Pay 2 Play

There's no shortage of comeback acts in the music business these days--Simon & Garfunkel, Duran Duran, Fleetwood Mac. Now, add Napster to the list. The online music service, which was shut down in 2001 after losing a courtroom fight with record labels incensed by its free-music-for-all ethos, is relaunching itself as a legit company to sell songs online. Its $20 million marketing blitz will be noteworthy for what's missing: any mention that the new Napster actually charges to download digital tracks. "We don't want to over commercialize the brand," says Chris Gorog, CEO of Roxio, Napster's parent. Trying to cash in on the freedom-loving spirit of the familiar Napster name is a smart move--competitors clearly feel threatened. Rob Glaser, CEO of RealNetworks, which owns the upstart Rhapsody download service, hopes consumers will think the Napster name is tainted by its freewheeling past. Selling a Napster download, he says, is like hawking "a porterhouse steak under the Purina brand name."

The sharp-elbowed infighting is just one sign of the gold rush underway in the budding business of pay-to-play music downloads. Companies are piling in, hoping to give music fans a better alternative to free services like KaZaa, with all their attendant baggage--lawsuits, viruses and unwanted porn. The new players, and those expected to join in, include the biggest names in computers (Dell and Hewlett-Packard), retailing (Wal-Mart), software (Microsoft) and the Internet (AOL). The online music stores generally sell single tracks, while others offer monthly subscriptions for an all-you-can-hear buffet (Napster will offer both). They're all hoping to match the success of Apple Computer's five-month-old iTunes Music Store, which has already sold 10 million downloads.

The record labels have given these services their blessing, largely because they have no alternative. They would love to turn back the clock to a time when a CD, sold at $18 a pop, was the only option. But KaZaa and services like it have cut deeply into the business--CD sales have dropped by a third, to $12 billion, over the last several years. That drop has forced the industry to reinvent itself. Now the five major labels are rushing to supply tens of thousands of songs to the online retail services. And they are granting consumers rights to use the music in ways that they had long resisted. Paying online customers can make unlimited numbers of CDs of the downloads they buy, for example, and listen to the tracks on more than one home computer or portable players like the Apple iPod. Jupiter Research predicts that sales of digital downloads will reach $3.3 billion in five years, about a quarter of total music-industry sales.

For the online services, the business equation goes far beyond the question of profits. If attracting "eyeballs'' was the key measure and goal of Web sites in the late'90s, then the new goal is to capture eardrums, often as a means to another end. Apple is betting, for example, that establishing a market for iTunes' 99-cent downloads will build demand for the computer company's iPod ($299 and up). For software companies like Microsoft and RealNetworks, it's a tool to help them become the dominant media software in cyberspace. Wal-Mart can use cheap downloads to draw throngs of customers to its Web site, where they might buy bigger-ticket items. AOL's MusicNet service is merely a logical extension of the giant's broad array of media and entertainment content for its 26 million subscribers.

Because the product it's selling is essentially a commodity--the quality of a song by 50 Cent will be the same at every site--marketing muscle and smarts will play a huge role. Watch for plenty of free trials. And, according to label executives, Napster, Rhapsody and others are trying to tap into all the file sharers on college campuses. The services, according to industry insiders, are in talks with colleges about offering exclusive agreements in exchange for discounts. Loudeye, a digital-music wholesaler, says some of the services it supplies are exploring different forms of payments, such as prepaid music cards, as a way to make sure kids can pay even if they can't use their parents' credit cards.

All the bells, whistles and discounts won't mean a thing if the actual services don't resonate with consumers. They have to be fun and simple to use--it's those qualities that have helped make Apple's iTunes such a huge hit. Once enough people sign on, music execs will then be able to tell which is the most popular, and profitable, choice for buying music: paying for each download or monthly subscriptions. Subscriptions let consumers listen to an endless stream of music, without actually "owning" it. But, the theory goes, that may lead them to discover new music, which in turn may spur them to buy a digital track (the more profitable transaction for the record company). Buying tracks may also cut into sales of downloadable albums. Says Paul Vidich, Warner Music's strategy chief: "Whether we like it or not, we're now in the business of selling tracks."

The music industry can only hope it's that simple. Downloadable music has changed the familiar rules of the business, in which a format--vinyl, CDs--is inevitably replaced by another physical medium. Now that music has been reduced to bits and bytes that can be distributed digitally, the industry must sort out a method to deliver it by cable, wireless and satellite technology. That means a constant game of cat and mouse between the holders of the copyrights (the labels) and savvy pirates. Even the new online pay services aren't foolproof; it would be easy for someone to pay once for a song, and then resell it over and over in the form of a burned disc. Industry executives are hoping that all the new legitimate services will reintroduce order to the frontier free-for-all that's cutting so deeply into their revenues. "We are giving consumers the benefit of the doubt to develop the market," says Thomas Hesse, BMG's chief strategic officer. The industry's theme song: "Brand New Day,'' by Sting.