SOFT(WARE) ROCK; MUSIC FIRMS, NET JOIN FORCES.

Byline: P.J. Huffstutter Daily News Staff Writer

Searching for ways to boost flat record sales, a growing number of music companies are joining forces with Internet service providers to create enhanced compact discs.

These add-ons range from an easy and direct way to sign up with service providers such as America Online and the Pasadena-based EarthLink Network Inc., to extra songs that can only be ``unlocked'' if customers check out the artists' Web site.

Though seemingly a smart marketing move, these new-media deals raise unusual legal questions about who actually owns the data that fills a CD. Music executives say they realize the empty space on a compact disc is prime property for novel marketing ploys.

``It's a really complicated issue. Because when you're talking about that particular bit of real estate, you're talking about a lot of money and a lot of different rights,'' said Jim Martone, vice president and general manager of Trauma Records, the Sherman Oaks-based label that handles such acts as No Doubt and Bush.

``But (labels) are willing to try new things, even if they don't work, because the competition for consumers is so fierce.''

Last week, EarthLink announced it signed a bundling deal with Sony Music Group, which calls for the entertainment concern to include the ISP's sign-up software on any - and possibly all - of Sony's music titles. Executives at the record company estimate that nearly 80 percent of its releases this year will include the software.

The deal extends to all of Sony's labels, including Columbia and Epic Records. The first title to include the EarthLink software, ``Coming Up'' by The London Suede, was released April 8. Subsequent acts set to carry the software include Michael Penn, Nancy Wilson, dog's eye view and Subrosa.

In April, BMG Entertainment North America signed a similar deal with America Online. Rap act Wu-Tang Clan's recent release on the New York-based Loud Records, titled ``Wu-Tang Forever,'' is the first BMG-distributed title to carry the AOL software.

``In the strictest sense, the record company owns that disc,'' said Steve Rennie, senior vice president and general manager of Epic Records for the West Coast. ``But it would be political suicide for a record company to put something on an album without the artist's consent.''

Neither the music groups nor the service providers would discuss financial specifics of the deals. But insiders say the ISPs pay the labels a bounty - ranging from $5 to $20 per person - every time an individual uses the CD to sign up for service.

The artist receives a percentage, usually half, of this fee.

``It's a win-win situation all around,'' said Sky Dayton, founder and chairman of EarthLink. ``Most of the young, hip group, the people who are these artists' fans, are still not on the Internet. Their CDs offer a natural channel to distribute our services, while helping more people get on line.''

When an artist records songs, the music is saved as a data file and stored on the CD. But the tunes rarely fill all the space available on a disc, which can store about 650 megabytes of information - or about 75 minutes of music.

In the past, record companies and musicians used this space to include video snippets and behind-the-scenes material. But few firms realized the space could be used to carry a third-party's product, such as a Web browser.

Columbia Records has used extra space on discs to store ``Easter eggs,'' unadvertised and hidden audio or video tracks. Fans can pop these discs into their computer's CD-ROM drive, get on line and go to the band's Web site. Their visit to the site triggers a code on the disc, which then unlocks the secreted tracks.

The Suede record, which housed a video for ``Saturday Night,'' used this trick. So did the latest release by Toad the Wet Sprocket, which tucked away the track ``Silo.''

``If putting EarthLink software on a disc is one more way to connect our artists directly with fans, then we're all for it,'' said Mark Ghuneim, vice president of on-line and emerging technologies for the Columbia Records Group. ``I don't care if we only get 10 people who sign up. That's 10 very Net savvy fans who know we're living in a land of C's - connectivity, content, community.''

Don't forget the biggest C of all - commerce. After three years of flat album sales, the $12 billion-a-year record industry is searching desperately for different ways to grab consumers.

Label executives hope the Internet, long seen as merely an advertising vehicle, will help. The trend of bundling ISP software on audio CDs started about a year ago, when labels quietly began experimenting with this formula with some of their lesser-known acts.

Last summer, Elektra Records added EarthLink's software to 30,000 free CD samplers that featured songs by several of the label's acts. These records were distributed at college campuses and record stores throughout the country.

For each person who used the disc to subscribe to EarthLink, the Pasadena ISP paid the label a $5 bounty, according to sources at Elektra. That money was to be donated to restore vandalized and burned churches in the South.

But label sources say the disc attracted a relatively tiny number of subscriptions - between 100 and 200 people signed up for the service, according to Kirsten Kappos, EarthLink's vice president of corporate communications.

``You have to understand that's really good for a disc like this,'' Kappos said. ``It's not like this was a major release by a really well-known band.''

Other companies experienced similarly tepid responses. Epic Records linked rock band Korn's album ``Life is Peachy'' with software from GNN, an ISP that is now part of America Online. Fans could pop the disc into their computer, sign up for AOL and jump directly to Korn's official Web site.

Over time, Epic executives discovered that only 1 percent of those who bought the Korn record tried out the add-on.

``It was not overwhelming on the numbers,'' Rennie said. ``There were a lot of technical compatibility issues, so we took a low-key approach. We wanted people to sort of stumble across it, rather than buy the CD and expect that it was automatically going to work.''

Multimedia experts warn that fans could sour on the artist or label if the buyers run into technical hiccups or connection problems.

``These providers say the software automatically works, but it doesn't,'' said Leo Rossi, co-owner of the Santa Monica multimedia firm Highway One Media Entertainment. The company develops software tools for the record industry.

``That flaw generates a tech support call. But they won't call the ISP. They'll call the label, who probably won't know what's wrong. So in the end, the user gets a negative experience.''

Record executives say they realize these deals could fail but insist the possible financial boon outweighs any potential problems.

``We'll know a year from now whether the initial trials were indicative of how well this will work or if this is the real deal,'' Rennie said. ``All we can do is try and hope it works.''

CAPTION(S):

Photo

Photo: (Color) No caption (Soft(ware) Rock)