BMG Boss Calls Digital Downloads ‘The Holy Grail’

In a keynote address Thursday to the Variety Interactive Summit in San Diego, California, Bertelsmann Music Group (BMG) president and CEO Strauss Zelnick left no doubt that the Internet has become an unstoppable force in the music industry by labeling distribution via digital downloads as “the holy grail.”

“The explosion of consumer interest from digital downloads will be the best thing that ever happened to retailers,” Zelnick added.

Zelnick also shrugged off industry fears that emerging technology will cut into recorded music sales and that downloaded music is difficult to protect, comparing the trepidation about the Internet to fears that the movie industry had about VCRs when they first arrived.

“The VCR ended up creating new enthusiasm for the film market as a whole,” Zelnick said. He added that the Internet “will do the same for the music business. More customers are good for us. This is real. It’s not going away.”

Copyright Issues Not a Block

Many industry fears of downloadable music surround issues of protecting copyrights in a distribution system that makes it easy for consumers to copy product.

“Security is important, but it’s not the be-all and end-all,” said Zelnick. He added that copy protection is not a problem that “can’t be defeated by copy protection.”

“CDs still aren’t copy protected,” he added.

Music and the Internet

Zelnick also noted some music industry trends to watch:

In two to three years, CDs will be replaced by computer chip-based portable devices that store music.

An Internet downloading storage standard will not emerge.

Music business consolidation will continue, since it provides cost-savings in the face of a maturing CD market.

Traditional media players with strong revenues and income will win the Internet game. Zelnick also noted that the industry is not sufficiently keeping up with how consumers use the Internet.

Rumors Abound

Zelnick did not comment on reports in The Wall Street Journal and The Financial Times that BMG parent Bertelsmann AG is interested in a partnership with Sony Corp. and is also considering various ventures for Internet music distribution.

Other rumors suggest that the German media giant is interested in a deal with Seagram’s Universal, which holds second-place in music sales.

Bertelsmann officially denied that the company is actively in negotiations with other music companies. Following the Time-EMI merger, the company is now ranked as the number four player in the industry.