Kate Bulkley, Media Analyst.

The "Big Questions" conference at the Frankfurt Book Fair. Article 1.

The Bookseller

Sept 7, 2001

In the first of a series of articles in The Bookseller informing the "Big Questions" conference at the Frankfurt Book Fair, Kate Bulkley investigates the extent to which online technology is cutting out the middleman and threatening copyright in music, as the book industry confronts the same challenges.

What many record executives considered a nerds-only technology with a limited appeal only two years ago – downloading songs from the Net - has rocked the music establishment to its core and paved the way for fundamental changes in how music is "discovered", packaged and sold. The Big Five record companies—EMI, Sony Music, Warner Music, Bertelsmann Music Group (BMG) and Universal Music— are far from down from hanging up "out of business" placards, but the pressure is on to find ways both protect artist’s copyright and make the Net a profitable enterprise.

Internet music-file service Napster may have only hit the consumer press headlines in mid-2000, a year after it was founded, but by that time billions of songs had already been traded among computers around the world, all without the record companies or the artists or the retailers getting a dime.

The file-sharing technology used by Napster that gives fans the ability to send music files on the Internet to each other without paying for them, is eating into the receipts of the $37 billion global music business and challenging how it operates.

"The availability of on-line file sharing services had clear repercussions for singles sales in the USA in 2000, where there was a 46% drop," according to the London-based International Federation of the Phonographic Industry. The global sale of singles fell 14.3% in 2000 compared with the prior year. Catalogue (the music equivalent of backlist books) sales, the biggest profit centre for record labels, are also under pressure from the Internet. In the USA catalogue sales have dropped from 50% to 38% of total sales in the last decade, according to the IFPI.

Napster’s success has caused a major rethink by music industry executives, most of whom until about two years ago thought of the Internet as having a limited affect on their business. Even those executives who did "get it" early on struggled to come to any kind of industry consensus about how to deal with this new, revolutionary technology. While industry groups pondered on how to set copyrighting standards for music downloaded from the Net, the attorneys at the big labels fought back the traditional way - through the courts.

The giant music business versus the 19-year-old college student and Napster creator Shawn Fanning took over the headlines late in 2000 and cast the labels as the big, bad guys. Suinga college student with a love for good tunes was not goof PR for the labels.

However, the expensive court battles through the California courts led, earlier this year, to an effective neutering of the free song-swapping service earlier this year that at its height attracted 50 million users and in February 2001 alone saw 2.8 billion songs traded. The San Francisco Ninth Circuit Court of Appeals ruled that Napster must delete or block songs from its computer severs that were not copyright protected, unless artists or record labels had given explicit permission. Napster tried several different filtering technologies, but it took several months after the February ruling to comply with the court order.

The music labels breathed an audible sigh of relief when a US court made the ruling. But the reining in of Napster is by no means the end of the on-line music revolution; other music file sharing technologies like Gnutella, KaZaA, Freenet and Audiogalaxy that are more difficult to patrol and are already attracting Napster refugees.

Music label BMG, owned by Bertelsmann of Germany, tried to turn around the bad PR when it agreed to buy Napster in October 2000. Many observers thought it the height of irony, Bertelsmann CEO Thomas Middelhoff was pictured physically embracing Fanning at the purchase press conference.

Earlier this year Vivendi Universal purchased music download site MP3.com. Clearly both companies realise that they need to get attractive, legitimate download sites in place if they are to beat off competition from other free-music sites and they hope to learn from these Net businesses about some of the tactics they will need.

Power to the Artists

The on-line revolution is not only changing the relationship between consumers and the record labels, is it also shifting power to the artists, giving them unparalleled control of their creative output and lowering the hurdles for new, unknown artists to reach a wide audience.

The Internet is a direct access point where bands of any type, from any country and of any level of talent can play to the whole of the world wide web. And they can do so without recourse to record companies or high street retailers or anyone from the traditional music industry. This 60s-style concept of 'free music' has a liberating effect for struggling artists unable to be heard amid the din of the industry.

But for the majority of artists, and all record labels, here is a hidden curse. Once any piece of music, from a pop song to a sonata, has been recorded it can be uploaded onto the Internet and thereafter its digital file can be shared by anyone for free. The only way to safeguard material is to create a secure format that can protect copyright and compensate copyright owners.

In 1998, a forum consisting of representatives from the music industry and several big-name consumer electronic and telecom firms was formed to develop a specification for secure digital music distribution. Called the Secure Digital Music Initiative (SDMI), it’s laudable aims to provide consumers with convenient access to copyrighted music stumbled over dissension among the members about how important such a plan really was in the grand scheme of things.

By the time the threat of Napster became clear, the SDMI group looked woefully behind the times and seemed to lack a clear direction; added to this was the difficulty of coming up with an effective system to protect music that all the members could agree on. SDMI director Leonardo Chiariglione resigned in January 2001; by May of this year the group had only just finished deliberating about its "phase two" proposals to protect music copyright. The rapid pace of technology seems to be wrecking havoc with the SDMI’s lofty goals.

That Stealing Feeling

Despite lots of progress from companies like Intel, AT&T, IBM and others on watermarking and designing secure systems for music downloads, the process of effectively protecting the copyright of music on the Internet is still unproven. Meanwhile, working against the concept of digital copyright protection is also a tide of technology and fledgling bands which want their music to be "stolen".

Even established artists are not always supportive. Prince (who has recently re-adopted his name after years of insisting on a jaw-breaking monikor) thinks that the Napster’s free file-sharing technology that doesn’t protect copyright is a way of rebelling against the record companies that he feels once made him a "slave". In April 2001 Prince announced he would give away a track from his upcoming album "the Rainbow Children" free on Napster.

"Napster is just one illustration of the growing frustration over how much the record companies control what music people get 2 hear," wrote Prince in a statement. "The air waves, record labels and record stores, which r now all part of the ‘system’ that recording companies have succeeded in establishing, r becoming increasingly dominated by musical "products" 2 the detriment of real music."

Not all big name artists agree with Prince, but bringing their music direct to current and potential fans has helped numerous new, unknown artists find an immediate audience. Sites like Bipbipbip.com were formed with the sole purpose of finding new acts, signing them to their web label and then promoting them on-line. The site’s parent company, Bip!Com, has its own label that searches out and signs independent artists with the promise of higher royalties because of its online distribution, promotion and marketing. Bip!Com is one of many independent online music companies that challenges the traditional record labels and the bricks and mortar retailers.

For every struggling new musician using downloads to get their music heard and to spread the word about his or her imminent fame, there are just as many already in the music business who are guarding against the threat to copyright and income from the same technology.

Interestingly, those fighting against the freewheeling state of music on the Net aren’t just folks wearing business suits. Rockers Metallica, rapper Dr. Dre and rock legend Peter Gabriel are among the most vocal anti-Napster artists.

After the appeal ruled against Napster in February 2001, Metallica issued a strong statement in support: "From day one, our fight has always been to protect the rights of artists who choose not to have their music exploited without consent. The court’s decision validates this right and confirms that Napster is wrong in taking not only Metallica’s music, but (that of) other artists who do not want to be part of the Napster system and exploiting it without their approval. We have never objected to the technology, the Internet or the digital distribution of music. All we have ever asked is that artists be able to control how, when and in what form their creativity is distributed through these channels."

Some established artists hae an ambiguous relationship with the Net. Peter Gabriel is an example. On the one hand, Gabriel is a new media experimenter par excellence; he has a pioneering Website and loves the idea of reaching new audiences around the world as well as staying in touch directly with his fans. On the other hand, his back catalogue - which extends through his solo career and original membership of Genesis along with Phil Collins – can be uploaded by any computer the Net, where it is available free to anyone. So for artists who depend on royalties from a back catalogue, the Net is particularly problematic.

The Internet’s ability to cut out the middleman is changing the basic economics of the music business: it is threatening to cut out entirely traditional retailers as well as record labels. Although both sectors spent much of the last several years denying that the Internet was a threat, the power of Napster’s technology has served as a wakeup call. Not only have two of the big labels, BMG and Universal, recently acquired "offending" on-line services in hopes of re-configuring them to respect copyright and demand payment, new alliances are being forged among the biggest record companies to create "legitimate" pay-for music downloading sites.

Next Generation Napsters

Napster’s principle appeal is it’s free. People, and especially kids, are willing to put up with a lot of headaches for a service which does not cost them anything. But, as anyone who has tried to download an audio MP3 file knows, the technology can be difficult to use as well as unreliable and, depending on where the audio file comes from, the quality of the recording may be poor. But these glitches are beginning to be ironed out in next-generation Napster sites.

At the same time that Napster is being re-formulated under its new record company owner into a paid-for site (the free service only suspended operations early in July 2001 in order to install new tracking software to keep copyrighted material off its website), web music surfers have already begun to find alternatives.

Ireland-based music file swapping service Freenet is considered by many to be difficult and tedious to use, but a new, less-complex version of the software is now in the works. Other sites based on Napster’s peer-to-peer technology are also being refined. Napster was vulnerable to legal attack because it organised its music files on central servers. Other music-swapping services are making sure they are much more de-centralised. On Freenet a person looking for a track is routed directly to a PC that has that particular song, rather than searching through centralised servers.

Of course one of the problems with true peer-to-peer downloading is that the technology acts a bit like a virus, accessing computer hard drives and extracting music without the user knowing anything about it.

The record companies hope to capitalise on these deficiencies with their own, authorised sites. With Microsoft as a technology partner, Sony Music and Universal Music have banded together to form Pressplay (formerly called Duet), while BMG, EMI and AOL Time Warner’s Warner Music have agreed to back MusicNet, which is relying on technology from Microsoft rival RealNetworks.

But the sites, both planned to launch in the autumn, are facing big hurdles. In early August the U.S. Justice Department said it has opened an anti-trust investigation of the online music business with a focus on Pressplay and MusicNet. The probe, which is in its early stages, follows an E.U. inquiry of a similar nature launched in June 2001. Concern is centred on the creation of a "distribution duopoly" for online music.

Splitting Old Allies

Music retailers, such as Tower Records, which have long been allies of the record companies, are contributing to the debate as well, saying that with the new music sites the record labels are looking to "steal our business" in the words of Mike Farrace, a senior vice president at Tower Records.

Besides facing the wrath of the retailers, the record companies also have a bigger problem of how to encourage users to pay for on-line music. Their only hope is to create music sites that offer an attractive alternative to the free sites. The labels are banking on their ability to offer high audio quality streamed music that can be listened to on line but cannot be copied, as well as downloadable tracks from the labels’ catalogues. They say the licenses for copyright-protected downloads won’t be exclusive to their sites, which is one of the aspects the regulators plan to look into.

The record labels backing these new-style sites hope that ease of use, high-quality content and access to extra information --from chat rooms to updated tour or artists details-- will make their services stand out, but their success remains to be seen. And with pressure from regulators on both sides of the Atlantic, how they will be allowed to operate also remains open to question.

Both record labels and individual artists have been experimenting with copyrighted music on the Net for some time. In January 2001, the French dance band Daft Punk launched the Daft Club in a joint venture with its publisher, Zomba Music, its record label EMI’s Virgin and InterTrust Technologies Corp, a developer of secure music software.

The Daft Club was created so members could have access to exclusive music via the Web without penalising retailers and record companies. When fans buy the band latest albumn, they are "rewarded" with a membership passport to the online club through a unique Daft Club user code packaged inside the CD wrapping. The code is viable only for a limited time, and the Intertrust software makes sure that only one PC could access the Daft Club site using the code, so the code cannot be passed onto friends or posted on the Net.

In August, Peter Gabriel’s label, Real World Records, co-launched a music download service of world music tracks on a subscription basis of $5 a month. Gabriel sees the new service as a David scoring a hit against the Goliath of the established music business, but its success will depend on how many people will be prepared to pay for it.

Trend Towards Payment

Setting aside all the unknowns, the trend seems to be toward paying for music online. According to research group Jupiter Communications, online sales of music in the USA alone will rise from $88 million in 1998 to £1.04 billion by the end of 2002, or from less than 1% of the market to more than 8%.

As the Net becomes increasingly pervasive-- accessible through cell phones and portable digital assistants as well as our PCs and TVs-- and as broadband technologies take hold and speed up download times-- there is little chance of a revival of the music business of the past. And there is an economic imperative for the Big Five companies as well. In the first half of this year the sales value and the volume of CDs sold fell against the same period a year ago to $5.9 billion and 443 million units, versus $6.2 billion and 489 million units. "We recognise the fact that more consumers are looking to get music online," said Hilary Rosen, the president of the record trade group the Recording Industry Association of America (RIAA). "We are experimenting with a number of approaches and we are committed to delivering music consumers love when they want it and how they want it. We are confident our year-end numbers will be strong."

Precarious Business Models

The Internet was heralded as the great leveller, enabling individuals to communicate and trade directly with each other without recourse to a third party. This is as true of the music business as it is about every other area of commerce. The problem is that very few of the new Internet players have figured out a business model that works. Napster is a leveller-type of service, but it did not have, nor was intended to become, a profitable business. Sites like bipbipbip.com promote previously unknown bands, but they make their money by selling normal high street electronics --Sony Play Stations, cameras and shrink-wrapped CDs-- while they wait for one of their artists to hit the big time.

These are precarious business models and, in many cases, open to the kind of legal challenge that Napster faced from the Big Five record companies.

Now that these majors are fighting back and trying to develop their own profitable versions of music download services, their size and economic power should help them. However, as the anti-trust investigations show, the fact that the Big Five represent 80% of the world’s copyrighted music between them could also be their Achilles heel. The music business, as any record company executive will tell you, is high-risk, low-margin because, even though the Big Five own the biggest musical acts, the success rate for a moneymaking artist is only one in 10.

Record company critics counter that the consolidation in the music business to just five large companies has created dinosaurs whose top-heavy systems of "discovering" and packaging and promoting talent is out of touch with consumers’ tastes and slow to react to the new trends in music.

The big unknown in all this is how quickly technology developments will continue to change the rules of the game. That’s what Napster did and if history is any guide then technology will continue to innovate and outpace corporate business plans.

The chances are that another Shawn Fanning is already out there working in his or her college dorm room on the next new Internet technology that could blindside the music industry and give consumers something for nothing -- which is, after all, difficult to turn down.

Articles Menu