Music Publishers, Labels Near Deal on Subscription Services

Music publishers and major record labels are closing in on a deal to authorize online subscription services, potentially opening a new era in music distribution.

Online subscriptions are the labels’ long-awaited response to the wildly popular--and arguably unlawful--networks that let consumers make free copies of hit songs through the Net. But the labels couldn’t move forward without permission from the publishers, which are entitled to royalties when their songs are reproduced.

The deal, which could be completed as early as this weekend, would allow the labels and their partners to launch Internet-based services without fear of being sued by the publishers. But it wouldn’t set the publishers’ royalties, leaving that issue to be settled through future negotiations or arbitration.

The publishers wouldn’t leave the bargaining table empty-handed. The deal, which would expire in two years, calls for the labels to pay the publishers an advance of $1 million, sources said.

Spokesmen for the two sides--the Recording Industry Assn. of America, which represents the labels, and the Harry Fox Agency, the licensing arm of the National Music Publishers Assn.--declined to comment.

The deal was all but signed last month when terrorists attacked the World Trade Center and the Pentagon, setting in motion a chain of events that pushed the two sides apart. But the talks got back on track this week, sources close to the labels said, and a tentative agreement was reached Thursday night.

Publishers and labels still were reviewing terms of the proposal Friday.

The first services to benefit from the deal would be the two ventures most closely associated with the five major record labels: MusicNet, which is jointly owned by BMG, Warner Music Group, EMI and RealNetworks, and Pressplay, a joint venture between Universal Music Group and Sony.

Beyond that, several executives at online music companies said the lack of a deal between the labels and publishers blocked a host of companies eager to build subscription services around the labels’ songs. “That’s obviously the linchpin that’s holding this whole industry up,” said Tuhin Roy of Echo Networks Inc., an online music service.

The two sides have been under considerable pressure to reach agreement, not just from online services but also from Congress. The House Judiciary Subcommittee on Courts, the Internet and Intellectual Property was slated to hold hearings in mid-September and early October on the music industry’s approach to the Internet, and legislation had been introduced to make it easier for unaffiliated companies to obtain licenses from the publishers and labels.

As the first hearing approached, the two sides appeared to be on the brink of a deal. But the terrorist attacks led the Judiciary Committee to postpone the hearings at least until next year, effectively lifting the deadline for an agreement.

Shortly thereafter, two unrelated events caused the publishers to reconsider their negotiating positions, several sources in the online music industry said. The publishers struck a deal Sept. 25 with Napster Inc., the Redwood City-based song-sharing service, that provided much higher royalties than they received from CD sales. The next day, a federal judge ruled that Universal Music had violated the publishers’ copyrights by failing to gain permission for an online jukebox service.

The two sides appeared to drift apart, leading Pressplay to postpone its planned October launch until later in the year. In particular, the two sides split on whether the labels could extend their agreement with the publishers to unaffiliated services, such as Echo Networks.

The publishers eventually agreed to let the labels extend their licenses, and the two sides settled on the terms they’d been poised to agreed to before the Sept. 11 attacks, two sources at the labels said.

The two-year agreement could help the online music industry regain some of the momentum it has lost. But James Glicker of FullAudio, an online music-distribution service, said the deal doesn’t make it any easier for upstart services to set prices and build healthy businesses.

“They haven’t agreed on the most essential point, which is the [royalty] rate,” Glicker said.