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When Steve Jobs introduced the iTunes Music Store last April, he hailed the online music service as the first one “that doesn’t treat you like a criminal.” Apple Computer Inc.’s CEO scored a major coup when he managed to get the five major music companies to agree to put a good chunk — estimated at 20 percent — of their catalogs online. Users can purchase a song for 99 cents, download it to Apple’s iPod portable music player, burn the song onto a CD and share it with two other computers — as long as they’re the Cupertino, Calif.-based computer maker’s own Macintosh computers, for now. Apple promises a Windows version “later this year.” (The music companies make 65 cents on every song purchased.) iTunes is breaking new ground. It’s like “the meteor hitting the earth when all the dinosaurs were roaming,” says Blake Morgan, producer and president of Engine Company Records, which produces the music of artists like Rick Henrickson — who isn’t currently selling songs via iTunes, but like many artists on independent labels, would like to. The public, or at least the Mac-owning public, seems to buy the idea. Apple reported 1 million songs downloaded the first week back in late April; that has declined as the novelty wore off, but the company reported 6.5 million songs sold as of June 30. The potential market is huge, however. Charles Wolf, an analyst with the New York-based Needham & Co. Inc., estimates that online music stores could generate revenues of almost $3 billion in the U.S. — which would amount to a 20 percent increase in record company revenues. The iTunes alliance is in stark contrast to the music industry’s own efforts to sell music online. With their eye on piracy, the older services pressplay and MusicNet impose severe restrictions on downloads. These services typically require monthly subscription fees, at around $10, and allow users to listen to songs only when their PC is logged onto the Internet. Those services have not made much headway in the marketplace, with fans shunning them mostly in favor of free downloads from file-sharing networks like Gnutella and KaZaA. (Pressplay has been acquired by The Digital Media Co. and will be relaunched as the reborn, legal download service Napster.) Even the recently announced BuyMusic.com, while aping many of iTunes’s features, restricts CD burns or copying to portable devices on many of the songs it sells. So is iTunes the music industry’s antidote to the free sites? It’s still too early to tell, but the initial answers aren’t promising. According to Needham’s Wolf’s research, 60 percent of free music downloaders aren’t willing to pay a cent for music downloads. Industry GCs are skeptical too. “I know that everyone is saying iTunes is going to be the big thing, but I don’t see it. The economics are not there. Free can’t compete with pay, no matter what people say,” says an in-house lawyer at an independent record label, who requested anonymity. And Jim Cooperman, acting co-general counsel of BMG, worries that Apple’s copyright protections don’t go far enough, and could lead to a thicket of licensing problems. Some artist contracts, for example, bar “bundling,” or putting songs on a compilation with those of other acts, and CD burners typically produce “mix” albums. “What is personal use?” asks Cooperman. “How many burns should be permitted? If you permit too many burns, some rights holders may argue that it triggers payments to them.” Hedging their bets, the Big Five music companies signed only one-year contracts with Apple. But that $3 billion revenue potential may be too lucrative to keep at arm’s length for long.

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