Big label pressure has forced British cable ISP Virgin Media to suspend plans to introduce a legal music sharing service for its subscribers, just weeks ahead of its launch, The Register has learned.

The radical initiative, tentatively branded as “Virgin Music Unlimited”, represented a major investment for the ISP, and would have been the first such attempt to monetise P2P file sharing in an ISP partnership in either Europe or the USA. However, 11th hour “anti-piracy” demands by major record labels including Universal Music and Sony Music meant Virgin could no longer launch the service as it had envisaged. Labels demanded that Virgin block uploads and downloads of songs from subscribers’ PCs, sources suggest. Since the system is designed to encourage file sharing, the demand removed the service’s USP.

Virgin is believed to be particularly disappointed at the collapse of the initiative. The ISP had been the first to co-operate with the music business-ISP Memorandum of Understanding (MoU) signed last July and send warning letters to file sharers. It had also made a significant investment in the Music Unlimited initiative, estimated at eight figures.

When Virgin’s boss recently announced a significant investment in deep packet inspection, he also hinted at “monetizing the intelligence” of the network, a statement that erroneous reports at the time claimed was a reference to Phorm. In fact, it referred to radical iniatives such as VMU. The withdrawal of major label support has serious strategic implications for Virgin: the ISP is left with a stick, but no carrot.

Why Virgin almost made history

While VMU had yet to be formally announced, it was being closely watched by both ISPs, the music business, and fans.

While they are reluctant to be seen to be monitoring their users, ISPs receive no incremental revenue from the vast quantities of infringing material that flow across their networks, which is a disincentive to invest in better network infrastructure. VMU was seen as a way to capture some incremental revenue voluntarily from users, increase customer loyalty, and decrease “churn”.

Similarly, many parts of the music business now express the view that prosecuting users and attempting to halt behaviour fails to bring in any revenue. Meanwhile, P2P remains a taboo: the one form of consumer behaviour that hasn’t been given a legitimate revenue opportunity. Millions have been spent over the past ten years in prosecuting users, and rather less on building legitimate services that capture revenue voluntarily from this behaviour.

For their part, consumers appeared to be keen on a service never previously legally available. In a survey last year 80 per cent of downloaders and 63 per cent of non-downloaders expressed an interest in a legal P2P service that allowed them to keep songs.

The reaction

Sony had not responded to a request for comment at press time. Speaking off the record, a source close to the recording industry stressed that ISPs must abide by the obligations in the MoU and that government regulation was likely if they didn’t. From that unprompted statement, it’s possible to infer that major labels still fear losing control, and have pinned their hopes on changing behaviour rather than creating services that generate new revenue streams.

A Virgin Media spokesman told us the company doesn’t comment on “rumour or speculation,” but Virgin’s technology partner PlayLouder MSP confirmed the deal was off but declined to elaborate. A source said that interest from UK and European ISPs in launching a legal P2P subscription service was higher than ever.