RealNetworks Venture May Find a Majority's Not Enough

Three out of five isn't bad. But it's not necessarily good, either.

Monday's announcement that three of the five major music labels have joined forces with Internet media firm RealNetworks (RNWK) represents a real milestone: It's the furthest that anyone has gone toward establishing a viable business for distributing mainstream music online.

But because so many questions about the online music service remain unanswered, it's too early to tell whether the venture will be as successful as it is noteworthy. Among the unknowns about the venture, dubbed MusicNet, are its price to consumers, its ease of use, the selection of music it will make available, and what type of antitrust scrutiny it might raise.

In other words, it's unclear whether the alliance of AOL Time Warner's (AOL) Warner Music Group, EMI Group and Bertelsmann's BMG Entertainment will click like those industry heavyweights the Three Tenors, or end up as imporant to musical history as the Hudson Brothers.

Along for the Ride?

If the MusicNet does succeed after its expected commercial launch by early fall, clearly RealNetworks will benefit from being along for the ride. The company, which claims 170 million unique users of its RealPlayer media player software, owns 40% of MusicNet, with the rest held by AOL Time Warner, EMI, Bertelsmann and RealNetworks employees. MusicNet says it will employ a combination of RealNetworks software already in the field and new technology.

RealNetworks shares rose 50 cents by Monday afternoon, or 7%, to trade at $7.63.

The online subscription service's most valuable asset is certainly the participation of a majority of music majors. In the first place, incurring the established music industry's wrath can cripple any company trying to build an online music business, as the litigation against Napster and other firms has demonstrated. Active antagonism aside, pundits in the nascent business of online music have said that for subscription services to work, a service will have to have music from the world's five largest record labels. In a conference call with reporters, RealNetworks CEO Rob Glaser (also chairman and interim CEO of MusicNet) said RealNetworks had, in fact, tried to get the industry majors to offer up their music catalogs for a computer-based "celestial jukebox" for the past six years.

By assembling a majority, RealNetworks and MusicNet are a slight step ahead of the two majors that are not part of the deal, Vivendi Universal's (V) Universal Music Group and Sony's (SNE) Sony Music Entertainment. Those firms last year announced they were working on an online music service called Duet. A Sony Music spokeswoman declined comment on the MusicNet announcement, but said Duet was still on track for an expected debut this summer. A UMG spokesman declined to comment. Asked whether Sony and UMG were invited to be part of MusicNet, Glaser responded, "It's very logical to assume we've talked to all five of the big music companies."

Another set of advantages are the music distribution agreements MusicNet has in place. The company, which is positioning itself as a business-to-business play -- one that will license technology and content to other companies that will in turn sell services to consumers -- announced two nonexclusive distribution agreements with two of its shareholders: AOL Time Warner, a company with unquestioned ability to market online services to consumers, and RealNetworks, which has 175,000 paying subscribers to its $9.95/month GoldPass content subscription service it launched last summer.

Now for the unknowns: One, for example, is whether the venture will provoke any antitrust concerns, what with the majors joining forces attacking companies such as Napster, then rallying behind a company that they own a piece of, are supplying music to, and, in the case of AOL, distributing the product of. In a possible precedent, the Justice Department didn't look kindly upon the 1994 announcement by the five majors that they were teaming up to create a music video channel that would compete with MTV.

In the conference call, Glaser pointed out that both the content agreements and distribution agreements into which MusicNet had entered were nonexclusive; he also alluded to the participation of Bertelsmann U.S. chief Joel Klein, who previously made life miserable for Microsoft (MSFT) as head of the Justice Department antitrust division. "I think Joel's bona fides in understanding antitrust law speak for themselves," Glaser said.

As for what services users will get for their subscription money, it's unclear, beyond that it will be some combination of downloads onto a computer and streamed music, which listeners hear as it is transmitted over the Internet. The participants made no reference to whether users will be able to download music onto portable devices such as MP3 players. It's also unclear what restrictions they'll place on how subscribers can use the service in the name of copyright protection, and how well any restrictions might sit with consumers.

Nor is it known what consumers will be paying for whatever they'll get; the retail price will be set by distributors, and neither RealNetworks or AOL Time Warner were talking about prices Monday.

About the only thing that is sure about Monday's announcement is that it will make for a very interesting Tuesday on Capitol Hill, where the Senate Judiciary Committee, chaired by songwriter Orrin Hatch, is slated to hold a hearing on the future of online entertainment. Only a cynic would say that the reason MusicNet was announced Monday was so that the industry would have something to show Tuesday to Hatch, who has expressed impatience with the music industry's foot-dragging in its online efforts.

And of course, that's exactly what one reporter did suggest on the call. But no, said Glaser, in a response that didn't quite assert that the timing was coincidental. "This is not just a fig leaf kind of thing," he said.

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