
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