The Internet Audio Dilemma

News last week about SafeAudio CD copy protection indicates that while fighting pirates, the major record labels are also attempting to seal off the ability of users to place their own music from CDs onto computers. If they succeed, the only alternative for consumers who want non-pirated music on their desktops will be to buy content directly from the labels themselves, or companies set up to legally supply digital audio.

But is there a viable business model out there that would allow record companies to make money selling music over the Internet and keep their customers happy? There are two approaches to distributing content online: downloads of individual music files (such as MP3s) or streaming. According to a new report from Red Herring Research, "Downloads in a paid-subscription environment require digital rights management (DRM) solutions. The current DRM offerings are cumbersome to consumers and by no means 100% secure."

As a result, the report finds that subscription-based services that charge monthly fees are again gaining popularity with the music industry. "Streaming is, at this point at least, more versatile and user-friendly. Thus, earlier business models will look more like current online radio offerings, albeit with a greater selection of music and more customization," says the study.

With the troublesome Napster drawn and quartered and under a former BMG executive's control, Red Herring Research believes that a new era in online music has dawned. The five major record labels have been busy creating alliances and setting up distribution services such as MusicNet (AOL Time Warner, EMI Group, and Bertelsmann) and Pressplay (Sony Music and Vivendi Universal), both slated for launch later this summer. Red Herring comments that "the very originators of numerous copyright lawsuits have finally initiated plans for taking their content online. Though they have yet to deploy services, MusicNet and Pressplay possess a crucial advantage: the support and backing of at least a portion of the five largest record label conglomerates."

While the form of online music distribution is starting to take shape, the profit picture remains clouded. The Red Herring report points out that the cost of acquiring paying customers may outweigh the revenues from subscription fees for months to come. The study, which says that services are currently proposing around $5 per month subscription rates, adds that "it will take, at best, five months for each user added to cover the costs of sales and marketing. But thereafter, $5—perhaps even as little as $3—should be sufficient to cover bandwidth costs as well as the remaining operational costs of the online music model."

However, Matt Wells, author of the report, adds an additional caution: "The highly variable nature of bandwidth pricing mandates that companies restrict usage heavily. Assuming a penny-per-MB bandwidth cost, listening to music one hour each working day for a month will cost the company over $5. And they haven't even gotten to royalty payments yet."