RealNetworks’ Music Deal Strikes A Muted Chord

A lot can happen between now and when the service is available sometime later this year, and many important details remain undetermined. But it sure seems as though online multimedia software provider RealNetworks just become a key player in the music industry’s bid to monetize the Internet.

Three of the world’s five major record labels announced on Monday that they are working with RealNetworks to launch a subscription service allowing music lovers to download songs from the Internet.

The financial benefits to RealNetworks are potentially vast but primarily unknown, thus causing investors to greet the news with muted enthusiasm, as RNWK shares rose a modest 7.1% to $7.56. Since the current market will make it difficult for RNWK to hang onto Monday’s gains, never mind add to them, this should give less impulsive investors an excellent opportunity to assess the deal from the sidelines in coming months without missing a good entry point.

Here’s what we know:

AOL Time Warner, Bertelsmann A.G. and the EMI Group will take minority stakes in a RealNetworks’ spinoff called MusicNet, created last year. RealNetworks will retain 40% of MusicNet.

Those three music companies own anywhere from 40% to 60% of available recorded popular songs. (Sony Music Entertainment and Vivendi’s Universal Music Group own most of the rest.)

MusicNet will sell music not on a retail level, to individual users, but rather act as a licensing platform to third parties such as RealNetworks itself, AOL Time Warner and even Napster. Thus RNWK’s role will be that of a wholesale distributor.

The arrangement is not exclusive. Other companies will be able to distribute music from major labels. Indeed, Sony and Universal Music Group plan this summer to launch their own joint subscription service, called Duet. And Microsoft is slated to announce some kind of Internet music deal this week.

Here’s what we don’t know:

What will be MusicNet’s take of the subscription revenue? This gets right to the bottom line, and history shows that the major music labels aren’t inclined to take on equal partners. Expect MusicNet to be treated as what it is — a distributor. That means a small piece of the action and plenty of pressure in the form of other potential distributors.

What will be the subscription model? A monthly fee makes the most sense for consumers, but again, we’re dealing with the music industry, which excels at one-sided deals. Longer-term subscriptions are entirely possible, which could turn off many already disaffected (read: Napsterized) music customers.

Also, will there be limits to how many songs a subscriber can download? You bet. The music industry isn’t in the business off offering bargains.

Can MusicNet get agreements from music publishers such as the Harry Fox Agency or performance rights organizations such as ASCAP and BMI? With three of the major labels on board, the answer is “probably, but it won’t be cheap.”

Will MusicNet be able to develop technology that will allow songs to be easily accessed by users, but still protect against piracy? We’ll find out.

Finally — and most importantly — how easily will consumers abandon the practice of downloading songs for free from Napster and its variants to embrace a paid-subscription service? Given that consumers under age 25, the music industry’s primary audience, are 1) the most resistant to paying for songs they can get for nothing, and 2) the most adept at finding free song downloads on the Internet, this is the make-or-break question.