EMI contemplates radical digital download strategy

EMI has long maintained that its relatively weak digital music sales were an accident of geography. The London-based record company has, despite repeated efforts to make a splash in the US, remained the smallest of the "big four" in the most developed market for downloads.

As music executives gathered in Los Angeles for the Grammy Awards, however, the question being asked by many was whether the industry's digital laggard was about to become the first to adopt a digital strategy many of them have dismissed as too radical.

After Steve Jobs, chief executive of Apple, challenged record labels last week to make music available without the digital rights management (DRM) protection for which his iTunes online store has been widely criticised, EMI has unexpectedly emerged as the company most likely to pick up the gauntlet.

EMI has not commented, but executives from leading online music retailers and internet radio sites say it has been holding discussions since December about making some or all of its catalogue available in the DRM-free MP3 format.

"They've been talking to us and other significant digital retailers," one executive told the Financial Times. Although these are thought to include companies such as Real Networks, eMusic and Last.fm, "my understanding is Apple's not among them", he said, adding that EMI's efforts to "create a counter-balance" to the dominant iTunes platform may explain Jobs' about-face on DRM.

For EMI's part, the timing may be related to its deteriorating financial performance. "EMI is under a lot of pressure to do something in order to make up for the fall in CD sales," another online retailer said. Releasing music in a format which could make it more accessible but which could also make illegal copying even easier, however, "is one of those big hairy scary decisions".

Haphazard

Several companies said EMI was wavering about the negotiations. "It has been a haphazard process. They've been blowing hot and cold," said one. Another executive said talks had "cooled off" since Jobs' open letter appeared. Online retailers have also had misgivings.

The approach would reassure doubters within EMI about its high-risk repositioning and provide welcome cash at a time when weak album sales are being exacerbated by a costly restructuring, but EMI's potential online distributors appear to have balked at the idea.

Although some sites appear willing to offer advances that would be recoupable against actual sales, most have refused to hand over fixed sums of cash with no guarantees if sales disappoint. "In the past, the Beatles demanded that Microsoft, Apple and Real pay them $15 million upfront," one retailer said. "But that's not the sort of money that we can work out."

The Beatles may prove to be another sticking point in negotiations. Despite hopes that a truce between the band's record label and Apple could see the Beatles catalogue become available online for the first time, the surviving band members could be wary of DRM-free digital distribution. No one really knows whether giving up digital protection will lead to higher sales of legitimate downloads to offset the greater risk of piracy, Brad Smith, general counsel of Microsoft, said last week.

However, those in favour of MP3 argue that the music industry has already been picked clean by piracy, with its entire catalogue already available on illegal file-sharing services whether they like it or not. Companies such as EMI may have little left to lose, the lawyer said. "That horse left the barn in a herd a long time ago."