Case Study: MusicNet

Imagine you're an e-commerce entrepreneur about to launch your Web business. You survey the competition, only to discover a terrible truth: the product you're selling is already widely available online for free. Worse yet, instead of the restrictions you must place on your product's use (due to legal concerns), your competitors offer users unrestricted use.

Thats what is confronting MusicNet, an online music distributor backed by Bertlesmann, Warner Music, EMI, AOL and RealNetworks. As free services like Kazaa were flourishing, MusicNet was laying the foundation. Now, with spiffier content, licensing agreements from all five major labels and an improved technology platform, the service is ready, says MusicNet general manager Ellie Hirschhorn. This year is "the real starting line in terms of measuring and observing and experimenting and ramping it up," she says. "Not just putting together the building process but unleashing it to the consumer."

MusicNet also faces competition from a bevy of legal services: Pressplay, Listen.coms Rhapsody and MusicNow are among the sites experimenting with ever shifting price plans. But MusicNet, with AOLs recent announcement that it will offer the service to its 27 million members, may represent the labels' best chance at mass-market acceptance.

Ever since the first early adopter downloaded an MP3 about 10 years ago, the music industry has grappled with the issue of Internet distribution. Now, after a year in which CD sales fell 9 percent, 2003 is an important year for the labels e-commerce efforts. Some might say critical.

A Well-Financed Underdog
Its unlikely that an alliance comprised of major record labels, AOL and RealNetworks would be an underdog, but indeed MusicNet is. The service faces no shortage of challenges.

The major labels are so late to the game that consumers have had years to get used to free music downloads. Sales of blank discs, often used to burn CDs with music downloaded from free services like Kazaa, now surpass that of pre-recorded CDs.

Yankee Group analyst Ryan Jones sees MusicNet, Pressplay and many of the legal online services as having two major flaws. "One is that they are expecting consumers to change their behavior far too radically either from their free music habits or from their retail purchase habits," he says.

The second is that "They don't isolate the consumer enough from the business rules that these organizations are subject to," he says, referring to the complications resulting from digital rights management (DRM). The labels feared that making their inventory available for sale online would be like opening the corporate treasure chest for pirates to plunder. But while DRM allows MusicNet to embed 'rules' in a music file to deter unauthorized duplication, it restricts how consumers can use music files. "The end result is that it's too complicated," Jones says.

Ready to Rock
With the popularity of free downloaded music, some might compare MusicNets efforts to selling snow to Eskimos, but the service has some powerful advantages.

Part of MusicNets strategy lays in leveraging its high profile distribution outlets. MusicNet has made a decision to not be a destination; users can't download music directly from MusicNet.com. Instead it's a wholesaler, forming B2B relationships with online outlets that already have consumer traffic.

"MusicNet does not have to go about recreating a brand from the start," Hirschhorn says. "We are riding on the brand and market relationships of our excellent distribution partners such as AOL, Real and others. They already have a deep and loyal entertainment connection but they also have credit card and billing relationships already established." This also means the retail pricing of MusicNet is up to its distributors.

So the service will have distribution, but can it compete with free? Hirschhorn points out that, in contrast to the free services, MusicNet is "virus free, its safe, youre guaranteed high speed bandwidth." You have excellent meta-data, meaning when you search for a track you get the track you wanted, she says. "For many consumers, for the right price, its worth getting that speed, safety, accuracy and entertainment experience."

With its deep pockets backing, MusicNet is much better equipped than free services to offer a complete entertainment experience. MusicNet plans on one-upping the free services with savvy cross-selling techniques and what Hirschhorn calls push technology, "which is everything from playlists to charts to features you name it," she says. The service will offer engaging content that helps users discover music they weren't even aware they wanted.

MusicNet, for example, could offer playlists programmed by celebrities. A user might decide to look at Coldplays playlist to see what the band is listening to, Hirschhorn says. "So theres a way to build out the discovery process to the 250,000 plus tracks we have."

As for digital rights management, for all of its complications it may prove effective. As Yankees Jones points out, "There are some strong sociological issues at work here. Weve seen it proven to some extent in the video industry, if you put even a little hurdle to the average users copy intentions, they wont do it. Thus far we havent seen any hurdles in the music industry, so I think thats something thats going to be worked out in the long run."

Profit In A Partial Victory
A record company executive was recently quoted to the effect that if all the users of free services paid a dollar for each track they pirated, that would generate $5 billion a month in revenues. While that may be an exaggeration, this idea points the way to a possible winning strategy for MusicNet.

The labels dont need to defeat the likes of Kazaa to turn the Internet into an e-commerce goldmine or at least reverse the Internets negative effect on the labels bottom line. If MusicNet can lure enough users to its paid service, it can turn a handsome profit even if free services continue to exist.

Achieving that wont be easy. It will require continued trial and error with pricing and quality of offering, as well as a massive marketing effort to woo consumers away from free. But, given how critical the online sales channel is for MusicNets backers, if its possible to make a profit from music e-commerce, theyll do it.