Legal P2P site doesn't have what it takes

At first blush, Qtrax seemed like a good idea.

Executives there wooed reporters by promising to corral illegal file sharing. They built an interface on top of the Gnutella network where millions of songs are pirated. They pledged to offer users a legal way to download and share music.

Qtrax managers said they had convinced the big record labels that it could turn file sharing into a cash cow for them. They said all four of the most powerful labels were on board.

But on Monday, Qtrax was more than 12 hours late launching its music service. A day earlier, the big record companies made news by contradicting Qtrax. They said the company was not authorized to sell their music.

What was once an eagerly awaited debut is turning into a fiasco for the New York-based start-up, which has tried for more than a year to get off the ground.

The issues with Qtrax illustrate two things. First, the labels have clearly signaled that they are willing to give ad-supported music a try--just not with downloads. Secondly, Qtrax executives should know better than to announce deals when they don't have ink. Qtrax CEO Allan Klepfisz told CNET News.com on Sunday that the company had agreements, but acknowledged that they just weren't signed.

But everybody knows that without signed contracts, there is no deal.

Perhaps actress Kelly Preston said it best in the movie Jerry McGuire: "It's not 'Trust my handshake.' It's make the sale. Get it signed. There shouldn't be confusion about that."

As Qtrax struggles with licensing deals, the big record companies are partnering with a growing number of ad-supported sites that stream songs to listeners but don't allow the music to be downloaded to computers or digital music players.

Services, such as Imeem and Last.fm, which only stream songs, offer music from all four major labels, Universal Music Group, Warner Music Group, The EMI Group, and Sony BMG Music Entertainment.

Meanwhile, SpiralFrog, one of the best-known services and one that enables people to download to a PC and a handful of portable devices (but not the iPod), has been toiling in the sector for nearly two years and has managed to land a music deal with only one top label: Universal.

But how did Qtrax get mired in this mix up? Is the company a victim of a misunderstanding? Were executives overly confident when boasting to reporters that they had signed the top labels?

After interviews with managers at Qtrax and the record labels, it appears that a bit of both occurred.

Previously, Qtrax had succeeded in striking agreements with at least two of the record companies as the start-up was preparing to ramp up. But sources with knowledge of the deals said those deals have expired.

Qtrax is close to getting signatures from Universal and EMI, said the source but, "Qtrax spoke too soon."

How this public relations nightmare affects Qtrax's prospects for the future is unclear. But don't believe the old adage that all publicity is good publicity. As it stands, the debacle undermines Qtrax's competence, if not its integrity.