Music publishers and recording companies on Tuesday announced a long-anticipated licensing deal for the use of songs online, removing a major hurdle to the launch of commercial Internet music services.
Industry-backed Web services known as MusicNet and Pressplay, which plan to launch soon, had faced a potential legal challenge by the publishers, who own the rights to compositions, regarding royalty rates for songs provided in interactive Internet music services.
“This agreement removes a major legal roadblock for the new online subscription services,” said Hilary Rosen, president and chief executive officer of the Recording Industry Association of America (RIAA).
The RIAA, the National Music Publishers’ Association and the Harry Fox Agency Inc, which acts as the licensing agent for more than 27,000 music publishers who represent more than 160,000 songwriters, reached the deal after months of talks.
Under the deal, the labels will pay Harry Fox a $1 million advance for use of its clients’ music over two years until rates are determined. Once determined, the royalties will be paid retroactively. If labels and publishers do not settle on a rate within two years, the labels will pay monthly advances of $750,000 per year until a rate is set.
While the $1 million does not reflect the actual rate – which could end up being higher – analysts said it enables the labels to move ahead by paying a nominal sum.
“It’s a testament to how small they expect these services to be, starting out,” said Ric Dube, analyst with Webnoize.
MusicNet is owned by RealNetworks, AOL Time Warner Inc’s Warner Music, EMI Group Plc and Bertelsmann AG’s BMG and Pressplay is owned by Vivendi Universal and Sony Music.
“This development is a great step forward for the digital music industry as a whole,” said Richard Wolpert, strategic advisor to MusicNet, which sent a preview of its service to analysts and journalists on Monday.
“Technically, its impressive,” said Dube. “It worked well and wasn’t too hard to install. Downloads are fast and the sound was terrific,” he said.
MusicNet’s rival Pressplay said on Tuesday it was also pleased with the publishing deal.
While the deal with publishers removed one key obstacle, analysts said these services still face several challenges, including the task of converting users into paying subscribers after millions of music fans have been getting music online for free on services such as Napster.
Napster has been idle since July as a result of a recording industry copyright lawsuit, but similar services offering free music have emerged in its wake.
EMI recently became the first label to join both ventures, and officials from both services have acknowledged the need to get music from all labels to be successful. They also have to convince several artists, who may still seek to block use of their music on these services.
For instance, EMI has said the music of the Beatles will not be available on any subscription services.
GOVERNMENT AGENCY PROBE
Another potential problem is a continuing investigation by government anti-trust investigators. The Justice Department’s anti-trust division has already asked the five big labels for information about the ventures, label sources have said.
Some industry insiders expect that probe to heat up as the launch dates for the new services approach and for more distribution deals to be announced in order to alleviate anti-competitive concerns.
“With the publishing deal putting these services closer to launch, the DOJ probe will likely heat up,” said one recording industry executive. “As a result, further negotiations with distribution partners, like portals, retail sites and Internet service providers will likely accelerate.”
The industry’s goal to reach as many consumers with as many partners as partners was underscored Tuesday by a deal announced between tiny upstart FullAudio – which is also launching its own subscription service – and Universal Music Publishing.
While another high-ranking industry official agreed there is a ton of dealmaking going on right now within the industry, he disagreed the probe by the DOJ would heat up right now.
“I never thought the investigation was trying to come to any conclusion before the launches. With a zero market share, there’s nothing to suggest these services’ publishing agreement should have any effect on the DOJ investigation,” he said.