Warner Finally Gets in Line on Downloadable Music Sales

Can you hear the sound of the other shoe -- actually, the fifth shoe -- dropping? Today Warner Music (TWX:NYSE - news - boards) will announce a scheme to allow PC users to download tunes from among an initial selection of 100 cuts by Warner artists, from Madonna to Tori Amos.

Warner thus becomes the fifth of the dominant Big Five record companies to announce (but not necessarily implement yet) downloadable, pay-per-song music programs. Sony (SNE:NYSE ADR - news - boards), Seagram (VO:NYSE - news - boards), Universal Music Group, EMI and the BMG unit of Bertelsmann have previously announced download efforts.

Much will be made today of support by major music retailers such as Amazon.com (AMZN:Nasdaq - news - boards) and Wal-Mart (WMT:NYSE - news - boards) for Warner efforts. (Though details of the Warner distribution system haven't yet leaked, perhaps delivery through the Web sites of Amazon.com and Wal-Mart.com bought some peace?) That support is important -- or at least, it looks important -- to Warner, since proposals to sell music directly from record companies to consumers have previously drawn sharp complaints from retailers, who see this as little more than a way of cutting them out of the distribution chain.

A note to Warner and to the other four of the Big Five: Guys, it isn't going to work.

As I've written here often, the pricing and the copy-protection glued onto these downloadable files (the music industry likes to call that DRM, for Digital Rights Management), are both deal killers. Indeed, each meets the "necessary and sufficient" test beloved by logicians: Either flaw, alone, would be enough to sink the downloadable-music ship. Together, they just do the job faster.

It's so clear that the only thing that will work on a continuing basis is going to be a subscription system -- and not just a one-label, or label-by-label, subscription system. Offer consumers a $10 per month flat-rate download-pretty-much-everything-ever-recorded deal, and you've got a winner. Maybe you can even stretch that to $20 a month, with a steep discount for signing up for a year. But I'm skeptical.

Can anyone make money on a $10 per month charge? If not, the music business is in even more trouble than we know, because that's likely to be the threshold of pain for "music consumers."

Why am I pessimistic about the workability of that DRM software? After all, there are lots of companies trying to claw up to the top of that hill. Surely someone's system will work. And surely the music meisters at the record companies will catch on, and flock to that company's wares. And surely analysts and columnists and investors will spot that winning DRM company, and make a bundle as its stock shoots skyward.

I don't think so, for exactly the same reason I've been writing for two years that DRM schemes won't endure: Whatever your guy can create, my guy can break.

And this isn't your ordinary gun-for-hire copy-protection busting. The overlap between the universe of skilled coders who know how to break copy-protection schemes, and the universe of people who live and die by their downloadable-music caches, is very high. There's real motivation here -- break the DRM flavor of the week, get famous among your peers -- rather than the hired-gun mentality that led coders a decade and a half ago to go after, and break, the copy-pro schemes used for Lotus's 1-2-3, etc.

So welcome aboard, Warner. Nice to see all five of the big companies finally in the game. Maybe nothing but experience will teach them.

For me, for now, these destined-to-fail download programs are big sell signals. Problem is, all these labels are embedded in much larger companies, so their continuing failure at selling music over the Net will have only a small effect on their parent companies' bottom lines. So what's to sell?

It's interesting that while Wall Street and most of the press have been distracted by the soap operas at MP3.com (MPPP:Nasdaq - news - boards) and Napster, the record companies' failure to "get it" about the dynamics of the downloadable-music market have gotten a lot less notice.

If there is a buy signal hidden somewhere in all this, it is that while the record companies keep demonstrating their skill at head-in-the-sand strategies, at least two major Net companies already have in place the reach, tech know-how, clout, and in at least one case, the billing system, to put together workable subscription-downloads systems, in cooperation with a soon-to-be chastened Big Five.

They are, of course, Yahoo! (YHOO:Nasdaq - news - boards) and America Online (AOL:NYSE - news - boards). Especially with AOL's pending union with Time Warner, AOL might seem to have the inside track to emerge as the coordinator/vendor of an integrated download subscription service.

I think Yahoo! would be a better choice for all concerned. Worries among always-paranoid record-company execs at the other four of the Big Five that AOL-Time Warner's in-house label, Warner Music, might be getting a better deal, would disappear. Also, there's the question of an AOL "membership." Would this service be available only to AOL subscribers?

If so, that $21.95 per month "tax" for an otherwise-perhaps-not-much-used AOL membership could kill the deal for consumers. If AOL is to become the central downloadable-music subscription site, it has to be through its free-to-all aol.com site.

By contrast, adding a download-music item to Yahoo's home page would be clean, easy and welcome. The billing back-end would take some time to construct -- the 30-to-40-million users I think would sign up for a service such as this over the first few years represent a considerable billing problem -- but that can be handled.

On the revenue side, sign-up 40 million users at $10 per month, and you have a $5 billion a year business. However you split that, it's a tidy sum.

Either way, I think that in a few months it will be clear that the only way downloadable-music sales can really work will be through an independent site, selling cross-label flat-fee subscriptions. And that won't, I think, be MP3.com, after its battles with the record labels.

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In case you missed it, I want to heartily endorse a wonderful, reality-based OpEd-page piece in last Wednesday's Wall Street Journal on the inevitable failure of these silly schemes (and of DRM, for that matter).

Holman Jenkins' piece outlines just why the record companies keep missing the boat, why copy protection will never work, and why nothing short of a subscription system can work.

Highly recommended; not to be missed.

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Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour had no positions in the stocks mentioned in this column, although positions can change at any time. Seymour does not write about companies that are, or have been recently, consulting clients of Seymour Group. While Seymour cannot provide investment advice or recommendations, he invites you to send your feedback to Jim Seymour .