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Universal Fires First Strike in Music Subscription War, but AOL Has Finger Poised on Button
With Version 6.0, America Online is primed to roll out a Napsteresque service to go with its new media player. Will the labels play along, or follow their own Farmclub.com-like path?
by Warren Cohen

Friday, October 27 02:16 P.M.

The La-Z-Boy digital life for America Online members got even easier on Wednesday when the Internet giant released the latest edition of its software. Embedded in Version 6.0 is the new AOL Media Player -- say goodbye to complicated plug-ins, now a single player covers a range of multimedia needs.

The new, all-in-one player is an integral part of what is expected to be AOL's post-Time-Warner-merger strategy: a music subscription service so cheap and easy to use that it will rival Napster. While AOL execs are mostly mum about the specifics, Barry Schuler, the president of AOL's interactive services group, said that the combination of new software and Warner Music content would allow the company to set an example for other record labels to follow. ''We'll use our assets to provide leadership that selling music online is not a bad thing, but an opportunity,'' said Schuler. ''Our strategy is to show the way.''

AOL already has a keep-it-simple approach and 25 million customers used to having their credit cards billed each month. With these advantages, perhaps the company will be able to persuade the major record groups to part with their unique, precious asset: the entire catalog of music. But not yet. Earlier this week, Jimmy and Doug's Farmclub.com, a Universal Music Group-owned subsidiary, launched a beta test of its all-Universal-music subscription streaming service. (Sources say that Sony works may be added to the trial later.)

While the notion of a flat-fee, all-you-can-hear subscription service was once resisted by the major labels because it could diminish the value of each individual CD, Napster has quickly revised that thinking. The outlandish growth in file sharing -- combined with early indications that there is little interest in the one-at-a-time paid-download services that all the majors are testing -- is beginning to nudge the industry toward subscription models. (A recent study by Jupiter Research found that 61 percent of active online music users would spend 20 percent of their music-purchasing budget on a subscription service. The firm estimated that the subscription market would become a $1 billion business by 2005.) Universal is thinking about charging $15 a month for Farmclub's streaming subscription service, which would amount to a not-too-shabby $180 a year per customer. Sony will likely exploit its forthcoming Playstation 2 game-player -- which will have Internet connectivity as an additional feature -- to help establish its own subscription music plan. EMI will also join in the subscription service market, too, albeit with a partner to be revealed later.

The major record groups have plenty of company in those vying to be big-time subscription-service players. Pure digital-music companies like MP3.com, musicbank, Emusic and ArtistDirect are ready to host such services. Popular portals like Yahoo, Lycos and MSN would probably also be interested, as might retailers like Amazon or CDNow and other ISPs like Earthlink. This August, RealNetworks, with 150 million users of its audio/video players, debuted a streaming subscription service for $9.95 a month that carries concerts from House of Blues clubs and ''UFO video'' footage. But so far, no recorded music.

One looming hazard for all the potential third-party subscription vendors is that the record groups may want full control of the field. Even companies like ArtistDirect and musicbank, which have direct investments from the labels, have not yet been able to obtain subscription licenses. ''This is what happens every time a third party becomes the interface with consumers,'' says Marc Geiger, CEO of ArtistDirect. ''Labels didn't want radio or MTV to be powerful, either. Now the labels want to do this themselves and be the front brands.''

Of all the possible music subscription outlets, AOL looms largest. Like an Earthlink or an MSN, the company already has a billing relationship with its customers. A music service could be part of the basic offering, or could be part of a premium service that costs a few bucks more, much like HBO and Showtime on cable. And if it acquires the Warner Music Group as part of the Time Warner merger, it will have content as well. But oddly enough, AOL could be hurt by having music of its own, since it will no longer be seen as an independent third party by the labels. On the other hand, if you're an artist, or a manager, how could you not want your music available to 25 million Net users? ''Do you make a Wal-Mart more powerful if you sell records to them?'' Geiger says. ''They're already powerful. And suppliers such as record companies make money selling wares.''

This do-it-myself thinking by the labels carries some obvious problems. It's unlikely that Napster-trained one-stop downloaders would pay for more than one subscription service. And any balkanized subscription plan would only frustrate people. The Universal trial, available at Farmclub, looks impressive at first glance, with roughly 20,000 songs from about 1,100 artists, running the gamut from Eminem to the Vienna Boys Choir. With almost 30 percent of the American music market, Universal is likely the only music group that could go it alone. But despite the label's success, it quickly becomes apparent while browsing the Farmclub's initial offerings that many of today's top sellers like Madonna (Warner Bros.), Britney Spears (Jive) and Radiohead (Capitol) aren't available for streaming. ''If you only have 20 percent of the content, you're going to disappoint people 80 percent of the time,'' says MP3.com chairman Michael Robertson.

Labels also aren't known for having strong brand identity, and any record company promoting subscriptions will have to ramp up its marketing. While Farmclub.com benefits from Universal's market share, a USA Network TV show and other multiplatform plays, the site lags behind its online music competitors, falling outside the Top 20 music sites, according to PC Data Online. In September, Farmclub.com had 687,000 unique users compared with more than 12 million at Real and 6.6 million at Napster. ''Consumers don't look for music by label, and consumers wouldn't know how to associate our choices by labels,'' says noted digital music guru Jim Griffin, CEO of Cherry Lane Digital. ''No one ever bought a Universal record, read a Doubleday book or went to a Paramount movie.''

And possible partnerships between the music entities bring up business and legal concerns. On the commerce end, it's unlikely that one company would allow another company to serve as the prime player. As one major-label executive puts it: ''Why would any other record label join the Universal service and build up the Farmclub brand? It doesn't make any sense.'' On the legal side, any joint approach to subscription services would invite antitrust scrutiny. A few years ago, the labels talked about a joint venture that would compete against MTV, which immediately drew an antitrust inquiry from the Justice Department. ''Companies have to be extremely careful to not tie up the business so that it's impossible for other people to do business,'' notes James Daniels, a former attorney with the Justice Department's antitrust division.

The feeling throughout the off- and online record industry is that consumers will likely be squeezed by yet another stalemate in the digital-music age. Analysts estimate that it could take the labels anywhere from one to three years to finish their own noodling with subscriptions and start licensing content to those third parties who can put together a credible Napster alternative. (That's if one or more of the labels don't decide to purchase the file-sharing service first.)

Of course, once the subscription plays finally emerge, there's the problem of how most people will enjoy them. Right now, a subscription service for digital music is only practical on the PC. But most people listen to music on radios, home stereos, car stereos and portable devices. The grand promise of linking these devices through wireless connections and adding simple user interfaces remains even further in the future.