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To: Dealer who wrote (26651)	7/26/2000 10:05:59 AM
From: Dealer	Read Replies (1) \| Respond to of 35685

RNWK--Big record labels tune in to digital downloads By Dan Briody Redherring.com, July 26, 2000 Downloading music on the Web is the perfect example of a great consumer concept but a terrible business strategy. Just look at the stock performance of companies like MP3.com (Nasdaq: MPPP) and EMusic (Nasdaq: EMUS). These companies and others like them are at a crossroads. In addition to the fierce competition from the slew of Web sites that allow users to download music for free, the big record labels are also finally waking up to the potential for digital music sales. How big is the impact of companies like Napster on the overall music industry? Consider that Richard D. Parsons, venerable president of Time Warner (NYSE: TWX) alternately referred to the file-swapping software startup as a "hijacker," "pirate," and "the devil" during a 30-minute keynote address to music executives attending Jupiter Communications (Nasdaq: JPTR)'s Plug.In conference in New York this week. The far-reaching effects of digital file-swapping over the Internet are bringing about the most wrenching change the music industry has ever seen. Digital downloads have increased the ease with which consumers can access their favorite music and have lowered the price that consumers are willing to pay for music, in some cases to nothing. The major record labels may not be in danger of going out of business anytime soon but they are begrudgingly admitting that Napster is forcing the industry to change. Mr. Parsons says that traditional record companies have been "asleep at the switch," but vowed that they would ultimately emerge victorious. Acknowledging that they had a lot of catching up to do, Mr. Parsons expects Time Warner's music unit to announce a digital downloading service in the fourth quarter of this year. FACING THE MUSIC Nevertheless, the ongoing copyright infringement litigation against Napster continues to draw more press coverage and swell the overall user base of the surreptitious software, which now counts about 21 million among its faithful. Napster begins its court battle in earnest this week. Napster CEO Hank Barry maintains that his site will increase the overall music market from a $40 billion business into an $80 billion business, creating a community of music listeners that ultimately will buy more music. Recent research from Jupiter finds that Napster users are 45 percent more likely to increase their spending on music than non-users. Record companies, not surprisingly, aren't buying it, claiming that the only thing driving actual CD sales are a limited user base and bandwidth constraints. The fact that the record companies finally realize that it would make sense for them to set up their own way to sell downloadable music online has certainly spooked investors of smaller pure-play digital music stocks. MP3.com, EMusic, and Musicmaker.com (Nasdaq: HITS) are all hovering near their 52-week lows. It's tough to make money when your main product can easily be found for free elsewhere. None of the companies in this area are expected to make money this year and except for MP3.com, analysts aren't predicting profitability for any of these companies in 2001 either. In a sense, the popularity of Napster is a perfect example of why investors have abandoned the pure-play digital music stocks in the first place. Privately held Napster currently has no revenue whatsoever, although Mr. Barry says it does plan to come up with a revenue model in the near future. Consumer expectations have been irreversibly altered as a result of Napster and its cohorts. Customers will not be willing to pay $16 for a CD, or even $9.99 to download it to an MP3 player for that matter, after having had a run with Napster. Selling music at traditional prices in this climate is "like selling lemonade when the guy down the street is giving away beer," says Nicholas Butterworth, president and CEO of MTVi Group, MTV's Internet arm. Internet music retailers, already in danger of becoming disintermediated, realize that the bar has been lowered. But determining exactly what customers will be willing to pay for digital downloads, after having paid nothing, is going to be tricky. "Consumers don't realize that cutting CDs out of the equation doesn't cut $5 off the price. Most consumers, sadly, expect to pay substantially less for digital music," says Jason Olim, CEO of CDNow (Nasdaq: CDNW), which was recently acquired by German media conglomerate Bertelsmann for a paltry $117 million, just $3 a share. And digital music is not the only area of entertainment that will be affected, as evidenced by Stephen King's digital download-fest of this week. Thousands logged on to The Official Stephen King Web Presence and walked away with the first installment of Mr. King's latest novel, The Plant. Mr. King asked for a measly dollar per customer in return for the download. MAKING MONEY As a result, record companies and digital download sites already have started looking for alternative ways to generate revenues online. The prevailing school of thought is that music online will evolve into a service, much like the software industry has already begun to do. EMusic underscored that belief this week by announcing the first subscription-based music downloading service. For $9.99 a month, users have an all-you-can-eat menu of the 125,000 titles on EMusic's database. Wall Street greeted the innovation with a generous 30 percent boost in the company's decimated stock but EMusic still is trading more than 90 percent below its 52-week high. Another potential solution presented by Realnetworks (Nasdaq: RNWK) CEO Rob Glaser was "windowing," or the method of tiered release that movie houses currently employ as feature films cascade from theaters to VHS to television. "I've never seen the majors [record companies] more open to creative solutions," says Mr. Glaser. The subscription-based model could have a major impact on sales of stereo equipment as well, as some executives foresee a day when stereos are given away as part of a music service, à la cell phones. Sales of photographs and lyric sheets (known as album covers and liner notes in the analog world) are also value-add revenue opportunities for record labels. But it is certain that the traditional way of buying and selling music will never be the same. Discuss the rich media and streaming technology space in the Rich Media discussion forum. Or check out forums, video, and events at the Discussions home page.