Warner Music Group (WMG) and Sony BMG Music Entertainment are feeling increased pressure to follow EMI and Universal Music Group's lead in distributing music in the MP3 format, which forgoes restrictive digital rights management technology.

A yearlong download promotion planned between Pepsi and Amazon is among several developments forcing WMG and Sony to consider the format, Billboard has learned,

News of the Pepsi promotion, which is expected to be announced February 3 during the Super Bowl, coincides with Wal-Mart's ultimatum that major labels supply walmart.com with their music in MP3, sources said.

Labels said they have been watching the success of an MP3 test that Universal Music Group (UMG) began in August. The major label continues to allow the sale of 85 percent of its current catalog as MP3s. Sources said UMG is on the verge of permanently embracing that digital format. But a source close to the testing insisted that the decision is still up in the air while the company awaits conclusive results from the trial, which are due in mid-January.

Meanwhile, Disney's Hollywood Records has joined the list of major-distributed labels testing MP3 at Amazon and walmart.com. The company has supplied 30 to 40 titles from its mammoth catalog in the MP3 format. A check of those sites shows the latest albums from Atreyu and Grace Potter & the Nocturnals on the Hollywood label available in the MP3 format, though they are not available at iTunes.

EMI began selling its music in MP3 format in June. WMG and Sony BMG Music Entertainment both declined to comment, but have continued to publicly maintain their separate stances in favor of using digital rights management for downloads.

Sources said Sony BMG is considering an MP3 test. The company initially was steadfast against MP3 and wouldn't allow its independent distributor, RED Distribution, to engage in negotiations on behalf of its labels with Amazon when the merchant was trying to set up its MP3 download store. But Sony BMG management relented and let RED become involved in those negotiations. The parent company, however, refused to supply Amazon with its catalog in the MP3 format.

PEPSI FREE

Pepsi's track record with download giveaways may be motivating labels. According to sources, Pepsi will feature a download promotion on the inside of 5 billion of its soda bottlecaps. Sources said Pepsi customers will need to collect five caps in order to exchange them for a download; this yields the potential for 1 billion redeemable tracks. A Pepsi spokesperson declined to comment.

Pepsi's first stab at giving away free music downloads, which was conducted in partnership with iTunes in 2004, was also promoted via a highly visible Super Bowl campaign. It resulted in 5 million people downloading free songs in the space of three months -- 5 percent of the 100 million tracks that were offered.

While the 5 million digital tracks redeemed in the campaign reportedly fell short of the 25 million target redemption rate, that was in the early days of digital distribution, when Apple was reporting selling digital tracks at a rate of 2.7 million per week.

Since then, with the widespread success of the iPod -- which is likely to be even more popular come Christmas -- digital track sales have grown by 416 percent, from the 142.6 million tracks scanned in 2004 to the 735.4 million tracks accumulated so far this year, according to Nielsen SoundScan. Based on trends of the past few years, Billboard estimates that digital download sales could increase by another 5 million per week in 2008.

In the week after Christmas in 2006, track sales totaled 30.1 million, a 51 percent increase from the 19.9 million scanned in the corresponding week of the previous year -- which was, in turn, a 197 percent increase over the 6.7 million scans generated during the corresponding week of 2005. Digital downloads generally increase drastically after consumers receive iPods and iPod gift cards for Christmas.

In the new Pepsi promotion, sources said, Amazon will serve as the supplier for the downloads, and customers will need to visit a specific redemption store on the Amazon site to access music from participating labels. All majors have been approached about participating in the offer, but the price that Amazon is willing to pay appears to be a sticking point for some labels.

Sources said that Amazon will pay labels in the area of 40 cents per track. This compares with the 65-70 cents labels currently receive from Amazon for digital track sales and the 70 cents they get from Apple.

Regardless of which labels ultimately sign on, the Super Bowl commercials will nonetheless double as the coming-out party for Amazon's digital download site, which soft-launched September 25. Since then, without aggressively promoting its download business, Amazon has captured about a 3 percent market share of the digital download channel, Billboard estimates. The store has a 6 percent market share of all CD sales.

WAL-MART's WISHES

Another factor driving the labels' decisions, sources said, involves mass merchant Wal-Mart alerting WMG and Sony BMG that it will pull their music files in the Windows Media Audio format from walmart.com some time between mid-December and mid-January if the labels haven't yet provided the music in MP3 format.

Wal-Mart declined comment. It's a matter of policy that we don't publicly comment on speculation, walmart.com spokeswoman Amy Colella said. We know digital music is important to our customers, and we're very pleased with the recent performance and customer response to our digital music offering.

Though Wal-Mart maintains a modest 2 percent market share in the digital download arena, its market share for physical CDs is considerably larger: about 22 percent, Billboard estimates.

Finally, given the steep decline in U.S. CD sales -- so far, down 18.6 percent year to date compared with 2006 -- music executives have expressed their worries about what the new year will bring for the physical format. Switching to a digital format that is compatible with all portable devices, including the all-important iPod, could help merchants like Wal-Mart and Amazon capture some of iTunes' 70 percent market share, and perhaps boost the size of the digital marketplace.

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