December 20, 2002
Can the Jukebox Be Heavenly and Profitable?

In the aftermath of Napster's now legendary demise, file sharing on the Internet continues to thrive. The music industry (major record labels, as represented by professional organizations such as the Recording Industry Association of America and its affiliate IFPI), has reacted swiftly and litigiously, digging into deep pockets to protect their stake in the shrink-wrapped CD unit market model. So far, they've been remarkably successful, at least on the legal front, thanks largely to a body of copyright protection laws that were drafted in and for an earlier technological era, along with more recently passed legislation -- often controversially applied -- designed to address modern technologies (such as the 1998 Digital Millennium Copyright Act).

Notwithstanding the industry's best legal efforts, music file swapping activity on peer-to-peer (P2P) networks KaZaA, Grokster, Morpheus, and countless others is widespread and growing. CNET News.com Staff Writer Larry Dignan reported last August that two recent industry reports, by separate analyst firms Forrester Research and The Yankee Group, predicted growing rates of unlicensed file swapping. (Among consumers, ages 14+, Yankee estimated an increase from 5.16 billion in 2001 to 7.44 billion in 2005.) Both also predict declining rates beginning around 2007, a downshift Forrester attributes to emerging music industry business models that will offer consumers an easy and flexible way to pay for music online.

Meanwhile, sales of audio CDs are in decline. The RIAA announced (in a statement released on August 26, 2002) that CD shipments declined 7% in the first half of 2002 -- a fact they attribute primarily to music piracy, as implied by their claim that the percentage drop "decisively debunk[s] the theory that stealing music online is somehow good for the music business."

Some view the current trends and legal climate as clear writing on the wall that music labels and artists should be developing a radically different business model - one that markets and sells music in a way that takes advantage of networked computing, rather than resists it. Some musicians have already begun to explore alternatives models, and now at least one music label appears to be willing to experiment. In some cases, free downloads of individual songs entice music consumers to purchase full CDs and other merchandise. Other experiments are even embracing free file swapping services, leveraging the undeniable potential of the viral distribution network.

The music industry's struggle with the digital revolution dates to the mid- to late-1990s, when exploding mainstream public adoption of the World Wide Web was soon followed by the debut of audio file compression algorithms (such as MP3). The recording industry quickly recognized a formidable threat to what had traditionally been their exclusive privilege: gatekeeper control over music distribution channels. The equilibrium that had secured the balance between industry executives, musicians, and the media-buying public -- a power balance many recording artists assert is designed to leave them under-compensated -- began to list precariously just as Napster was rising to killer app status. Before long, a nervous corporate music industry brought any available legal weapon to bear in a series of defensive maneuvers aimed to curb technologies that might threaten the "old school" way of doing business.

Some lawsuits appeared to challenge even conventional wisdom about consumer rights and copyright-protected material. "MyMP3", a service offered by MP3.com, enabled consumers to access streaming MP3 versions of songs they had legitimately purchased on compact disc. When the RIAA filed a copyright complaint against the service, MP3.com fought the action, saying its legal counsel had advised the service was defensible. The RIAA subsequently prevailed, however, and MP3.com later sued their lawyers for malpractice.

Stanford Law professor Lawrence Lessig argues in his book The Future of Ideas that the music industry's response is the result of too few incentives for an older generation of business leaders to experiment with new and innovative models, and too many proven incentives to preserve the old way. There's no mystery surrounding why industry executives would be so defensive of a business model that has been enormously profitable for them.

Charles C. Mann pointed to much the same issue in discussing the attitude of Edgar Bronfman Jr. when he was about to become Executive Vice Chairman of then-forming global media giant Vivendi Universal. In "The Heavenly Jukebox", an article that first appeared in the September 2000 issue of The Atlantic Online Mann quoted Bronfman's prediction that it soon would be possible with a few mouse clicks "to summon every book ever written in any language, every movie ever made, every television show ever produced, and every piece of music ever recorded." Yet, at the same time, Bronfman was contemptuous of Napster, an app that Mann pointed out could be the best tool for delivering exactly that kind of digital content.

Why did Bronfman dismiss Napster outright? Mann offered that perhaps the biggest problem with the heavenly jukebox was that "users couldn't put a nickel in the machine even if they wanted to."

A new generation of experimenters, however, has nothing to lose and plenty to gain from trying innovative new uses for emerging technologies. A quick Google search reveals that many radically different proposals have been floated in an effort to realize revenue from digital entertainment distribution and channel it to the creators.

John Robb, President and Chief Operating Officer of Userland Software has offered his own vision. Enumerating his monthly entertainment content consuming habits, he argues for the profit potential of establishing a single, subscription-based, "all-you-can-eat media system" to distribute digital content. Such a metered system would track exactly what media each individual consumed, and then apportion the subscription revenue to individual artists and authors, along with a share for the distribution service itself.

GNU Project founder and free software proponent Richard Stallman, proposes a different solution to Mann's missing coin slot argument. During a talk Stallman gave at UC Berkeley in October 2002, he envisioned a simple user interface element (such as a small, non-intrusive button) to a P2P application or Web site. With a simple mouse click, satisfied music listeners who have enjoyed the music they downloaded could reward artists directly. Consumers, he argued, are quite willing and ready to pay a reasonable price for good content. But a major hurdle in implementing such an idea, Stallman concedes, is that no one has yet developed an effective infrastructure for handling online micropayments. Perhaps a more difficult hurdle might be the reaction of an "old school" minded recording industry at the prospect of a major power and profit shift to the artists.

An example of such industry reaction occurred in late 2000, when an American rock band called The Offspring devised an innovative marketing strategy clearly inspired by the untapped potential of the World Wide Web as an effective distribution tool. Their plan to pre-release their album "Conspiracy Of One" via download from their official website would have almost assuredly guaranteed huge fan traffic. To take advantage of their fans' captivated attention, the band would make other promotional offers available on their site -- merchandise, concert tickets, and so on -- to this very targeted and preferred audience. They saw real value in connecting directly with the fan base and capitalizing on the good will and exposure they felt certain they would receive in return.

But the plan was met with swift and, ultimately, effective legal pressure from their label, Sony Music. Fearing career suicide, The Offspring eventually backed down. Sony "compromised" by allowing just one song download from the site and a contest promotion. In the aftermath, the band's manager Jim Guerinot shared some choice words with mp3newswire.net: "It sucks, because once people get their hands on the music, fans will have to turn to Napster and other distribution methods to take a listen, but they won't be able to find the songs at www.offspring.com. We will be the only site on the Web that will not have the Offspring's new music."

Reporter Robert Menta speculated in the mp3newswire.net article that there seemed to be a more ominous motive behind Sony Music's position: to discredit a Napster-esque business model: "If the campaign was successful, it would have proved that MP3 downloads are not a threat to CD sales but a promotional tool like radio. The Offspring's promotion would have also been repeated by dozens of other bands, all releasing their full array of album tracks before the actual CD release. Had this happened, the act of giving away music in MP3 would have become standard practice and the music industry's legal case against Napster would probably fall apart. After all, you can't be accused of stealing what is being given away."

Two years later, the tide appears to be turning -- ever so slowly. P2P file sharing application company Grokster (whose Web site dutifully trumpets the corporate motto "Support the Artist. Buy the Record."), announced a promotional partnership on November 5, 2002, with recording artists Insane Clown Posse (as mentioned on the bIPlog). The initiative includes a free MP3 download of one of the singles on the group's new CD, a giveaway of album-related merchandise and a link for purchasing the full CD.

Also in November, KaZaA, another well-known file sharing app company, and its distributor Altnet Inc., announced a partnership with Sharman Networks for a different sort of marketing strategy, one that attempts to turn piracy into profit. Bands may use KaZaA to promote themselves by paying for preferential ranking in KaZaA search results and featured links to their music when users search for songs by related bands. The New York Times reported that the deal also includes a new type of "wrapper" software, developed by Microsoft, that would provide users a free-trial listening period before prompting them to pay for a song.

Even one music label appears to be getting into the act: Universal Music Group.

In November 2001, Robin Richards, then just-appointed CEO of Vivendi Universal Net USA (formerly, founding President and COO of MP3.com), told Wired magazine the company's business strategy would be based on a media "killer app" -- software that would "deliver content to its 36 million users within six months" via a single network. Coincidentally this came at about the same time that the aforementioned Edgar Bronfman was resigning from Vivendi Universal.

A year later, on November 20, 2002, Universal Music Group (a Vivendi Universal subsidiary) announced a new pay-per-track service model with no limits on copying -- a move virtually unprecedented in the music industry. According to UMG's press release, consumers can "purchase, burn and transfer songs to portable devices" without restriction and at a cost of $0.99 each, or $9.99 for an entire album. (See also the related bIPlog post.) To sweeten the incentive to participate in the new service, the promotion offers consumers "exclusive pre-release-date content" by recording artist Mariah Carey.

Will Universal's willingness to pioneer this new business model incite copycat behavior? Given the historical context, it seems unlikely that other labels will follow suit until the results of UMG's experiment are in. In the meantime, it appears likely that individual musicians, P2P services and technologists will continue to experiment, mapping out a new business model for the heavenly jukebox, with or without the industry's blessing.

Posted by Maggie Law at December 20, 2002 12:18 PM
Comments

My Nomad Jukebox 3 (40GB) is damn heavenly... I can queue up the 15GB of mp3s that I have in one playlist and shuffle them. This ensures that I can listen to everything I own in about 9 days of continuous play... this is an example of a new use of technology that wasn't necessarily intended by it's creators that redefines how I listen to music.

Posted by: joe on April 9, 2003 06:49 PM
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