The Labels Start Turning up the Volume
The recording industry beat Napster and continues battling free file-sharers. But in slow steps, it's learning to dance to an online beat.

From Business Week;
http://www.businessweek.com/technology/content/aug2002/tc20020812_4809.htm
In June, three of the five major music labels -- Universal, Sony, and Warner Music -- announced that they would make thousands of songs available for download over the Internet at the discount price of 99 cents each. Better yet, in a major about-face Warner Music agreed to let buyers of many of the songs, by both new artists and established acts such as the Red Hot Chili Peppers and Alanis Morissette, copy or transfer them to portable MP3 players. Sony and Universal's music was released in copy-protected format.

Industry analysts hailed those moves as a giant step forward -- a sign, at last, that the music establishment is beginning to "get it" when it comes to cashing in on the Internet as a distribution vehicle for music. No question, the labels' decision represented their first realistic effort to create a viable alternative to popular but illegal file-sharing networks such as KaZaA and Morpheus (heirs to Napster, now languishing in a fog of uncertainty about its future), where savvy Net surfers can download millions of individual songs without buying a whole album -- and all for free.

"In the past, fear of cannibalization" would have ruled out the 99-cent solution, says Larry Kenswil, president of Universal Music Group eLabs, the label's new media arm. "If consumers could get the single, why buy the album" the music industry worried. "That's still a concern," Kenswil confirms, "but right now, anyone can get any song for free" -- which makes getting at least some Web revenue look like a reasonable alternative to getting none.

End of story, right? Not exactly. It turns out that major retailers -- the companies that actually sell music to the public -- haven't yet signed up to promote the 99-cent downloads, either in-store or online. The reason, according to sources close to the negotiations between music companies and retailers, is the labels' onerous demands. In exchange for offering up popular songs cheap, the music companies want retailers and resellers to hand over valuable customer data -- or even let the labels handle the online transaction in its entirety.

DINOSAURS' WALTZ. That way, customers who think they're purchasing from Best Buy(BBY ) or Amazon(AMZN ) would really be buying direct from Universal or Sony Music. To the retailers, introducing their customers to the music companies would be a recipe for extinction. "It's a question of kill me now or kill me later," says Pam Horowitz, president of the National Association of Recording Merchandisers, the trade group for music stores.

The stalemate demonstrates how far the music establishment still has to go in dealing with the new realities of its marketplace -- and also how far it has come. Music executives still can't restrain themselves from waging what are probably quixotic battles over who gets access to their products, and under what circumstances. As long as that continues, what has suddenly become a moribund music industry could remain stuck in neutral -- to the detriment of the labels, retailers, recording artists, and music lovers.

Yet the industry's latest move is also a sign that music executives, who, even six months ago, regarded the Internet as more a menace than an opportunity, now realize that they can't avoid embracing the digital future. Indeed, independent digital-music services such as Listen.com's Rhapsody and FullAudio, plus label-backed services such as pressplay and MusicNet, all are predicting that, within 18 months, they'll be able to offer the labels' full song catalogs online -- along with the right for consumers to burn songs onto CDs and move them to portable devices.

SLIPPED DISKS. What may be in store, in other words, is the most fundamental change in the way music is sold since Paleolithic disc jockeys of the 1920s first started playing songs on the radio. "Once we move past this period of acrimony, we'll emerge with amazing new ways to promote and market entertainment that we couldn't have dreamed of before," says Ted Cohen, vice-president of new media for EMI.

The epiphany that may lead to all this has come less from a sudden understanding of online music's potential than the dizzying decline in sales of music CDs -- which, according to Nielsen SoundScan, have fallen 12.8% this year through Aug. 3, vs. a year earlier. And that's on top of a 10% decline for 2001. Sales of singles have plummeted 65.4% this year, clearly one motivation behind the labels' 99-cent offer.

The sales slide, it's important to note, isn't wholly attributable to online music piracy. True, the rise of Napster in 1999 taught a generation of young listeners that music could be free for the taking. But the crisis in the music industry results from a confluence of factors -- including the end of the repurchasing cycle in which millions of adults bought CD versions of albums they already had on LP or cassette, plus the tail end, for now, of the bubblegum pop craze, that saw acts such as Britney Spears and the Spice Girls sold more than 10 million albums a piece.

SHOCK OF THE NEW. The industry's crisis is also one of identity -- as described in the 16th century by Niccolo Machiavelli in "The Prince." Machiavelli wrote: "Innovation makes enemies of all those who prospered under the old regime. And only lukewarm support is forthcoming from those who would prosper under the new. Their support is indifferent, partly from fear and partly because they are generally incredulous, never really trusting new things unless they have tested them by experience."

In other words, no one wants to go on record as backing a new idea until it's a proven winner. Indeed, with subscribers to paid digital-music services totaling at most 100,000 according to industry insiders -- 400,000 if you include free online radio services and pay satellite radio -- it isn't yet clear when the online music market will mature to the point of producing a return on investment.

The danger of switching business models too quickly is dramatized by what has happened to corporate execs who hitched their star to online businesses. Just the past month has witnessed the departure of AOL Time Warner's chief operating officer, Bob Pittman, who spun grand visions of the convergence of old media and new; the firing of Jean Marie Messier, the architect of Vivendi's multibillion dollar transformation from a water utility to entertainment giant; and the dismissal of Thomas Middelhoff, CEO of German media conglomerate Bertelsmann, who had championed ill-fated online ventures such as Napster to the bitter end.

"NO STAKE IN DIGITAL." All three were punished because the Internet failed to deliver the dazzling riches they expected -- at least according to the timetable they predicted. In that environment, notes one well-placed music executive, no media baron "wants to be the one who tells Wall Street that he's betting the farm on the Internet."

The foot-dragging isn't only at the top. The record labels' distribution arms also are objecting to a wholesale embrace of digital delivery, according to industry insiders. The distributors, which sell CDs to retailers on behalf of the disparate labels in each music conglomerate, take 10% to 15% of CD revenues. If selling tunes online for 99 cents apiece causes the physical product to disappear, so will their piece of the pie. "These are very powerful people with no stake in digital distribution. They need to be part of it," says James Glicker, president of digital-music service FullAudio and former senior vice-president of BMG's Classics.

Even as the various factions inside the music companies vie for control, the industry is struggling to present itself in a more flattering light to millions of alienated consumers. That's a tall order, as illustrated by the widely repeated joke that the terrorist group Al Qaeda has better PR than the music industry. The reason: The face of the industry is its powerful lobbying group, the Recording Industry Association of America (RIAA).

ALLIES ON THE HILL. The RIAA is an odd choice for the job, given that, for the past two years, it has tried to crush the free online music services with one legal assault after another. In March, for instance, industry representatives testified on Capitol Hill in support of the Consumer Broadband & Digital Television Promotion Act, which would limit consumers' ability to mix and copy music by requiring that copyright-protection software be embedded in PCs, handheld computers, and CD players. (See BW Online 4/18/02, "High Tech vs. Hollywood on Capitol Hill"). In July, 2002, a bill was introduced by Rep. Howard Berman (D-Calif.) which, in essence, that would permit music and film companies to hack into the computers of customers they suspect of illegally trading copyrighted work. (See BW Online 7/31/02, "Taking the Piracy Fight Too Far"). And on Aug. 9, 19 members of Congress sent a letter to Attorney General John Ashcroft imploring him to prosecute users of peer-to-peer file-sharing systems.

The RIAA has an won an impressive string of victories in the courts, but at a high price: Many music fans, especially in the critical 18-and-under age group, interpret the industry's aggressiveness as a call to arms -- and swear to react in kind. For four days beginning on July 26, for example, the RIAA Web site was rendered inaccessible by a denial-of-service attack, in which hundreds of computers overwhelm a server with requests. "This is only the beginning," says one hacker, who denies taking part in the actual attack. "We're going to bring them down."

Such talk drives execs such as Steve Vining, president of the Savoy Jazz and Denon Classics label, to see measures such as the Berman Bill as essential to fight music piracy. But even he concedes that the industry is suffering from a public-relations disaster. "We've done a miserable job of making the case that this is stealing," he says. "What we should have is an ombudsman...a warm, kindly grandfatherly type who can talk in calm tones about how, if this continues, music as we know it will disappear."

STEAL THIS SONG. To that end, the industry is beginning to enlist a a new generation of tech-savvy executives to make its case, rather than relying on RIAA President Hilary Rosen, whose image is that of a musical Conan the Barbarian. One of most oft-seen on the talk circuit is EMI's Ted Cohen, a certified technophile, who before joining the labels worked as a consultant at a host of music and technology companies including Napster. Cohen makes a compelling case why consumers should feel sorry for the music industry, not resent it. One of his favorite anecdotes is the story of a seller on eBay who offered up a digital jukebox stocked with top-10 hits from the last 25 years, all presumably downloaded from the Internet. The price: $400.

Giving the industry a new public face couldn't come at a more crucial time. The music industry's new online strategy needs credibility if it's to attract consumers to the labels' new and improved digital services. On July 1, one year to the day that Napster was shut down, Listen.com's Rhapsody service announced that it had secured a long-sought licensing deal with Universal Music.

The agreement anointed Rhapsody as the first independent online service to offer songs from the five major music labels: Universal, Warner Bros., Sony, BMG, and EMI. With 175,000 tunes now available, the deal eliminated one of the key issues plaguing sanctioned online services: having enough music to compete with free music-sharing networks. (See BW Online, 7/1/02, "Rhapsody's Five Part Harmony" Listen also signed two deals to distribute music via DirecTV DSL and Time Warner's RoadRunner broadband service.

FREE VS. FEE. A month later, the label-backed service pressplay launched a new version. "We think [version] 2.0 signifies the first time a service is making available everything that the consumer has asked for," says Mike Bebel, CEO of pressplay. Essentially, he's right. Though pressplay lacks music from Warner and BMG, it allows subscribers to stream or download music to their heart's content for $9.95. For $17.95, they can also burn up to 10 songs per month onto CDs or transfer them to portable players. Moreover, the new service has dropped onerous restrictions. If you want to burn more than 10 songs, you can purchase download packs of five, 10, or 20. Extra songs cost just 99 cents a piece.

Even as the Establishment services improve, the file-sharing networks are becoming increasingly difficult to use. The RIAA's lawsuits have forced the most intuitive services -- Napster and AudioGalaxy -- out of business. The surviving networks, KaZaA and Morpheus, are both slower to use and riddled with low-quality files, spoofs (allegedly placed there by the record companies themselves), and computer viruses. The sites still get plenty of traffic -- the KaZaA homepage boasts that its software was downloaded almost three million times the week of Aug. 5 alone. Tech-whiz teenagers or a determined fan in search of a lost track won't be put off. But music buffs with more money than time are becoming increasingly disenchanted. "We're reaching the tipping point," says Listen.com CEO Sean Ryan.

That said, the online music biz has yet to create true harmony from the music Establishment's chorus of voices. "We're building the foundation for a long-term sustainable business," declares Alan McGlade, CEO of the music industry's second official site, MusicNet. Still, he adds: "It's an evolutionary process that will go on for years."

ONLINE GOLD? He's right on both counts. Acquiring the right to stream and burn music from still-stubborn labels and technophobic superstars such as Madonna remains a challenge for the music industry's nascent digital services. Bricks-and-mortar retailers and the labels have yet to negotiate a deal that determines which one will own the customer. And experiments aimed at finding ways to promote digital music from within retail stores are just beginning. "Ultimately, it's going to be a mix of physical and digital delivery" that makes the music business thrive again, says Aram Sinnreich, an independent music analyst. "That blending necessitates better cooperation between suppliers and distributors than we've seen in the past. It's a long and winding road."

There are still a lot of curves to be negotiated. The good news is that executives at the labels, retailers, and technology companies are now focused on the path ahead. Relationships are less antagonistic. Instead of fighting each other, players are realizing that what's good for the goose is also good for the gander. And they're all praying that digital music will be the golden egg they're searching for

First Post!!

Do the records finally get it? It seems that they don't understand that the people are always right. If all you do is try to prevent innovation, especially after so many have had a taste of what it's like, you are going to die. Obviously, this is true when looking at the record sale declines in the article. Survival of the fittest.

Hail Mp3!!!

"Bricks-and-mortar retailers and the labels have yet to negotiate a deal that determines which one will own the customer."


You do not "own" us. We are people, not "consumers". Assume otherwise, at YOUR RISK.....

what i don't get is how they're offering to "stream or download" songs, yet can still somehow control how many times i burn it onto a cd or load it onto a portable... unless the hardware is supporting their copyright efforts (which i hope we've seen that little effort fizzle) i don't see how they can pull that off... hmmm

Actually I think it will be a long time before they do get it. The are so entrenched in a pay per unit model, that it's going to be next to impossible to get them out of it. For example: There would not be a problem over the webcasting fees if it was a set rate per song, but instead they opted for, and got included in the legislation "per listener". The ASCAP and BMI (publishers rates are per tune,per play, not listener). The difference in $$$ is staggering. It's quite conceivable that they could make $10,000 per month per webstream per station. That eliminates the college stations from the market, and kills all but those with deep pockets (Such as Clear Channel) and frankly we don't need no freakin Clear Channel dominating web radio after all they've done for regular radio.

A friend of mine had the idea that this was just a ruse by the RIAA all along. That this was the way they were going to anyway, but they know have learned the age old "negative pubilicity can be MUCH better than none at all". I find myself (jokingly of course) asking what if. What if Hilary Rosen IS smarter than the average turnip, and this was her goal from the beginning. Sacrifice Napster and AG, get the business in the news and on the web so everyone knows who they are, then turn tail at the last minute and act like they are surprised. Shyeah right.. what's that line about monkeys?

man what a long article!This subject is becoming really boring!...why don't we talk about how wonderful it is to be able to spread our music around, so people 'steal it' so what, if people did'nt 'rip off' Windows copies(I did'nt incidentelly)we would'nt have this fantastic world forum for discussion and music sharing.I am a muso, if I wasnted to be rich I would have taken up banking instead!Lets just watch, wait and see, and stop wasting millions of words and music making hours over our leaders who for the most are simply under educated,insecure,self opiniated, egotististical wankers who like to play God with legal restricions on every thing that was once a basic freedom for man.We now operate under so many 'rules' life is getting to be tedious.Jimi knew it...thats why he 'checked out in 1970, he had far more useful things to say in his songs than any politian,lawmaker,or would be intellectial!

I just want to know who in the right mind thinks 99 cents is a BARGAIN price for a song?? Given that an average album has 13 tunes on it (I know it can be as many as 18 but stick with me here) That's 13 bucks. You can buy the CD itself for 12.99 from the big chains like the Wiz. I don't see any savings here whatsoever. If I had to chose, I would at least get the CD so I have the cover art and I didn't hand them over 100% profit (only 90% now)

Good thing I don't plan on buying based on this "new" same-old price structure. I just got the new Tori Amos album and the new Coldplay, neither have been released yet, and both cost me the fee I pay to my ISP. Thanks, really, but no thanks. Find an agreeable structure, or go back to trying to shut me down.

Sven: they must seriously believe their consumers think 99 cents is a bargain and that they'd be willing to pay extra to burn downloads onto CD. "We think [version] 2.0 signifies the first time a service is making available everything that the consumer has asked for," says the CEO of Pressplay.

No one who used Napster two years ago can forget the variety of music available and the fact that everything was so unrestricted. If you wanted it burned onto CD, it just worked. Where do they FIND their "consumers"?

I've never been a fan of "the 99 cent solution". I am not going to pay the same price for a digital file as I am for a CD. That's it. period. Maybe a flat fee per month, or 25 cents per dl or less if they really insist on a per dl basis. Hell I've paid the $27 or so for Weblisten several times to get the music I want. each time I've dl about 150 tunes. Latest albums, and I'm legal. (its in Spain).

Yes, I just don't understand this price model. 99 cents a tune is just as bad as their LAST model. I don't see how we are getting what we asked for here. Prepare to have your sales dip ANOTHER 5%. This consumer has NOT gotten what he's asked for.

I hold to my desire for a flat fee. A monthly stipend for unlimited (or even tiered to pay-per-100) but at a competitive rate, none of this buck-a-tune nonsense.

99 cents is way too much, as you say Sven, a flat fee is more desirable. It works in Spain as Thumbtack rightly points out, why cant others accept it?

Some net albums are $4. Thats about £2.50 to me. Considering that there are much fewer overheads on a net album than on a real album (as I'm finding out, heh heh) that's still a good price though. It beats the £15.99 or whatever for a full album. If I want the info on a band I've digitally purchased, they can provide a nice web site with images, lyrics and whatever else (as a lot do).

The prices really do indicate that the only difference between street music and net music is the abominable amount of greed lurking behind the street supply.

**Such talk (of retaliatory hacking against the RIAA) drives execs such as Steve Vining, president of the Savoy Jazz and Denon Classics label, to see measures such as the Berman Bill as essential to fight music piracy.**

Just like the Polish Communist regime's 1981 imposition of martial law (and placing union leader Lech Walesa under house arrest) was "essential" to counter the growth of the Solidarity labor movement in that country. Just like the Chinese Communist regime's brutal crackdown on (and subsequent execution of thousands of) dissidents in 1989 after the Tiananmen Square incident was "essential" to counter the growing pro-democracy movement there. And so on, and so forth. (Anyone remember that video of a demonstrator squaring off with a tank at Tiananmen Square? I bring this up because in a very real sense, being on the side of the RIAA-MPAA is like being on the side of the tank.)

Enough with the hyperbole folks, this is about free music, not martial law or tanks in the streets.
I don't know about the rest of you, but I only use file sharing to acquire the stuff that is too old, obscure or rare to get in the traditional sense, or to try out a band without shelling out twenty bucks for the cd.
I still buy cd's and vinyl because the sound quality is better.
I don't think guys like me are a threat to the RIAA.
But as much as I support file sharing I have to say that some of the rhetoric being spewed out by the more militant of us isn't helping very much.
We either sound like lunatics or whiners or both half the time.
Music has never been free. Even the oldtime wandering minsterel demanded and deserved a hunk of bread or a few sheckels thrown into his cap for his trouble.
None of us are so special that we deserve free music.
The RIAA sucks because it has long outgrown its usefulness and exists now only to perpetuate itself at the expense of hard working musicians.
If all of the RIAA's dreams came true and they could get any law they wanted passed, the WORST that could happen to you would be for them to hack your hard drive and maybe fine you the cost of all the music you 'stole'. As much as that would suck, the likelihood of it coming to that is microscopic but even so it's a far cry from getting shot by the police at a democratic rally or thrown in jail and tortured. Get some perspective please.

I am a musician and producer in NYC. I work in the "middle class" of the music industry. That means I don't do the J Lo's or Creeds that are paying for our screwed up industry. I tend to work with new artists that I have a passion for their music whether they are signed or not. I do music because I love it and over the course of my 20 year career I have always felt that contributing something to music and it's audience was more important than making millions of dollars. I have toured and recorded with many successful acts (as a sideman, and not participating in the percentage of net profits) as well.

With people expecting all music to be free, you are expecting all the people that are paid a salary bby the labels or an artist or producer to work for free because when you don't pay for your J-Lo or Backstreet Boys or Creed record, etc, some of the profits from those records that labels use to develop new acts is no longer available. What does this mean...it's means that the labels will keepp putting out Jo-Lo and Destinys Child records but are less willing to take chances on developing acts that may be different or a greater risk. Then what the labels start doing is develop "clone" acts that will be a sure bet because they sound like something that is already out there.

This has always gone on in the indusrty but it worse now than it has ever been because profits are way down. That's why your are hearing a lot of rehashed garbage on the radio this year. The labels are not willing to take a chance on unique bands.

Yes, the music industry is fucked and greedy and souless. I fight with labels all the time to get paid even for the smallest projects or to get royalties I am due. Let's get real..what major industry isn't greedy... but it's all I have got. When you don't pay for a U2 record you are indirectly stopping a band that you may have fallen in love with from getting signed.

Would you go into a record store and steal a CD? For those of you who answer "yes" then I am not addressing this to you. For those of you who relpy "no" but have not bought a CD 2 years you need to rethink your morals. When you only download free music and don't buy a CD you are stealing from the middle and lower income earners of the music industry as well as the multimillionaires. How can you justify that?

Bring the cost of cd's down. Why must the public be punished for ill-advised promotional tactics?

This is the future. We are seeing a change in who has control of music, information, and technology. The working people are in control. This is what Alvin Toffler describes in his book Power Shift. The days of Industrial age are long gone. We are seeing the death of that age now where people like myself can control and use of information. So many systems are crumbling because they were built upon big finances, abused people, and inflated their positions to an upper 1% tier: the elitist. No more we control the information now not them. I am the Power Shift I can find anything because I have the power and control to do so. Because the music industry still uses the same adages over and over will not here and will not work this is the future get used to it.
I own you RIAA.

Thanks for reading.
.

I'm partially with proTooler,(although I'm a cubase man myself), but the assertion that file sharing indirectly prevents new acts from getting signed, misses the vital point that it isn't as necessary to have a record contract as it used to be.
Professional analog recording is and has been prohibitavely expensive for a band without a record contract, I know this from experience.
Advances in digital and home recording have opened up the music recording frontier to the point that a good computer, software, and a few good mikes costs as much as a medium quality studio demo cd. Plus, owning the equipment gives the musician the time to experiment and perfect the recorded product unlike studios where you are always watching the clock.
So if we don't really need expensive studios anymore, why do we need record companies? Promotion and distribution can be done with the help of the internet.
Clone music has been around forever and I don't think it's more frequent now than in the early nineties when you had to sound and look like Nirvana in order to get signed, or in the eighties when you had to wear leather and lipstick and be a cross between a drag queen and a Hell's Angel in order to get a contract.

Screw the RIAA! Support local music!

P2P is wrong. It's piracy and that is stealing. No matter how much you want to deny it.

I am going to download an open-source RPM file. How is that piracy.

RPM downloaded using p2p system, and audacity is now running at last.

After seeing kde3 dependency list I have decided to continue with current version.