The scope of a yearlong download promotion planned between Pepsi and Amazon, Billboard has learned, is among several developments forcing further consideration by Warner Music Group (WMG) and Sony BMG Music Entertainment to follow EMI and Universal Music Group's lead in distributing music in the MP3 format.

News of the Pepsi promotion, which is expected to be announced Feb. 3 during the Super Bowl, coincides with an ultimatum from Wal-Mart asking major labels to supply walmart.com with their music in MP3, sources say. Labels, meanwhile, say they have been watching the success of an MP3 test UMG began in August; the major continues to allow the sale of 85% of its current catalog as MP3s. Sources say UMG is on the verge of permanently embracing that digital format. But a source close to the testing insists the decision is still up in the air while the company awaits conclusive results from the trial, which are due in mid-January.

Meanwhile, Hollywood Records has joined the list of major-distributed labels testing MP3 at Amazon and walmart.com. The company has supplied 30-40 titles from its mammoth catalog in the MP3 format. A check of those sites shows the latest albums from Atreyu and Grace Potter & the Nocturnals on the Hollywood label available in the MP3 format, though they are not available at iTunes.

EMI began selling its music in MP3 in June. WMG and Sony BMG Music Entertainment both declined to comment, but have continued to publicly maintain their separate stances in favor of using digital rights management for downloads.

Sources say Sony BMG is now considering an MP3 test. The company was initially steadfast against MP3 and wouldn't allow its independent distributor, RED Distribution, to engage in negotiations on behalf of its labels with Amazon when the merchant was trying to set up its MP3 download store. But Sony BMG management relented and let RED become involved in those negotiations. The parent company, however, refused to supply Amazon with its catalog in the MP3 format.

PEPSI FREE

Pepsi's track record with download giveaways may be motivating labels. According to sources, Pepsi will feature a download promotion on the inside of 5 billion of its soda bottlecaps. Sources say Pepsi customers will need to collect five caps in order to exchange them for a download; this yields the potential for 1 billion redeemable tracks. A Pepsi spokesperson declined to comment.

Pepsi's first stab at giving away free music downloads, which was conducted in partnership with iTunes in 2004, was also promoted via a highly visible Super Bowl campaign. It resulted in 5 million people downloading free songs in the space of three months-5% of the 100 million tracks that were offered.

While the 5 million digital tracks redeemed in the campaign reportedly fell short of the 25 million target redemption rate, that was in the early days of digital distribution, when Apple was reporting selling digital tracks at a rate of 2.7 million per week.

Since then, with the widespread success of the iPod-which is likely to be even more popular come Christmas-digital track sales have grown by 416%, from the 142.6 million tracks scanned in 2004 to the 735.4 million tracks accumulated so far this year, according to Nielsen SoundScan. Based on trends of the past few years, Billboard estimates that digital download sales could increase by another 5 million per week next year.

In the week after Christmas in 2006, track sales totaled 30.1 million, a 51% increase from the 19.9 million scanned in the corresponding week of the previous year-which was, in turn, a 197% increase over the 6.7 million scans generated during the corresponding week of 2005. Digital downloads generally increase drastically after consumers receive iPods and iPod gift cards for Christmas.

In the new Pepsi promotion, sources say, Amazon will serve as the supplier for the downloads, and customers will need to visit a specific redemption store on the Amazon site to access music from participating labels. While all majors have been approached about participating in the offer, the price that Amazon is willing to pay appears to still be a sticking point for some labels.

Sources say that Amazon will pay labels in the area of 40 cents per track. This compares to the 65 cents-70 cents labels currently receive from Amazon for digital track sales and the 70 cents they get from Apple.

In the 2004 promotion, Pepsi paid iTunes directly for each track redeemed. iTunes then paid record labels the same per-track wholesale fee they would receive if it had been a regular paid download. It's not known exactly how much Pepsi paid iTunes-whether it was the full 99-cent cost or just enough to cover iTunes' obligation to the labels, or somewhere in between.

Regardless of which labels ultimately sign on, the Super Bowl commercials will nonetheless double as the coming-out party for Amazon's digital download site, which soft-launched Sept. 25. Since then, without aggressively promoting its download business, Amazon has captured about a 3% market share of the digital download channel, Billboard estimates. The store has a 6% market share of all CD sales.

WAL-MART's WISHES

Another factor driving the labels' decisions, sources say, involves mass merchant Wal-Mart alerting WMG and Sony BMG that it will pull their music files in the Windows Media Audio format from walmart.com some time between mid-December and mid-January, if the labels haven't yet provided the music in MP3 format.

Wal-Mart declined comment. "It's a matter of policy that we don't publicly comment on speculation," walmart.com spokeswoman Amy Colella says. "We know digital music is important to our customers, and we're very pleased with the recent performance and customer response to our digital music offering."

Though Wal-Mart maintains a modest 2% market share in the digital download arena, its market share for physical CDs is considerably larger: about 22%, Billboard estimates. A senior executive at one of the other majors says that if Sony BMG or WMG resist the merchant's digital requests, they may be concerned about risking such consequences as losing out on prime in-store real estate or smaller buy-ins on new releases in the physical world.

Finally, given the steep decline in U.S. CD sales-so far, down 18.6% year to date compared with last year-music executives have been vocally worried about what the new year will bring for the physical format.By switching to a digital format that is compatible with all portable devices-including the all-important iPod-the move could help merchants like Wal-Mart and Amazon capture some of iTunes' 70% market share, and perhaps grow the overall size of the digital marketplace.

Additional reporting by Antony Bruno.

Questions? Comments? Let us know: @billboardbiz

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