Leave it to the music industry to throw a monkey wrench into an emerging technology that could improve music sales. Amid Warner Music Group's (WMG: sentiment, chart, options) third-quarter earnings conference call, the company warned that it would cease licensing songs for music-based video games if it could not get better terms. The company's complaint stems from the wild success of Activision Blizzard's (ATVI: sentiment, chart, options) "Guitar Hero" franchise, and Harmonics' [i.e. Viacom (VIA: sentiment, chart, options) ] "Rock Band" series. According to Warner, the company feels it isn't getting its fair share of the cut.

Below is an excerpt from that conference call, courtesy of Silicon Alley Insider:

But we have to be very careful that we do not allow an eco-system to occur where we do not get compensated properly. Like what happened with MTV, and now with Apple. And now [game developers] Activision and Harmonix [owned by Viacom] are in the same place. Amounts being paid to music industry for downloads, etc. "far too small". Industry needs to participate much more fully. If that does not become the case, "we will not license to those games." Very small license fee per song, plus additional revenue if artist involved. But royalties far below what true value is.

I lost quite a bit of sympathy for the music industry when the group closed down Napster back in the mid-90s. No, I'm not promoting piracy, but the music industry was offered a subscription structure in the area of $10-$15 per month to allow the service to continue running as it was. The industry turned it down, and is now suffering from the proliferation of new Napster clones across the Internet.

This time around, Warner has people actually paying for its music in a new technological medium, and is getting a boost in sales of both digital and old-fashioned CD formats.

If companies such as Warner Music Group are not careful, they will end up alienating a whole new generation of potential music buyers. Many from my generation still remember the poor handling of the Napster debacle, and still haven't purchased a CD to this day in protest. (I download my songs from Amazon.com (AMZN) - DRM free and a great selection). Just ask Metallica's Lars Ulrich how hard this kind of a public relations snafu is to repair.