EU probes music giants on online ventures

For the grandees of the music industry, it seems that life after the taming of Napster is yet to return to the bed of roses it was before the online music file-swapping pioneer was conceived.

Having used the might of the US courts to reign in Napster for the time being, the music establishment is now in danger of being deemed the bad guy following their own recent advances into selling music online.

Last month, the European Commission began investigations into whether the world’s biggest record companies are abusing their dominant position to carve up the market for internet music sales between them.

Mario Monti, the European Union's competition Commissioner, ordered an enquiry into the activities of MusicNet and Duet, the rival online music ventures set up in April by Bertelsmann, EMI and AOL Time Warner, against Vivendi Universal and Sony respectively.

As a result of these ventures, the Commission fears that smaller labels could lose out on online sales, due to the market power shared collectively by the Big Five labels backing MusicNet and Duet, and has acted promptly in a bid to protect their interests.

In a move that was remarkably quick off the mark for any regulatory body, the Commission has acted before official complaints about either service were received. However, the Independent Music Companies Association has already lobbied the Commission.

‘These are important cases for the development of music services offered online to consumers and there are potentially a number of issues which merit close examination,’ Mr Monti told a consumers' meeting in Stockholm on 11 June.

What may have contributed to the Commission's fears is the open confession by RealNetworks chief executive Rob Glaser that he is trying to convince the Duet camp to use his firm's infrastructure, thereby giving RealNetworks the monopoly on licensed music downloads.

However, the complexity of investigating the ventures before they have even got off the ground has not been lost on the industry. Rebecca Ulph, an analyst at Forrester Research, said: 'It will be difficult to investigate because [the EU] don't know what they are investigating. They don't even know what services will be offered.'

Paradoxically, even though the EU is looking into whether the major labels are exploiting their dominance, Ulph thinks that more cooperation is precisely what the Commission will prescribe in the interests of the consumer.

'I suspect they will end up working together. Consumers don't buy on a label basis, but on a band basis. So they will have to operate largely together so they can sell in the way the consumer wants to be sold to,' she adds.

MusicNet's distribution will be via AOL Time Warner and streaming software group RealNetworks provides the infrastructure, placing it at the centre of the legitimate music download marketplace. Yahoo! will distribute Duet's service, and both ventures were originally set to launch this summer.

Meanwhile, the case continues between the Big Five and Napster, after the music-swapping start-up lost its appeal against their injunction to use their music on 25 June, and both parties are preparing for a full trial.

But, at the same time, the world's music giants are determined to take advantage of the legacy of Napster and the burgeoning consumer demand for music downloads that it unleashed, while tentatively leading the maverick start-up even further down the path of legitimacy.

To this end, and despite the ongoing lawsuit brought by the Recording Industry Association of America, Napster has signed up to MusicNet as a distributor, which will in turn force any record labels associated with Napster into exclusive online distribution via MusicNet. The deal also prevents Napster from signing a similar deal with Duet unless the rival venture joins with MusicNet.

Napster had originally planned its own paid service in conjunction with German media giant Bertelsmann, when Bertelsmann's E-Commerce Group offered a loan to Napster in October last year to create a legal and secure version of its service. This achieved, Bertelsmann would then be in a position to take a majority stake in Napster and drop its lawsuit against it.