When Online Got Off Base

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To hear Cuban tell it, the labels are terrified by online music distribution because they have no idea how to make a penny from it. The majors are run by dinosaurs so frightened of extinction--that is, getting fired--they're reluctant to reduce CD prices (each disc costs about 68 cents to make and $20 to buy) or make it easier for consumers to buy individual songs than complete albums online. Rosen keeps insisting consumers are happy to pay exorbitant fees for CDs--"If Hilary wants a complaint about CD pricing," Cuban says, "she has one from me paying 22 bucks for a DMX CD"--but even the RIAA's Web site makes it perfectly clear that the cost of manufacturing discs keeps dropping. Which is why Napster and its kin are the perfect solution for consumers who have no other way to fight back: They'll gladly (or rightly?) take for free what they've been overpaying for for years.

Which is why Cuban suggests the labels, major and independent, create a subscription service available through AOL (which owns Warner Bros., Elektra and dozens of other labels), Earthlink and all other Internet service providers and broadband providers, who would offer music content the same way, oh, DirecTV provides network programming. If you want all the Linkin Park you can stomach, he says, then simply have your ISP add an extra buck to your monthly bill. The label would take 25 percent, the ISP would get 25 percent and the band would take 50 percent--which, Cuban figures, would make the band a nice hunk of change, since it eliminates distribution, the need for promotion, retailer returns and other risky variables.

Cuban's sentiments are echoed in an April 2001 music-industry overview published by Lehman Brothers, which says, in so many words, that the only way online music will be profitable is if it's part of a bigger service, not the whole shebang.

"The labels are religious that [downloading music] is stealing," Cuban says. "You can't get anywhere profitable from that position."

Such a scenario doesn't sit well with Andy Schuon, the CEO of pressplay, a subscription-based distribution service funded by Vivendi Universal and Sony Music, which have made only small portions of their current and back catalogs available for streaming and downloading. (It also offers limited selections from the EMI catalog, as well as a handful of indie labels.) Schuon, who created for MTV the show that would become Total Request Live, insists such an all-you-can-eat scenario won't work, since Linkin Park's 12-song Hybrid Theory retails for about $20--meaning, people are happily paying more than a buck per song, essentially, and the band couldn't exist on the model Cuban proposes.

But Schuon's thinking like a label exec: Yes, Hybrid Theory may sell for $15-$20 at a retail outlet, but the band's only getting some 10 to 14 percent of each record sold, with the rest of the money going to support other bands, pay for distribution and promotion and line execs' silken pockets. In the online world, most of those factors are eradicated; the money made from online sales is pure profit. If that: The Los Angeles Times recently reported that bands are getting less than 1 cent from each song downloaded off pressplay, which Schuon says he can't confirm or deny since, he says, accounting practices are handled by the labels affiliated with pressplay.

"The record companies are the bank, and they're putting up all the money up-front," Schuon says. "Just like anybody else, whether you wanna bash the record companies or not, they're the bank, and they put up the money, and generally the person who puts up the money gets to keep a large portion of it, and they deserve to get it back first. That's just how it works. If you and I had a business idea, and we wanted to go to a venture capitalist or to a bank to get the money, we might get to keep a little bit for ourselves, and they would get all the money."

Likely, pressplay will not soothe the music industry's downloading blues; it's a beginning, and barely that. And Cuban, of course, is quick to dismiss it and AOL Time Warner and BMG's counterpart, MusicNet, which doesn't even allow users to download and burn copies of its songs--rendering it, essentially, useless to people who once used Napster. But what can you expect from an industry that treats its artists like slaves and its consumers like suckers who are just delighted about getting ripped off?

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Robert Wilonsky
Contact: Robert Wilonsky