Music bosses told: Pump up the incentives if you want to beat pirates

MUSIC labels will have to make it worth fans' while to download legally if they want to stop internet piracy, industry experts warned last night.

It came as the record industry announced it was entering into an agreement with Internet Service Providers (ISPs) in a drive to clamp down on illegal peer-to-peer file-sharing, which it is estimated will cost it £1 billion over the next five years.

The move may result in users looking to share music files paying a yearly fee of between £20 and £30.

However, a media analyst yesterday said that if record labels want to avoid alienating the music-buying public, and recoup the lost revenue, they must offer incentives and abandon the role of "middle men" between musicians and fans.

Britain's six largest ISPs – BT, Virgin Media, Orange, Tiscali, BSkyB and Carphone Warehouse – have now signed a memorandum of understanding with the British Phonographic Industry (BPI) to commit themselves to developing legal file-sharing services and to ensure their customers know that it is illegal to share copyright-protected music.

The immediate effect of yesterday's announcement will see letters sent to the most prolific sharers, informing them that their activity has been detected, is illegal and being monitored.

But Matt Phillips, head of UK communications for the BPI, said that to make legal digital downloads profitable, the industry had to persuade the public of their value.

He said: "We believe in a three-way approach. The first is to make it easier for people to download music legally. We've got to do that more and better.

"We've got to make it harder for people to download illegally for free. That will be through tackling the systems that offer unlicensed music for free and the possibility of partnering with ISP so they do something about it.

"We have to communicate better, the value of music and why we want people to pay for it, and that's a difficult thing to do."

He said that the issue "threatened the very future" of the music industry.

Mr Phillips said that idea of a levy is only one model of controlling downloads and that a number of other routes were workable.

Graham Lovelace, a media analyst, said yesterday's announcement was a result of "chickens coming home to roost" for the record industry, and that rather than try to fight the internet and risk alienating its young customer base by criminalising them, the labels should make themselves a more attractive proposition in order to compete.

"In the Seventies, with vinyl, while they were expensive, you got a lot of added value: sleeve notes, lyrics, art, posters, cardboard cut-outs. There were reasons to buy the product that weren't just to do with the music," he said.

"There is still something in that. Certainly you can rip off a film online, but you don't get the extras you get with a DVD."

Mr Lovelace said that the record industry had to redefine its role: "They have to become a service provider, not just a middle-man.

"Record labels have to do the digital equivalent of the vinyl days, value-added enhanced experience: video extras, opportunities to meet the band, gigs. There's an entire social network to be built around the label sites, but they haven't done that yet."

A spokeswoman for Virgin Media said that while it was too early to identify a price, the single fee for access to legal monthly downloads was being considered. "This is possibly something that could work. BSkyB and Universal announced earlier this week that they were setting up a download service. But it's really to early to say at this stage," she said.

The BSkyB service will combine an unlimited on-demand jukebox service with a set number of monthly downloads that can be saved, even if users stop subscribing, for a single monthly charge.