Online Music Companies Outplayed

Record giants hold the licensing baton

The music lovers dream of a digital "Celestial Jukebox" has turned into an entrepreneurs nightmare, and critics maintain major record companies are to blame.

Using aggressive lawsuits, outrageous licensing demands and strong-arm tactics that range from refusals to share promotional materials to monopolistic threats, Internet music executives said the powerful recording industry has made it nearly impossible for dozens of companies to profit from their dreams of using technology to transform the music business.

The five major record companies, which have grown fat and powerful as middlemen in the brick-and-mortar world, are using their copyrights as bludgeons against musics digital new wave, they said.

"The labels have been incredibly reluctant to license their catalogs to anyone in the digital world, because its all about control," said David Pakman, founder and president of business development and public policy at Myplay, an online music locker service. "If they want to license their catalog to you, they want to be restrictive, because they dont want you to do things they havent thought of. They dont want someone else to build a humongous business that they are not a part of."

As a result, dozens of music start-ups, including and, have gone out of business. Of those that have survived, many are limping along on the cash reserves they built up two years ago because venture capitalists are afraid to fund them. Shares of publicly traded Internet music companies have fared far worse than the rest of the industry, even though the controversial, but wildly popular, file swapping service Napster clearly demonstrated the huge demand for digital music.

Record companies, for their part, insisted they have a right to control the ways others use their music. Their copyrights, after all, represent a substantial financial investment. Embracing Internet distribution while protecting copyrights, they said, is an enormous challenge theyre working hard to meet.

"We are agonizing to make every realistic, fair deal that we can make," said Ted Cohen, vice president of new media at EMI, one of the five major record labels. "It has to be equitable all around, but there is no desire to be onerous and unfairly restrictive."

Some critics and legal experts, however, said the industry is being just plain greedy.

"Anything that allows flexibility or allows someone else to make money, theyre not willing to do," said Pamela Samuelson, co-director at the University of Californias Berkeley Center for Law and Technology. Some of their practices, she said, "raise serious antitrust questions."

But the president and chief executive of the powerful Recording Industry Association of America (RIAA) said she is "puzzled" by the accusations of controlling tactics. "I think its silly," Hilary Rosen said. "Its obvious its in the record companies interests to expand their distribution options." Rosen said she is frustrated by the "sense of entitlement" she sees at many Internet start-ups. "Some companies say: Because I want it, you should license it. Clearly, the business model has to make sense."

Critics understand the major labels are merely trying to protect their established businesses from inevitable change that threatens their strength. But in doing so, they said, they have strayed far from the original intent of copyright law.

"The law says nothing about control," said Jonathan Potter, executive director at the Digital Media Association (DiMA). "Its about enhancing creativity for the public good. If the copyright holder isnt putting out content, then how is it benefiting society? Have we lost our focus on incentive?"

The controversy has caught the attention of Senator Orrin Hatch, R-Utah, chairman of the powerful Senate Judiciary Committee and a musician. He issued a harsh warning to the record industry in a recent address at the Future of Music Policy Summit in Washington, D.C.

"I do not think it is of any benefit for artists or fans to have all the new, wide distribution channels controlled by those who have controlled the old, narrower ones," he said. "This is especially true if they achieve that control by leveraging their dominance in content or conduit space in an anticompetitive way to control the new, independent music services that are attempting to enhance the consumers experience of music."

Some members of DiMA are calling for legal remedies, in the form of so-called "compulsory licenses," which would require the record labels to open their collections to third parties on preset terms.

DiMA, which was launched two years ago, now has more than 70 members, including America Online and RealNetworks. It is building a lobbying presence in Washington. However, it has a formidable opponent in the established and influential RIAA, which maintains that broad compulsory licenses would impose terms that dont fairly compensate them for their investments in artists. Licensing terms should vary according to the business model, record company executives have said, and should be negotiated case by case.

Meanwhile, as the debate rages over whats fair play, more and more Internet music companies are going under.

"Its a little scary to see an entire industry folding in on itself," said Philip Fracassi, senior vice president of production and distribution at House of Blues Digital. "All the content is in the hands of five companies — its a very scary thought."