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Net Music That's a Steal-but Not Stolen

Acknowledging that online piracy is forcing dramatic changes in the music industry, the world’stwo largest record companies are poised to make it easy and cheap for fans to buy-rather than steal-songs off the Internet.

The moves by Universal Music Group and Sony Music Entertainment accelerate the industry’s transition to an era in which music is distributed electronically. Other major labels are likely to follow as the record business grapples with the rise of online music copying through unauthorized services such as Napster, Kazaa and Morpheus and potentially billions of dollars in lost sales.

Rather than trying to force consumers to buy music on the labels’ terms, the services signal that record companies are slowly adapting to Internet-fueled changes in the marketplace.

This summer, Universal plans to sell tens of thousands of high-quality digital singles for 99 cents or less and albums for $9.99 through online retailers such as Amazon, Best Buy and Sam Goody, according to sources and company executives. Universal plans to make new releases available for downloading as well as older ones, and possibly offer downloads before the music is available on CD.

Significantly, the company plans to let consumers download songs and record them freely onto CDs -a major shift from the company’s practice of limiting what users could do with downloaded music.

The question is whether consumers accustomed to getting music for free will pay even 99 cents. Executives hope that, at some point, consumers will elect to pay a modest fee rather than steal.

“Forty-nine cents seems like the appropriate amount,” said Ron Stone, president of Gold Mountain Entertainment, an artist management firm. “If you can get kids to spend 49 cents, consider it a gift. Make it 99 cents, you won’t sell any, particularly if the singles market is a kids market.”

Consumers have flocked to digital formats that let them build custom collections and transfer music freely between their computer, portable players and CDs. But most of the music industry services offer relatively small selections and restrict how the music is used. As a result, they are considerably less popular than free pirate services.

The new services suggest that Universal and Sony no longer will handicap their online music business for fear of eating into CD sales, which have been the industry’s lifeblood. Billions of song files have been copied for free through the Net, and consumers have no legitimate source for the vast majority of those songs.

Sony also has quietly changed its policy on downloads to allow CD burning-a change that should go into effect any day, according to company executives. That is expected to increase the number of downloadable songs dramatically this summer, and a spokeswoman said prices would drop to $1.49 a song as soon as Sony’s vendors could make the change.

Although some music retailers and analysts applauded the moves Tuesday, they said it would be a challenge to wean consumers from the steady diet of free downloads they have enjoyed for more than two years.

“I think the consumers ultimately are going to decide if it’s too late to come back to the market,” said Matt Durgin, director of retail merchandising for BeMusic, a Bertelsmann unit that owns online music retailer CDNow. “The only thing you can do is put the product out there… and hopefully the consumers will come back.”

The efforts by Universal and Sony mark a reversal on three key issues for the record industry.

By discounting the songs, the labels acknowledge that music delivered through the Net should be sold for less than a packaged good. By allowing the songs to be recorded on CD, they are sacrificing security for the sake of consumer acceptance. And by working through independent retailers, they are relinquishing some control over online music distribution.

In fact, the downloadable songs will compete with the subscription music service from Pressplay, a fledgling joint venture by Universal and Sony.

Pam Horovitz, president of the National Assn. of Recording Merchandisers, praised the Universal initiative as “a great first step in the right direction” because it provides a legitimate source of singles at entry-level prices. The association has criticized the labels for abandoning the singles market, leaving consumers no alternative to the unauthorized free services.

Lawrence Kenswil, president of Universal ELabs, the record company’s new-media arm, said Universal planned to offer downloadable versions of every song to which it holds the digital rights. That’s tens of thousands of tracks from a total of 10,000 to 11,000 albums.

The songs will be distributed first by Liquid Audio of Redwood City, Calif., whose audio format provides better sound quality than MP3 files. Liquid Audio delivers music to dozens of online retailers, including CDNow, Amazon.com, Best Buy and Sam Goody.

Liquid Audio files are scrambled so they can’t be freely copied from computer to computer. But Universal has decided to let buyers burn the files onto conventional CDs in unscrambled formats, meaning they could be copied or moved freely from that point.

The major labels have resisted the idea of letting consumers burn downloadable songs because they believe it would encourage piracy. But Kenswil noted that songs are widely being pirated, so “you’re not keeping anything from being open [to piracy] by copy-protecting the download.”

The Liquid Audio files are designed to help labels enforce their copyrights, though, by helping them trace the source of pirated copies.

The downloads contain watermarks that are designed to stay with any digital copies made of the song, enabling authorities to identify the original buyer.

Sony initially offered downloadable singles only through its Web site, using a special player, and with stiff restrictions on copying. The company cut the price to about $2, and it expanded availability by striking a deal with online distributor RioPort Inc. of San Jose, whose partners include MTV.com and Best Buy.

Jim Long, chief executive of RioPort, said, “I expect to have 70,000 to 100,000 total downloads for sale before the end of the year.”

One key to success, he said, is removing the restriction on recording songs onto CDs.

“If you want to sell downloads, they’ve got to be burnable…. You can’t change the way people use music. You try to do that, sales will plummet.”

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