UNAUTHORIZED COPYING OF SONGS FLOURISHING

On his way to MusicNet headquarters in New York, Alan McGlade, chief executive of one of the record labels’ newest online ventures, passes a humbling sight: the largest McDonald’s restaurant in the world.

This single restaurant served more paying customers during the past year than all the online subscription music services combined. “I’ll run downstairs to Times Square and ask people if they’ve ever heard of these companies,'’ McGlade said from his desk. “It’ll be a waste of time because, of course, none of them have.'’

In the 12 months since MusicNet and the other subscription music services were launched to counter the file-swapping frenzy that Napster ignited, none has managed to attract more than 100,000 paying subscribers, label sources and analysts say.Meanwhile, unauthorized music and movie swapping continues to flourish. Despite the recording industry’s best legal and technological efforts, the free file-swapping service Kazaa remains the most popular music destination on the Internet in the wake of Napster’s collapse, attracting nearly 13.7 million visitors a month from the United States alone.

And as testament to the allure of getting something for nothing, Kazaa’s audience is growing 324 percent annually, according to Nielsen/NetRatings, an audience measurement firm in Milpitas.

The fundamental problem for the paid subscription services: a lack of music selection, caused by big-name artists and niche labels refusing to license their songs and actions by some big labels to reserve popular content for their own online ventures.

Executives for the label-backed music services say they are finally ready to prove that the “Evian theory'’ can work for music just as it did for the bottled water industry: Consumers can be coaxed to buy something they can readily get for free if the marketing is right, it’s convenient and portable.

“We’re entering a new era,'’ said Matt Kleinschmit, senior research manager for Ipsos-Reid, a research firm in Minneapolis. “The first eight months of these services were kind of preseason. Now, they’re giving consumers more of what they want.'’

To be sure, the pay services have evolved since they began. Listen.com’s streaming music service Rhapsody allows subscribers to burn favorite tracks to CD. And Pressplay ditched its earlier count-the-downloads turnstile mentality this summer, allowing its subscribers to freely stream and download as many songs as they want, buy individual tracks and burn their music to a CD or download to a portable player.

Services bedeviled by gaps

“Since we launched version 2 in August, we have more than doubled our user base,'’ said Michael Bebel, Pressplay’s president and chief executive officer. “At the same time, we’ve grown in usage. These two factors combined signal to us that we have a real product that people are interested in.'’

MusicNet, the other label-backed venture, said its distribution partners, America Online and RealNetworks’ RealOne Music, will offer something similar early next year.

But the subscription services remain bedeviled by gaps in the one thing that matters most – the music. A recent check of Rhapsody and MusicNet’s service through RealNetworks RealOne Music revealed that neither service offers all top 10 of the most popular songs in the country, as tracked by Billboard Magazine. The best of the lot, Pressplay, offered only four of the biggest hits. The worst, MusicNet, offered only two.

Sometimes it’s an artist issue. Some artists, such as No Doubt, Avril Lavigne, the Rolling Stones and the Beatles, refuse to have their work online.

In other cases, deals have yet to be struck with certain independent labels, such as Clive Davis’ J Records or Madonna’s Maverick, which deprive the services of sought-after acts like Alicia Keys or Michelle Branch.

Sometimes it’s a publishing issue, where singer-songwriters like Billy Joel own the rights to their own compositions but just haven’t sold the rights to online services.

Will they ever catch on?

And sometimes labels favor their own affiliated services. Sony Music Entertainment, for example, offers Jennifer Lopez’s Top 10 single “Jenny from the Block,'’ only on its Pressplay service.

“With services like ours, we’re working so hard to get basic content,'’ said Listen.com’s chief executive, Sean Ryan. “And with the fringe cases – it just takes more time and effort for the industry to evolve to get this to happen.'’

The more daunting question is whether paid services will ever catch on with consumers. The most successful industry-supported sites, America Online’s AOL Music and Yahoo’s Launch, are free. Launch, which attracts 7.9 million people a month, uses advertising to subsidize its free radio, music videos and artist spotlights.

AOL Music – which garners the largest audience of the legitimate online offerings, with 10.8 million listeners a month – embraces the cable model, bundling the cost of its programming into the customer’s monthly bill.

Indeed, the subscription services may never amount to anything but a niche business.

What could save the nascent industry – at least in the estimation of researchers such as Forrester and Ipsos-Reid – will be individual music downloads.

The ability to buy tracks or entire albums on impulse online – through Amazon.com, Borders or Virgin – will both revitalize the moribund (and traditionally money-losing) singles business, and generate an estimated $2.1 billion by 2007, researchers estimate.

For now, all-inclusive subscription services have an uphill fight.