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The Music Industry Strikes an e-Note
The battle over who controls digital music has broad implications about consumer expectations and the Internet economy as a whole.
Posted Jan 3, 2001
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Editor's Note:

When the December issue of eCRM magazine came out the story on which this article is based, "The Music Industry Sings the e-Blues," was somewhat dated. While the controversy surrounding the rights to distribute electronic music is far from settled, two agreements, one between MP3.com and Universal Music Group and the other between Bertelsmann and Napster, show a new willingness on both sides to work together to create a new business model.

The music industry is making its peace with the rogue element of casual online music distribution the same way music and video industries previously made peace with home-made tapes of best-selling music CDs and videos. The two recent agreements--struck to end costly court battles--are an indication that the music industry is maturing to encompass new technologies and to acknowledge the consumer culture that has sprung so enthusiastically from those technologies. On the dot-com side, maverick entrepreneurs have realized that their outlaw days are numbered and if they can't beat 'em, join 'em. So these arch-enemies, through mutual business interests, become innovative business partners.

In one corner stand the forces of youthful rebellion, the perennial heart of popular music. Using technology like Napster, hundreds of thousands of these rebels--and their more staid counterparts in homes and offices across America--are downloading MP3 song files from the Internet through the hard drives of others every day. For free. Giddy with the thought that they may have
finally wrested control from corporate America's evil clutches, these file-swappers affirm that nothing less than the soul of music is at stake.

And in the other corner, you have the five major record labels--Universal Music Group, BMG Entertainment, Sony Music, Warner Music and EMI Music--currently locked in an all-out war to protect their interests from the above-mentioned "pirates." For them, nothing less than a $40-billion industry worldwide is at stake.

Both sides, however, are committing the sin of omission. Because when the
issue is framed as a battle over who "owns" music, the main player--the artist--is entirely missing from the equation. True, the music labels may own the existing catalog for a particular artist or have an agreement that stretches far into the future, but how long will it take artists--especially the up-and-coming young artists upon which the industry feeds--to figure out that they no longer need record companies; that they, as the pivotal piece in this scenario, should control their own destinies?

Clearly, a music industry shakeout is brewing in which some will win and some will lose. But as far as music distribution in the new millennium goes, the times they are a-changing.

Eric Scheirer, an analyst at Forrester Research, estimates that the record labels stand to lose as much as $3.1 billion in new revenues in 2005 alone if they don't get on the digital bandwagon soon. Retailers like Virgin Megastore have even more to lose. As music labels begin bypassing brick-and-mortar retail outlets in favor of online distribution, the effect could so erode profits that these companies would be forced out of business.

On the other hand, as new digital distribution models emerge, so do enormous opportunities for collaboration and growth. One model that has been gaining favor is based on subscription services in which consumers pay a flat monthly fee for unlimited Internet access to a wide range of music from many artists. And with the projected increase in broadband penetration, Forrester estimates that 38 percent of homes in the United states will have DSL or cable modems by 2003 as well as paid downloads and pay-per-listen models such as those that are offered by My.MP3.com, and Myplay will become more widespread.

However, at this point, the $54,000 question remains. Is there money to be made for what is presently being given away gratis? And if there is, how? In other words, Napster may have 30 million users, but the company has yet to come up with a viable way to monetize them. Being tied up in the courts for the foreseeable future probably will not help matters either.

The fact that Napster has been wildly successful is beyond dispute, but its legality is not. Lawsuits by the Recording Industry Association of America against Napster and Universal Music Group against MP3.com both contend that what is called file "sharing" really amounts to copyright infringement on a massive scale.

That assertion, however, doesn't seem to bother most music-swappers, perhaps because they know it is the record companies, not the artists, that reap the lion's share of the profits. And Napster cites rising music sales as proof that its technology actually benefits the industry, asserting that people will want to buy what they are sampling.

Regardless of the eventual victory or failure of Napster, most industry analysts agree that countless other peer-to-peer computing programs will spring up to take its place. And in these technologies, like the open-source application called Gnutella, there is no one to sue because users link directly to each other's computers, eliminating the need for a server.

There can no longer be any doubt that consumers have spoken. And what they want is a convenient, peer-to-peer file sharing experience. And so far the major record labels haven't provided that.

According to Scheirer, the gauntlet has been thrown down. "Napster's technology is here to stay and sets a standard for functionality and ease-of-use that the labels must exceed," he continues.
Until very recently, says Scheirer, the record labels had been taking a slow,
deliberate approach to online distribution, focusing more on the need to maintain control over their content and minimize unauthorized use rather than looking for ways to take advantage of new Internet distribution opportunities.

According to Forrester Research, 50 percent of music label executives believe that Digital Rights Management technology will provide the answer to their copyright woes. However, the technology is still in its infancy, and Forrester says music executives report feeling very confused about the offerings, explaining that there is nothing to differentiate the claims of one product over another.

Software developers like Gene Kan, who helped create Gnutella, and others like him, respond by saying that any attempts to shore up security will ultimately be futile. "Even assuming the most draconian of digital locks and chains, copying is unstoppable," said Kan, in a roundtable discussion in the New York Times published September 20, 2000. "And with the Internet, once the lock is unlocked once, the game is over."

Major Labels Take the Offensive

The September announcement by Universal, the world's largest music group, that it had selected the encryption company Loudeye to encode and store its entire
active U.S. catalog of approximately 14,000 audio titles and more than 30,000 music videos signaled a major shift from a defensive to an offensive mode. In the two-part deal, Loudeye will store and make full-length versions of the catalog available to Universal's licensees such as Musicbank, a secure on-demand streaming service which was set to launch in fall of 2000, as well as 30-second samples which will be available to online CD retailers.

Universal is the first of the major labels to take such an aggressive digital stance. The other labels, however, are not far behind. Many are already selling digital downloads, with the exception of Warner Music, which had announced it would begin doing so in November of this year.

Their efforts may well miss the target, however, if they fail to "aggressively reposition themselves as service organizations," says Scheirer, "starting with their new-artist pipeline." Scheirer and others say that the future will belong to those companies that act as aggregators, investing in collaborative filter software that helps consumers navigate the wide range of music choices.

As far as the hundreds, no, thousands of unknown bands out there seeking fame and fortune, the Internet holds a tantalizing promise of being discovered without having to sign away potential earnings to a major record label. How many of these dreams will actually be fulfilled remains to be seen, especially in an age of free digital downloads. But Internet technology is now making it possible for determined artists to forge new business relationships in which they may be justly compensated for what they have created. More importantly, consumers' expectations have evolved from a posture of passive consumption into a state of empowerment.

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