Internet Music Distribution Might Heat Up in Wake of AOL-TW Deal

At the moment, music fans who want to add to their collections by trolling the Internet are limited to bootlegs of dubious quality and legality, low-resolution shareware from innumerable unsigned bands, and teaser samples intended to help sell CDs by mail. Despite the subject's near-constant presence in the media, sales of downloadable music amounted to only about $1 million in 1999—as compared to total music sales of approximately $13 billion. The trickle of business is in large part due to reluctance by the music industry to open up its vaults because of a lack of copyright protection.

The much-hypothesized "universal content library" that many music lovers will plug into once the necessary bandwidth is available still lies somewhere over the horizon, but it has moved several steps closer with the coming merger of America Online and TimeWarner, announced early in January. TW chief Gerald Levin, speaking at a press conference on Monday, January 10, said the development of online music would be one of the new company's top priorities. TW already has a cable TV network capable of transmitting digital signals, and AOL has inked previous deals with Internet music sites like for "streaming" audio to its subscribers. TimeWarner also owns the Warner Music Group, which, despite lackluster performance in recent years, has a solid roster of artists, including Jewel, Madonna, Alanis Morrisette, Eric Clapton, and R.E.M.—and a huge back catalog. The merger "catapults Warner Music Group into a unique position," Levin stated.

The president of AOL's Interactive Properties Group, Ted Leonsis, said that the deal will "jump-start and legitimize the digital music industry as a whole," although he emphasized that AOL-TimeWarner wouldn't favor Warner Music Group over any other labels.

Promotional and developmental deals are popping up all over. A couple of days after the merger announcement, a Warner Music executive said that the new company could start an Internet music video channel to go head-to-head against MTV—although MTV already has a sweetheart deal with AOL. Warner Music Group announced a deal January 12 with LaunchMedia to stream its music videos over the Internet, and on January 14 announced the acquisition of London Records, a British music company. London Records will be operated independently, according to Dow Jones Newswires.

Seagram Ltd.'s Universal Music, meanwhile, has canceled the trial of an online music-selling system it developed with three other companies: BMG Entertainment, AT&T Corporation, and Matsushita Electrical Industrial, Panasonic's parent company. Technical glitches were the official explanation for the cancellation, announced by Seagram CEO Edgar Bronfman, Jr. at an investment conference. Universal has doggedly pursued the proprietary technology, which it called Project Nigel, while other music companies were forming strategic alliances and mutual-aid pacts to share the effort and risk of going online. One reported hope for Project Nigel was that it might become an industry standard for the purchase and download of copyright-secure music over the Internet. The audio quality of the project's test transmissions was said to be quite good, and Universal executives hope to have the system operational by spring.

Universal Music has also signed an agreement with RealNetworks Inc. to allow what the Wall Street Journal called "a vast selection of digital music from Universal's extensive catalog" to be sold and played on RealNetworks' RealJukebox software using Universal's distribution format. Artists on various Universal labels include Philip Glass, Andrea Bocelli, Sting, Amy Grant, Nine Inch Nails, and Limp Bizkit. In addition, Universal is one of four major record companies to have recently made a huge investment in online music company ArtistDirect Inc. A consortium consisting of Warner Music Group, Universal Music, BMG Entertainment, Sony Music Entertainment, Latin American broadcasting company Cisneros Television Group, and Yahoo! Inc. has put in a total of $97.5 million.

The investment is to ensure that the music companies maximize their Internet leverage, and represents a 20% stake in Encino, California-based Artistdirect, which failed to go public last year. Universal contributed $30 million for a stake of about 6%, approximately twice as much as any of the other partners chipped in. Universal and BMG are already equal partners in commercial music site GetMusic LLC. Warner and Sony plan to merge their jointly owned Columbia House music and video business with e-commerce site CDnow Inc.