MSN, LABELS CAN'T AGREE ON SUBSCRIPTION LICENSING.

Navigation: Main page

Author: Bruno, Antony

DIGITAL MUSIC

The much-anticipated debut of a Microsoft/MSN music subscription service is on hold as negotiations between the computer giant and the major record labels have broken down over pricing.

According to several label sources, Microsoft informed them it is unhappy with the licensing model established for other subscription services and wants a better deal.

Online subscription services like Napster, Rhapsody and Yahoo Music Unlimited pay labels a per-user minimum of $6-$8 per month. Microsoft reportedly was negotiating for a lower rate, which labels resisted.

A Microsoft representative declined to comment. It is unclear whether this is an attempted power play by Microsoft or simply a signal for a re-evaluation period. No timeline was given for talks to resume.

However, a source close to Microsoft says the company is not abandoning its interest in a music subscription service, and implies the ball is now in the labels' court.

"There's no question Microsoft is going to get into this business," the source says. "It's just a matter of when. It's all about the labels right now."

Sources at the major record companies, however, call the dispute over royalties a red herring.

"For Microsoft to say the economics are not feasible is disingenuous," one label source says, noting that Napster, Rhapsody and Yahoo all manage to operate with the same financial terms that Microsoft was offered. "It seems amusing that Microsoft can't figure out a way to make it work. They could buy us tomorrow and we'd be just a rounding error on their balance sheet."

Yahoo set the online music subscription service world on its head in May when it started offering an unlimited portable service for only $5 per month, undercutting competitors Napster and Rhapsody by $10 a month. Yahoo is able to subsidize the service through advertising revenue, and labels say Microsoft should be able to do the same.

Microsoft currently has the only digital rights management system used for portable subscription services. Its MSN portal claims more than 400 million unique visitors per month worldwide, and the company owns the most widely used operating system and Internet browser on the market.

Last spring, Microsoft offered a 5-for-1 track giveaway to attract new users to the MSN Music Store, indicating its willingness to subsidize digital music.

As such, some feel the delay is more likely a result of internal Microsoft politics. The company recently reorganized its business into three divisions. The MSN Music Store now falls under the Entertainment and Devices division, led by Xbox chief Robbie Bach.

The majors have met Microsoft's withdrawal with mild surprise and a collective shrug. The MSN Music Store is largely considered an also-ran in the digital music space, having failed to have a significant impact against such competitors as Apple Computer's iTunes Music Store.

"So far, Microsoft has been notoriously bad at all things dealing with music online," another label source says.

~~~~~~~~

By Antony Bruno