More Pain For Napster

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Put Don Henley and Alanis Morissette in front of any crowd in the world, and you would expect an instant epidemic of air guitars. Any crowd, that is, except the Senate Judiciary Committee. Not a single lighter was raised when the ex-Eagle and the queen of ironic rock testified at a digital-music hearing last Tuesday. Indeed, the duo's presence had been effectively overshadowed by a single press release, and Henley knew it. "As Alanis and I sit here," he said, "there is a Ping-Pong game going on over our heads about business models on the Internet."

The focus of the digital-music debate is rapidly shifting. Once dominant song-swapping service Napster is a shell of its former self, with 1.6 million copyrighted tunes now fully blocked by court order. And the music industry has not wasted time before stepping into the void. Its first Ping-Pong ball was served in the early hours of Monday morning, when EMI, Bertelsmann and Warner Music--three of the labels long lampooned as dinosaurs that didn't get the Net--were inking a deal with Real Networks and AOL after a year of top-secret negotiations.

The company they created, MusicNet, is set to become an online clearinghouse (read: tollbooth) for any website that wants to license recordings for you to download. Of course, AOL and Real.com are first in line. Real owns 40% of MusicNet; the three labels own 20% each. (AOL, Warner Music and TIME are divisions of AOL Time Warner.) But the deal is so unavoidably big, even Napster is thinking about signing up.

It was enough to make you think the era of pay-to-play music downloading has finally dawned. Spurred on by the MusicNet deal, Sony and Vivendi Universal hastily announced that their licensing service, known as Duet, had found its first customer in the shape of Yahoo. MTV.com said it had done its own deal with all five major labels. And Microsoft hopped on the bandwagon with the radio-style site MSN Music. Result: in just one week "the landscape changed 100%," says Eric Scheirer, digital-music analyst at Forrester Research.

More precisely, it was as if a dormant volcano had just erupted. Nobody has a clue to what the new landscape is going to look like when the ash settles--like how much you will be shelling out for your tunes, though at first it's less likely to involve micropayments (99* per Morissette single) and more likely to be subscription-based services ($9.99 a month for an Alanis buffet).

Still to be solved is the key question: In what format will your music arrive? Can the industry create a standard that will satisfy users who want MP3s they can transfer to portable players and CDs, while protecting copyright owners? "We don't know all the details," admits Richard Wolpert, the Real executive who helped create MusicNet. But "it's fair to say [the files] won't be free-and-clear MP3s as we know them."

The labels' dream is that you will go to a portal like AOL, discover any music you like and move it anywhere you choose, in a process so seamless that you won't mind paying for it monthly. The nightmare scenario: a poor selection of music in confusing and conflicting file formats that will drive you underground to a Napster clone like Aimster. So every portal needs to do a deal with MusicNet and Duet--at the very least. "None of these services can survive without content from all five major labels," says Dannielle Romano, music analyst at Jupiter Media Metrix. Not to mention the hundreds of independent labels they'll need licenses from.

This is a tough business to take online, and it will need more than a few dazzling new services to succeed. No one knows that better than Napster CEO Hank Barry, who is still earnestly trying to fashion a legal compromise that will keep his company in the game (just like MP3.com, which is still alive after losing millions in lawsuits to record labels). Along with Henley and Morissette, Barry tried to sell the Senate on compulsory licenses--giving websites the same status as radio stations, which pay royalty fees for playing music. Says Barry: "It's government intervention. It's not my first choice. But collecting licenses [in the open market] is not just painful, it's impossible." If AOL and Yahoo start feeling his pain once MusicNet and Duet kick in this summer, you may see a lot more rockers singing the Senate blues.