With the decision to offer tens of thousands of songs online, the world's two largest record companies have steered onto an unlit road with no clear destination.
Universal Music Group and Sony Music Entertainment revealed plans this week to make much of their catalogs available for download at a discount, going far beyond the major labels' previous--and as yet unsuccessful--experiments in online distribution.
Although the move drew praise from recording artists, retailers and Internet music advocates, it also raised questions about the fate of full-length albums and the companies' ability to succeed online in the face of rampant Internet piracy.
Those questions are difficult to answer, even by industry executives involved in digital downloads for years.
The companies' plans came as the Department of Justice interviewed artists' representatives as part of an antitrust investigation into the major record companies' online ventures.
Sources said a team of federal officials looked for evidence of anti-competitive practices in the way the companies distribute music online--particularly through their own services.
The initiatives by Universal and Sony do not rely on the companies' jointly owned online distribution service, Pressplay. Instead, they use independent distributors Liquid Audio Inc. and RioPort Inc.
By making a large selection of songs available in a format that allows CD burning, the two companies are trying to offer consumers something close to what they've gotten free from such online file-sharing networks as Napster, Kazaa and Morpheus.
"So now the major labels' message to the consumer is: 'Download from us so that artists and songwriters get paid,' " said pop star Don Henley. "To me, the issue is how much do they intend to pay the artists. I suspect very little, if history is any gauge."
So far, artist representatives say, Universal labels are proposing fair royalty fees to acts with music sold through the new system.
Under the proposal, an artist signed to a contract with an 18% royalty would receive 18 cents on the dollar for every track downloaded--after reimbursing the label for recording costs, sources said.
That's significantly higher than what an artist receives under the CD model, which, after packaging and "free goods" deductions, would amount to about 9 cents per $1 single.
Universal plans to make as much of its library of songs available for downloading as possible, including new releases, starting later this summer.
The price is expected to be 99 cents per song and $9.99 per album, and buyers will be able to burn the songs they download onto CD--a major shift in the company's policy.
Sony said it will increase significantly the number of downloadable songs, cut the price 25% and enable burning. By letting consumers buy individual tracks, rather than bundling them all into albums, the companies could create new problems for themselves.
The industry has used singles--and lately, individual songs released only to radio stations--as a promotional tool to induce consumers to buy the full album. Labels rely on the higher price tag of an album to recoup the cost of promoting an artist and cover publishing fees, among other things.
Many consumers who use file-sharing networks say they have no other way to acquire the songs they want without paying for the ones they don't. But if the labels persuade those consumers to pay for downloadable tracks, they could undermine the bundling that's key to their business models.
"When you punt the bundle, that's when the trouble starts," said Jim Griffin, chief executive of Cherry Lane Digital, a Los Angeles media and technology consulting firm. "You cannot price a single low enough to attract fans to buy it, or high enough for the labels to cover the cost of developing an artist."
Several artists and artist managers said they were not worried about the effect downloaded singles might have on the album market. Survival in a single-heavy sales world might push artists and companies to produce better material, several managers said. It also could prove to be prudent for the industry, allowing labels to return to signing acts to modest single deals instead of costly long-term album agreements.
"I think it's a great exploratory step," said Scott Welch of Mosaic Media Group, which represents Alanis Morissette, OutKast and the Goo Goo Dolls. "It will force artists to create better songs and companies to sell better content. The fact is if we don't start making some concrete changes to give fans what they want, then all we're doing is rearranging the deck chairs on the Titantic."
Executives at several independent labels and online services that offer downloadable singles say there just isn't enough data to tell what effect the moves by Universal and Sony will have on CD sales.
Matador Records, an independent label that already has made much of its catalog available for downloading, said "it's really hard to quantify" the effect of downloads on CD sales, if any.
The only approach that seems to have worked is EMusic's subscription service, which lets users download an unlimited number of songs for a flat fee, said Patrick Amory, Matador's general manager.
If nothing else, the new system will resolve several ethical issues surrounding digital downloading, said artist manager Cliff Burnstein.
"One thing this will do is cut through the hypocrisy by giving people the option of whether they want to buy or steal music," said Burnstein, who along with Peter Mench runs Q-Prime, the agency that represents Metallica and the Red Hot Chili Peppers.
"We won't have to listen to anymore of that b.s. like 'I was forced to download the single because the album had only one good track on it,' " he added. "Now that you can buy your favorite single for 99 cents, what's the argument going to be? We'll get down to the truth, which is: 'I want it free. I'm too cheap to pay 99 cents....Screw the artists.' "