It is still unproven that people will go from paying zero to a reliable but paid-for service

Rob Glaser, chief executive RealNetworks

Tuesday's deal may have been sealed on the record industry's terms - but one problem still remains for the big five music giants - the three MusicNet owners plus Sony and Universal: It is still unclear how many people are prepared to pay for music online.

Record industry victory

Napster had no choice but to sign up with the big labels, analysts agree.

There is still very little understanding as to how consumers will react with having to pay for something online

Mark Mulligan, Jupiter MMXI

The online service is estimated to have lost a fifth of its users in the months following the court order. Napster users had originally been attracted by the wide range of content on offer for free and quickly logged off when the choice of music shrank and the prospect of payment loomed.

Napster planned to launch a two-tier subscription service later this year, but the problem remained that without major label content, users might not log on.

"It was the only way Napster was going to survive in the longer term," Forrester Research's Rebecca Ulph said.

What next for Napster?

Napster's path ahead is still not clear.

EMI has misgivings about the deal

EMI and Warner, signatories to the Musicnet deal, have stressed that Napster still hasn't met all of their conditions.

"EMI has always said that we'd be prepared to consider licensing our music to Napster but only when certain critical conditions are met, particularly in the area of copyright. At this point, those conditions have not been met," EMI said in a statement, echoing comments made by Warner.

"The issue will be how quickly Napster will change their system to become compliant with what the labels want. That is the sticking point. That is the point Napster really hasn't got on top of," Forrester Research's Rebecca Ulph added.

Until Napster does this, it still might not get the major label content it needs. It is also thought that Napster and the record companies are also likely to still have to clear each and every song copyright with the song publishers.

Jupiter MMXI's Mark Mulligan says: "It is effectively a very bad deal for Napster, but their negotiating position is so weak they had to accept it."

Napster founder feels the heat

What this means for the music industry and consumers is that online music is back in the hands of the big five music companies and there is no large independent provider of online music out there.

Online music providers

The MusicNet deal has a competitor in Duet, an alliance forged between Vivendi Universal and Sony.

Yahoo later joined this alliance. Under this scheme, the music of Vivendi Universal and Sony Music will be available for a fee through the Yahoo website.

Microsoft's MSN portal has already said it plans to offer an internet music broadcasting service. This is expected to lead to music downloads and online music subscriptions.

But, given that a generation of consumers are used to downloading music for free, how many will now be prepared to pay for it?

Industry opinion is mixed and cautious.

Users may have got music for free before, but quality was variable and it lacked the added extras such as artwork, lyrics, concert tie-ins. So, consensus is users are likely to pay for a quality product.

Wary approach

But even so, the companies behind MusicNet are wary.

"It's still unproven that people will go from paying zero to a reliable but paid for service," Rob Glaser, chief executive of media software giant, RealNetworks, said earlier this year. "Until we're out there with millions of users and revenues flowing end-to-end, it will be no more than just informed optimism."

Given the lack of clarity as to which will be the winning online formula, the music industry has shown itself willing to experiment with options such as streaming and pay as you go.

"The record industry is experimenting, while the market is nascent, they are experimenting with every solution," Jupiter MMXI's Mark Mulligan said. "There is still very little understanding as to how consumers will react with having to pay for something online."

And offline, physical sales of CDs remain buoyant.

"This is certainly not the case that the physical market will be destroyed in any short or medium term. Digital music will squeeze physical music sales," predicts Forrester Research's Rebecca Ulph.