Buy a CD, right off a set-top

New music channel also reckons to be a new kind of retailer of rock
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Cable operators will be singing a new tune if the team behind a soon-to-be-announced cable channel dedicated to music and e-commerce has its way.

The still-unnamed channel, which will eventually enable cable subscribers to buy entire albums via cable set-top boxes, is the brainchild of World Theatre, a company founded in 1999 and currently headed by Executive Chairman and CEO Robert Summer.

Among other positions, Summer has served as president of RCA Records and Sony Music International and was chairman of the Recording Industry Association of America. That experience and his connections helped him get the support of four top record companies behind the cable net.

That support means the rights to distribute complete music albums to paying viewers via hard disks incorporated into next-generation digital cable set-top boxes. Once the content is on the set-top, the listener will be able to send it to other devices in the home—and even burn a copy onto a CD.

"The concept that brought us together was the belief that the music industry was poised for transition and that there was a need for a solution," says Summer.

He is looking to launch the network next April or May, initially offering an interactive service for the 2000 generation of set-top boxes. The channel, which will offer rock-centric programming featuring star artists, is to be named "shortly,'' the company says.

World Theatre, based in Raleigh-Durham, N.C., with offices in New York, is mainly the holder of intellectual property that will make the channel's e-commerce possible. Its technology is designed to work across major interactive platforms and with major set-top boxes, such as the Motorola DCT-2000 or Scientific-Atlanta Explorer 2000.

Once more-advanced boxes are launched, the e-commerce opportunities will scale out from the purchase of a CD delivered via mail to the ability to purchase digital music files. The company is currently discussing carriage deals with MSOs, hoping to have at least one signed on by year-end and 10 million homes reached by the end of 2003.

"While we haven't finished negotiations with the MSOs, there is clearly a balance between the entertainment channel being paid for by the MSO and the channel paying for carriage," Summer says. "That mix is changed by the fact that we're able to offer some piece of the transaction revenue to the MSO. We think it's also why operators will be supportive of the underlying business."

The deals with the record labels are non-exclusive. That could spark the headache Intertainer ran into with video: Once the movie studios saw the potential for real business, they did it themselves.

But Summer is confident that the value proposition offered by the new service will prevent that. Some patents also might help.

"The agreement becomes exclusive by virtue of our having the rights and the know-how," he says. "We also have a broad base of patents currently gestating in the patent office that support that our early vision resides with World Theatre."

The business challenge will be to keep the service running when it relies substantially on profit margins related to the sale of music. The company has $30 million in financing now, and the revenue model does have an advertising component. But it's the sale of music, and the split of revenues between cable operators and World Theatre, that will define success.

"Ultimately, our business of transferring data will require a set-top box with a hard drive," says Summer. "We're working closely with operators so we can understand their timetable for deploying those types of boxes. Initially, the viewer will have what we believe is highly attractive programming with the ability to buy any CD."

Rob Barnett, executive VP of the new channel, who spent 12 years at MTV Networks and was VH1 VP of programming, believes the interactive elements and the proprietary IT technology behind the channel need to be as simple as an ATM. "We're leading with entertainment but providing the cable operators ready-made ITV functions that keep people focused on the television set," he says. "Viewers can click and get immediate music information, free samples of any track on any album, and the power to click and buy any album."

The company's research, he says, shows people want a lot more music and music variety than currently available from the likes of MTV or VH1. "Interactivity makes the content much more sticky, and the complement on the series side is based more on an HBO model than an MTV model [with] a smaller amount of original shows done at a dollar amount a little heavier than the budget for shows that are cranked out."

The digital sale of music goes beyond tech issues: Pricing is a top concern for consumers. World Theatre says, if viewers purchase four or five CDs per year through its service, it will succeed. But, if digital product pricing is too close to current physical CD costs, consumers could balk.

Summer finds it improbable that the record industry will misprice the digital offerings; also, the service is for digital downloads of whole albums, not tracks.

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