RealNetworks signs 3 majors to new service

Major record labels Warner Brothers Music Group Inc., BMG Entertainment Inc. and EMI Group PLC said Monday that they will license their music to RealNetworks Inc. (RNWK) for use on Internet-based music subscription service called MusicNet, in exchange for minority stakes in the service.

RealNetworks, like nearly every other digital media company, has been in talks with the labels for more than a year. The Seattle-based streaming-technology company would use music from the three labels on a non-exclusive basis, and would license its platform to other companies seeking to sell music-subscription services under their own brands. The licensed music would initially be available on RealNetworks and AOL Time Warner Inc.

The explosive popularity of the controversial Napster Inc. file-swapping service has underscored the widespread demand for digital access to music. The music industry - online and offline - has grappled with how to take advantage of that demand and build legitimate and profitable business models for digital distribution, such as those that include paid subscriptions. This multiple-label subscription service may move the industry closer to answering these questions.

Andreas Schmidt, the CEO of Bertelsmann AG, said at a conference in Barcelona that Napster would receive licensing to three major labels by July 1.

The news comes as the Senate Judiciary Committee prepares for its second hearing on online entertainment and copyright law. Some members of Congress have criticized the major record labels for their glacial pace in resolving copyright and royalty issues and in issuing licenses for digital music distribution.

Over the past year, RealNetworks, a pioneer in streaming technology, has begun to resemble a media company. Last summer it launched a subscription service called RealPlayer GoldPass that gives subscribers content that includes movie trailers, downloadable games and sportscasts, for $9.95 a month. This week the company announced a deal with Major League Baseball that gives subscribers live audio Webcasts of all MLB games. The service has about 175,000 subscribers.

RealNetworks pays license fees to its content providers for the GoldPass service. The company is offering each of the three labels a minority stake in the planned MusicNet service in return for use of their content.

Bertelsmann, the parent of BMG, has already pledged to license the BMG catalog to Napster if it succeeds in developing a secure version of its file-sharing platform. AOL Time (AOL) Warner has been developing a streaming subscription service led by former BMG executive Kevin Conroy that is expected to launch this year. Universal and Sony (SNE) , which have been working on a subscription service code-named Duet, have indicated that they plan to add a third partner to the venture. EMI, meanwhile, signed a deal with a Dallas-based startup called Streamwaves. That service was expected to launch during the first quarter, but it appears to be running behind that schedule.

A big sticking point for all of the proposed subscription services is getting licenses from music publishers, which have yet to resolve issues surrounding royalties for digital streams vs. downloads, among other things. Ironically, Universal was sued for copyright infringement by the music publishers late last year over the label's subscription service available through its Farmclub.com operation.

MusicNet and Duet are likely to have access to similar amounts of music if RealNetworks' signs licensing agreements with Warner, BMG and EMI.

Schmidt acknowledged that Duet would be a direct competitor to MusicNet.

Kristi Essick contributed to this report from Barcelona.

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