Warner Music: with EMI bid still up in the air, next stop Russia

Is it possible to run a profitable, legit business in a market that's already established a thriving but illegal trade in the same item? If you look at the music industry, and how it's tried to make money out of Internet music distribution in the wake of successful sites predicated on piracy (and of course cheaper/free content), it's not entirely impossible. But it may take a very long time, if it ever happens at all.

In the latest attempt by Big Music to create a market in a thriving but illicit environment, yesterday Warner Music and Sony BMG announced they would team up with Russian firm Access Industries to start a wholesale digital music distribution business in Russia and former Soviet-bloc countries.

Digital Access, as the JV will be called, will aim to create a new distribution channel for legitimate digital music, including wholesale deals for full-track downloads, ringtones and video clips. It anticipates its customers will be online music portals, mobile operators, rights owners and other content providers; and it doesn't have plans to launch its own retail operation.

The news comes at a time when the Russian digital music industry is thriving, but at a controversial cost. Sites like Allofmp3.com, owned by Media Services, have been hugely popular for music downloads, not just in the region but worldwide—it sells music by the megabyte, which works out to a fraction of what a track would cost on a site like iTunes. This has meant the site usually ranks as number-two or number-one for music downloads in different markets.

MediaServices says allofMP3.com has a license to operate from the Russian government, but in recent months, it has come under a lot of pressure to close down its international operation. Major credit card companies will no longer allow payments to the site, and it appears to be blocked in many countries. (In London, where I live, I cannot access the site or its mirror domain, allofMP3.ru.)

But like many a black market Lazarus, MediaServices has launched several other sites to siphon new business. Among them are the punny allTunes and mp3Sparks. These do allow credit card purchases and seem to work on the same business model as allofMP3.com. And I can access them in London.

Big music's domestic partner, Access Industries, is an interesting company to watch. It may hold the key for Western labels to at least get a foothold in the market, rather than continue to be taken for a ride by the likes of MediaServices. Access Industries is controlled by the uber-influential Russian-American billionaire Leonid Blavatnik, who also has investments in oil, aluminum, coal and telecoms (ie the typical portfolio of Russian ex-state commodities held by most oligarchs). He is on the board of Warner Music and owns Russian music labels Soyuz and Nikikin Records, which will also join the venture.

The plan is to launch Digital Access in the 4th quarter of this year.