Recording industry trying to create new business model

LOS ANGELES -- When you're not inclined to give your product away for free, make your customers believe they're getting something for nothing.

That's the thinking behind some of the offerings music fans may see this year as the recording industry scrambles to offset losses from plunging CD sales and find new sources of revenue when many consumers simply download music for free.

Among the business models music fans are likely to see more of: music subscriptions bundled with the price of Internet access, and services like Nokia Corp.'s upcoming Comes With Music, which would give users of select mobile phones a year's worth of unlimited access to music, for no extra charge.

Music companies also are expected to license songs for more ad-supported Web sites like www.imeem.com, which lets visitors watch videos or listen to full-length tracks posted by other music fans for free.

Major recording labels, long-criticized for being too slow in adapting to changes brought by the Internet over the last decade, are under pressure to explore new ways to get music fans to pay for music, leading to more choices for consumers.

In 2007, the recording industry arguably took the boldest steps yet.

After years championing the necessity of copy-protection safeguards on digital music, three of the world's biggest recording companies agreed to license their music for sale online as unprotected MP3 files. Many analysts expect the last holdout, Sony BMG Music Entertainment, to follow this year.

That's an important step for music lovers hesitant about buying digital music because songs are generally tied to specific devices -- for example, Apple Inc.'s iPod players can't play copy-protected music not bought at Apple's iTunes store.

Recording company executives who once saw new technology as the enemy seem to now see it as a lifeline.

The major labels -- Sony BMG, Vivendi SA's Universal Music Group, Warner Music Group Corp. and Britain's EMI Group PLC -- declined to comment.

In a recent memo to employees, Warner Music chairman and chief executive officer Edgar Bronfman Jr., touched on the importance of developing new areas of digital music. The company's stock price has plunged more than 75 percent over the past year.

"There's no denying that WMG and the industry as a whole have been struggling for almost a decade now with the challenges and opportunities that the digital space presents," Bronfman wrote. "The recent trend of dramatic changes in the recorded music market will continue. ... And, though it's a cliche, it's a cliche because it's true: technology will also provide us with new opportunities."

Bronfman alluded that the industry this year would pursue a way to "monetize the unauthorized flow of our artists' audio content on the Internet."

That could involve striking deals with Internet service providers to help compensate labels for the millions of songs swapped online.

Another approach involves Internet service providers offering a pricing tier that comes with unlimited music downloads or faster download speeds that might be attractive to computer users who download a lot of music files.

Last year, Universal Music began testing an unlimited music download service in France offered through broadband provider Neuf Cegetel.

Then there's Universal Music's Total Music, which is expected to extend what Universal is doing with Nokia's Comes With Music to everything from personal computers to digital music players, with the cost of the music built into the price.

Internet users collectively download about 1.1 billion songs from file-sharing networks every month, according to BigChampagne. So the music industry's success could be tempered if those people see little value in digital music without copy-protection strings or services offering feels-like-free music.

Sales of digital tracks at iTunes and elsewhere surged 45 percent last year compared with 2006, according to Nielsen SoundScan. But digital music still accounts for a small portion of overall music sales, and U.S. album sales in CDs and other physical formats dropped 15 percent during the same period.

Combined, the number of albums sold declined 9.5 percent.

"The industry for the last several years had hoped that eventually the pain would subside and they expected that eventually the market slowdown would level off," said James McQuivey, media and technology analyst at Forrester Research.

Instead, he said, the recording industry saw CD sales falling even faster.

In a research note issued in November, Pali Capital analyst Richard Greenfield suggested retail floor space for CDs would probably shrink this year by as much as 30 percent.

Like many other music retailers, Related Companies' Virgin Megastores North America has diversified its product offerings in recent years, adding clothing, novelties, electronics and other items to help offset CD sales declines.

After two years of moderate declines, Virgin's same-store music sales rose 5 percent last year compared with 2006, while overall sales jumped 15 percent. CDs now represent only 40 percent of overall sales, said Kevin Milligan, Virgin's vice president of product and merchandising.

Despite mixed results trying to breathe life into the CD by adding video and other multimedia extras, the recording industry will roll out a host of new variants to stores this year.

One, dubbed the CD-View Plus, lets customers access a trove of additional content when they go online. Another is the digital gift cards, which enable users to download specific albums, something Starbucks already sells.

"There's a lot of experimentation going on," said Jim Donio, president of the National Association of Recording Merchandisers, a trade group that represents hundreds of retailers, record labels and other music-related firms.

Music fans are also likely to see more albums released in multiple versions, such as pricier deluxe or limited-editions, and more albums pre-loaded onto small, portable storage devices such as thumb drives attached to rubber bracelets.

Consumers may also see a bigger push this year for CD singles, dubbed "ringles," that include mobile phone ringtones and other digital content, Milligan said. Universal Music and Sony BMG, which is a joint venture of Sony Corp. and Bertelsmann AG, are among the labels that have plans to release ringles, he said.

"Everyone is looking for a formula that will provide healthy growth for the industry, which I believe will come," Donio said. "The other side of this will be loaded with new kinds of opportunities, for arguably a marketplace that probably doesn't look anything like it looks now."