Labels study how to profit in digital era

By NAOMI SNYDER

When Rachael Adams buys a song online, she feels like she owns it.

That's why she's perplexed that the music industry has made it tough to play her songs on the multiple computers and music players that have become a part of her life.
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"It just frustrates me,'' said Adams, a 26-year-old graphic artist in Nashville.

Record labels have been encoding digital music files for the past several years to ward off piracy. People who bought music online were limited in the number of times they could copy or transfer music between music players. The same restrictions don't exist on CDs, however.

After years of annoying fans who carefully buy music legally online with such maneuvers, the industry is moving away from such tactics.

"What the labels learned — it took them about seven to eight years to learn — consumers were not going to pay them to complicate their lives," saidPhil Leigh, senior analyst at research company Inside Digital Media in Tampa, Fla.

The growing shift is seen as a victory for consumers. But music labels have trodden cautiously as they try to figure out how to continue making money in an Internet age that continues to threaten overall music sales. In 2007, album sales, including digital, fell 9.5 percent compared with the previous year.

Amazon.com launched a new site last fall to sell unrestricted music and has since managed to sign on all the major music labels — Universal Music Group, Sony BMG Music Entertainment, Warner Music Group and EMI Group. The music sells for as little as 89 cents per song and most albums sell at a price range from $5.99 to $8.99.

Last week, the music-oriented social network Last.fm launched an ad-supported Web site where music lovers can listen to, although not download, entire songs, not just snippets, for free.

A key part of the new service involved striking a deal with all the major labels to make their music available on the service. Many independent labels have offered their music for streaming for years as a way to promote artists.

In a memo to employees last month, Warner Music Group Chairman and CEO Edgar Bronfman Jr. said: "By removing a barrier to the sale and enjoyment of audio down loads, we bring an energy-sapping debate to a close."
MP3 gains acceptance

The music industry's apparent willingness to offer consumers more control over digital music appears to be good news for people such as Adams, who has purchased mostly protected music through Apple's iTunes during the past two years.

Recently, she tried to download a song she had bought and was told she had ex ceeded the limit on the number of computers on which it will play.

Music labels are moving away from those protections, called digital rights management, or DRM, which typically limits the number of times downloaded songs can be copied. The industry in creasingly is embracing the MP3, a type of unprotected file that can be copied multiple times and played on any number of players, from BlackBerrys to iPods.

Mark Ott, 25, an ac count manager at an online marketing firm in Nashville, once had to call a technician at Apple just to get his iTunes music to play on a new computer.

"It's kind of like you're telling your customers that you don't trust them,'' Ott said.

Amazon.com recently launched a new online music service that sells only unrestricted digital files, in the widely compatible MP3 format. ITunes has been sell ing label EMI Group's music in MP3 format, al though Apple has said many labels still limit how much unprotected music they will sell.

Universal has begun selling MP3 files through other online retailers such as Best Buy and Wal-Mart, in part to challenge iTunes' dominance of the digital market.

When announcing that part of its catalog would be sold on Amazon, Sony BMG's president of global digital business and U.S. sales, Thomas Hesse, said it was the "newest element of our ongoing campaign to bring our music to fans wherever they happen to be."

EMI Music spokeswoman Jeanne Meyer said that the company was the first major label to move away from digital rights management and that the industry has had to adapt to changes in the marketplace in a relatively short amount of time.

Without providing figures, she said the label was pleased with early results from the sale of unprotected music, particularly full album sales.

The move away from digital rights management is a "white flag" of surrender for the music in dustry, said Justyn Baker, executive di rector of li censing and digital service at Naxos of America in Franklin.

The company is a classical and jazz label that has sold unprotected digital music on emusic.com since 2005.

"I've never believed in charging someone and then restricting what someone … could do with it," said Baker, who admitted the classical industry has had fewer problems with illegal downloads.

The industry has not given up, however, on attempts to control fans' sharing of music.
Continued fears

London-based recording industry trade group IFPI issued a report last week calling on Internet service providers to do more to protect the industry's profits by filtering out illegal downloads. It congratulated French President Nicolas Sarkozy for brokering a deal with providers to shut down persistent copyright violators.

Many in the recording industry hope digital-tracking technologies such as watermarking will help monitor how many times songs are copied and shared.

And even though record labels are beginning to sell unprotected versions of their music, many have not offered their entire catalogs. Universal, in fact, called its sale of MP3 files at Amazon.com and other retailers a "test" to see the effect on piracy.

The major record labels still have much to worry about.

U.S. album sales fell 9.5 percent last year from 2006, even counting digital sales, according to Nielsen SoundScan Inc. Sales of individual digital tracks climbed 45 percent but still didn't turn around overall sales, as digital makes up just one-quarter of music sales.

Technology firm Jupiter Research estimates that physical U.S. music sales, made up mostly of CDs and vinyl records, will shrink by $2.7 billion to $5.7 billion in sales in 2012, while digital download sales will gain only $1.7 billion in that time frame.

Although the industry blames illegal downloading, Jupiter Research analyst Michael Greene says increasing competition from other forms of entertainment and falling prices also are factors.

"Wal-Mart has driven down CD prices while putting many smaller retailers with higher prices out of business,'' he said.

ITunes also has been instrumental in lowering prices, by insisting that people should be able to buy one song and not the entire album.

Some are predicting that music will be come increasingly free online, supported by Web advertising. But how major music labels and their artists will be able to generate enough revenue to make up for lost sales has not been completely worked out.

"Anyone who claims to know one model and that's the future is going to be incorrect," said EMI's Jeanne Meyer.

"Whether it's subscription, whether it's mobile or a hybrid, the point is we need to make it a really good consumer experience … and to make sure the artists who create it are compensated."