The growing and dangerous intrusion of this new technology threatens an entire industry's economic vitality and future security." That's Jack Valenti of the Motion Picture Association of America talking. The year was 1982. The technology was the VCR.
The Supreme Court found against the Motion Picture industry in the Betamax case in 1984. Movies, you may note, are not only still vital and secure, but the videocassette recorder technology has created a whole new distribution system.
In 1908, the music publishing industry was up in arms about new technology that would destroy it. That was the industry that published sheet music. The technology was the gramophone which has thrived and morphed through several new technological versions while sheet music publishing thrives as well.
Now we have the Napster issue. Recorded music is the canary singing in the mineshaft of intellectual property. Anyone with a bit of available technology can reproduce music digitally and share those digital files across a network, like the Internet. It doesn't require the heavy bandwidth that video demands. And it's transmitted in a form that allows folks to use it naturally, unlike books which have to pass through a printer or some kind of less-than-popular e-book reader.
Essentially, Napster is a giant swap meet on the Internet. Folks looking for a particular kind or piece of music can find out if anyone online when they are has what they're looking for and get it over the net. Record companies looked that this and didn't like it. They saw one CD purchase followed by an unlimited number of unauthorized copies. So they did the American thing. They filed suit.
In December 1999, 18 record companies filed suit claiming that the people using Napster were guilty of copyright infringement. There were a lot of them. Napster's own records show that almost 60 million folks have downloaded the software. The record companies claimed that Napster, by facilitating the illegal sharing of files was guilty of contributory infringement. They wanted Napster shut down.
Judge Marilyn Patel agreed with the record companies. On July 26, 2000 she issued a preliminary injunction ordering Napster to shut down while the trial went on. In by-now-common tit-for-tat fashion, Napster's attorneys got the Appeals Court to issue a stay of that injunction.
Last week the US Ninth Circuit Court of Appeals shut the door gently, but firmly on Napster. The ruling said that Napster had to stop facilitating the unauthorized sharing of copyrighted material. Now what?
Let's look at Napster first. They're putting up a brave front over there, but there's got to be some weeping and gnashing of teeth going on behind the scenes.
To begin with, Napster never has made any money. Like a host of other dot-com companies it generated millions in venture capital funds based on the fond hope that it would make money someday. Those funds have been flowing rapidly into the pockets of lawyers, which is not usually considered an effective growth strategy.
OK, then, how about developing a way to share authorized versions of music? There are a couple of problems here. The first is that even though Napster has said it was working on a system for this since it hooked up with the publishing giant Bertelsmann late last year. The system isn't ready yet. In fact, no one, even at Napster is willing to forecast when it might be ready.
Don't take this to mean that the record companies have eliminated the threat posed by digital reproduction and sharing. This is an industry ripe for a bit of seismic activity.
Most music is sold today on CDs. They cost anywhere from $13 to $17 or so at retail. More than half of this goes for distribution, shipping and store markup. All of this is according to Billboard magazine which also tells us that a whopping 95% of albums don't make money for the record producer or the artist.
With those kind of numbers, it might make sense to think that the record industry would embrace the net as a way to share music at a far lower cost than it takes to drive it down the distribution chain to the retail store. But things are not always so simple.
First of all, the record companies are currently dependent on the retail stores for revenue. Without that revenue, they die. Over the years, for good and bad reasons, record companies have built up huge investments in infrastructures, staffs, offices, production facilities and distribution channels. Any big change means immediate losses, and those don't sit well with an investing public that somehow thinks it's possible to have growth in earnings every quarter or else the CEO needs to be beheaded.
There are three key players here-creators, producers, and stores. All of them need to make a profit, and unless something has changed overnight, that means they have generate more revenue than expenses. To increase profit they have to increase revenue, or decrease expenses, or both.
Creators, the folks who write and perform music, live with dreams of using the net to expand their audience while they bypass the studios that take both control and a cut of revenue. They divide into two groups-established creators and others.
The established creators are already doing pretty well with the current system. So they, like the record companies and others have a stake in it. Some of them have experimented with different ways to use the net. Arrowsmith has released songs over the net. Todd Rundgren developed a system called Patronet to develop online fan communities and to share his music with the faithful as he develops it. He sold the system last year with the idea of expanding the concept to other artists and markets.
Some newer or less established artists are working hard on the traditional route to stardom. They're willing to spend years on the road, on buses and in crappy clubs because they believe that at the end of it all they will have more money than they can count.
Others are experimenting. They're buying small digital studios and cutting their own CDs. There are even small, boutique studios springing up to do this for them. They attend a live "concert" of a garage band, say, down at the lounge at the local Holiday Inn. They record the sound, take digital pictures for the CD case and help the band get something to sell. Some of these businesses are looking for ways to sell these products online, too.
Producers are faced with three strategies. They can prosecute. They've already done that with Napster and other file sharing systems, but hauling a couple of million customers into court is probably a bad idea.
Producers can work on schemes to prevent unauthorized copying. They're doing that, too, but not well. Two years ago they said they'd have a system ready for Christmas, 1999. It's still not done and seems to be dead in the water. Part of the problem is that the record companies seem to want a security system that will withstand a nuclear attack, or at least that greatly-feared-but-hardly-ever-seen character, the genius teenaged hacker.
Producers can also try to use the technology. They haven't proven any better at that than they are at the prevention thing. Sony, for example, has been offering a limited number of songs for download. They started by charging $2.49 per song. That's almost double what songs cost on a CD. Now they've dropped the price to $1.99. Selection is still limited.
Retailers, meantime, are experimenting with in-store kiosks, digital downloads and more. Nothing is clicking yet, but they're watching, waiting, and not entirely trusting the record companies.
So, what kind of system will make users happy? Users want something that's easy to use. They want something that's in a standard format. And they want to feel that they're fairly treated and getting value for their money.
We can be sure of a couple of things. First, if someone develops such a system, music lovers will use it, just like they moved to CDs from vinyl because of better perceived value. Second, whatever system is out there will use digital reproduction and distribution technology. That toothpaste is already out of the tube. The challenge is to use the technology to add value.
Here are two ways things could look a ways down the road.
Record producers and probably retailers could work out a combination subscription and play for pay system. There could be several variations in the quality of subscription, much like cable TV is today in many US cities.
Or imagine a possibility of a subscription to your favorite artist over something like Todd Rundgren's Patronet. You'll get songs as they're completed and first crack at the final CD. Expect tiers here too. There might be a basic CD at one price and a Gold CD with additional information, artist interviews or tracks at another. The CD's could be delivered through record stores with several possible cross-promotions.
If history is any guide, it won't be the record companies leading the change. Companies with investment in established technologies and infrastructure almost never do that. Instead, the change will come from the experiments of artists and entrepreneurs. I figure it will take ten years or so. That's because I think the answer is in the soul of a twelve year old, who's right now playing riffs on a guitar in the family garage.
This feature appeared on 19 February 2001
