The battle for the hearts and wallets of online music users is set to hot up this year - as record companies band together to sell music online.

The record companies have already tackled the threat of Napster, emerging the victors of a court battle to stop web surfers using its software to swap copyrighted songs.

But the sale of music online is likely to remain a problematic area for the music companies.

A generation of internet music users have grown up used to the idea that music downloaded from the net is free - are these people now willing to pay?

Recent research from Jupiter MMXI suggests that more than a third of European net users are unwilling to pay for music online.

But it is still anticipated that online music will be a hugely lucrative market.

In Europe alone, the online market for music is expected to soar in value from 333m euros last year to more than 2 billion euros by the end of 2006, according to research from Jupiter MMXI.

Napster woes

Song-swapping service Napster has lost one fifth of its users since it was ordered to block the exchange of copyrighted music between its users.

The number of people using the Napster software slumped from 15 million in February to 12 million last month.

The court order had represented a victory for record companies, which had feared that the firm's free song-swapping services would undermine CD sales and erode music industry profits.

But Napster's decision to pay royalties and introduce a subscription service may prove to be a short-lived victory for the music companies.

For if Napster - one of the most credible youth brands on the web - can't make money from selling music online, what chance do the record companies have?

Napster's chances

Scepticism exists as to the chances for success of Napster's two-tier subscription scheme.

Jupiter MMXI analyst Mark Mulligan said: "If you calculate the amount of money they are going to charge and the money they must pay the industry, they have to have five million subscribers [to be profitable]. Some of the more successful services only have 5,000 subscribers."

April saw a flurry of announcements from music companies and internet portals.

Yahoo joined the Vivendi Universal/Sony alliance, with the aim of creating a subscription-based plan, Duet.

Under this scheme, the music of Vivendi Universal and Sony Music will be available for a fee through the Yahoo website. Duet aims to licence half of the world's music.

AOL, TimeWarner, Bertelsmann and EMI have joined forces to launch a subscription-based service, Musicnet, using RealNetworks software

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 even the companies behind the announcements 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 and acting CEO of Musicnet said.

"Until we're out there with millions of users and revenues flowing end-to-end, it will be no more than just informed optimism," he added.

Easier to pay

EMI Records' new media director Fergal O Gara said the key to success is to make paying for music easier than stealing music.

Selling CDs through e-tailers accounts for about 4% of online sales, and if it continues to grow at current rates, he says, this could soon be 10%.

Many people agree that the problems with the services on offer could be one of the reasons why there has been a reluctance to pay for the new services.

"The current proposition is not sufficiently consistent to drive mass market adoption...This is undoubtably a barrier to mass market adoption," EMI Records' Fergal O Gara said.

Free services

Jupiter MMXI's Mark Mulligan's view is all subscription services should be tiered and include a free service.

This gives the current Napster users something to latch on to and these users - typically the younger surfers - can then migrate to the premium high-quality service when they have more cash.

"We have to offer free services to people who can't afford to pay at the moment as well as paid for services," Mark Mulligan added.

The free service could, for example, offer a limited choice of songs in lower quality, while the premium service would offer a wide range of high-quality songs from the entire catalogue, guaranteed to be virus-free.

Those sales can also be driven by offering discounts for concerts and merchanise tie-ins.

Alliances

What the new crop of alliances have in their favour is that they boast an internet service provider among their members.

ISPs such as AOL and Yahoo have a vast reach, Mulligan said, and appeal to young people.

"They have various levels through which they can sell music," he added.

Some observers think that linking with these portals will provide the music industry's best chance of success.