|
Feature
June 2001
Someone's gonna pay for this
The post-Napster digital music world seeks sustainable business models.
Erik Sherman, Contributing Editor
In the last several months, online digital music has become synonymous with the court battles between Napster and the major corporations that own the record labels and, in turn, the music itself. At this point, Napster may be down for the count, unless its licensing of “fingerprinting” technology to prevent the trading of copyrighted songs keeps the courts off its back.
If Napster does survive, its only remaining task would be to actually make money from digital distribution—a hurdle that, ironically, Napster’s recent adversaries also face.
The hullabaloo over Napster has had an unfortunate side effect: It has largely obscured many of the real issues, opportunities, and potential business models of an Internet Tin Pan Alley. To be successful in online music, companies will need to cast aside suppositions and perhaps find business models that few envision today.pp
First among the misconceptions of online digital music is that Napster and its ilk were the only companies smart enough to see the promise of digital music, while the major recording labels are nothing but ill-informed luddites.
“[The labels] are sophisticated people who are in charge of billion-dollar corporations,” says Ivan Hoffman, an intellectual-property lawyer who worked in the recording industry for 20 years “It’s glib to say they just don’t get it.” Being large corporations, the largest recording labels move slowly, and their actions often indicate little about their strategies. “We just see the actions, not the minutes of every meeting,” Hoffman adds.
“[The labels] desperately want to do digital distribution—there’s more money to make.”
Joe Vangieri, Visiosonic |
|
This degree of invisibility makes it easy to misinterpret the actions the labels do take. “The record companies are not afraid of Napster,” says Joe Vangieri, CEO of Visiosonic, which makes software for professional DJs. “They desperately want to do digital distribution—there’s more money to make.”
 Joe Vangieri |
|
But there’s only money to be made if someone collects it and pays a share to the labels. “When the Napster thing took off the way it did, there was no permission given from anyone,” Vangieri says. “[Napster is] trying to ask for forgiveness after not getting permission.”
Napster’s meteoric rise put the labels into a problematic position. Because of their size and current business relationships, they cannot immediately change their business models. “Each major label owns its own distribution company and CD replication plant,” says Vivek Tiwary, president and CEO of StarPolish, a company that provides guidance and management tools to musicians. “It’s just not that easy to incorporate new technology into huge companies.” Tiwary also admits that the labels have also been “overly cautious to embrace technology.”
At this moment in time, the labels have little fear, because they own the material that people want. And ultimately, as the courts have shown in the Napster case, the recording companies must be included in the party. The real fear in the music industry lies elsewhere.
“I think that the people who are most frightened are the people on the physical distribution chain,” says Andy Grundy, president of Spun.com, an online music retailer. “For retailers and traditional distributors, digital distribution must seem like something out of a Halloween B movie. I think the real issue is the consolidation of a number of these retailers. If you can go online and find that [music] for a better price, why are you going to go to that mall store that’s trying to sell the CD for $17.98?” (See the sidebar, “Musical chairs.”)
But it’s far too early to predict the death of CDs and record stores. Consumers have proven time and again that they have an affinity for physical products and stores. It seems unlikely that they would suddenly boycott music stores. Napster has also so far lost in court. However, Hoffman still warns against complacency. “The reality is different than the legality,” he says. The legality is that Napster was held to be infringing. MP3.com was held to be infringing. To the extent that the other peer-to-peers become economically significant, they’ll be sued, too. The technology that Napster either unleashed or refined is here forever. Once the cat is out of the bag, the cat is out of the bag.”
Online alignments
Even though online distribution is not about to replace the existing music industry, it is going to cause changes—big changes. “I think this is fundamental,” Hoffman says. “And I don’t think anybody has grasped just how fundamental it is. The analogies that have been talked about have been in terms of the advent of the VCR and its impact on the motion-picture studies and television. I don’t think that’s even remotely in the ballpark.” VCRs left control of content largely in the hands of the movie studios. Sure, someone could copy a movie and give it to a friend. But now anyone can send relatively small audio files over the Internet and become a de-facto republisher.
Although the labels are not fond of moving quickly, they are caught in a fast-moving stream and left with the options of swimming or sinking. Because no one knows what arrangements will eventually work, the music companies are forming an overlapping set of alliances, often with competitors (see the sidebar, “Who’s in bed with whom”). The arrangements may look haphazard, but the day is young.
“Let’s be reasonable,” suggests Tom White, senior director of audio product marketing at InterVideo, which makes media-playing software for consumers. “We look at the record industry today; it’s been around how many years? It’s easy to look at the deals they’ve made and say it’s only two, but it’s only been a couple of weeks. It’s a lot more fun to just criticize them, but we have to step back and look at where they are today and where they will be.”
There is little doubt that they will be near large mounds of money. Yet the path toward that end is cloudy. The various industry alliances are considering various approaches. One is to provide a streaming service, where consumers would be able to listen to music online without downloading files to their hard drives.
Another model is to let people pay for downloading music. The labels remain hesitant to embrace that approach until they can find ways of preventing people from freely copying and sharing files. “Once the music hits the wire, you can’t protect it,” Vangieri says. “When Thomas Edison came up with his first cylinder [recorder], I’m sure there was someone in Philadelphia knocking off the cylinder. The simple business dictum is that control equals income. If I have the control, then I can keep my income.”
Technical disharmony
To have control, companies would either have to depend on the kindness of strangers, as a technical Tennessee Williams might say, or find ways to prevent unauthorized copying. The Secure Digital Music Initiative (SDMI) is a trade organization of recording companies, artist associations, electronics firms, and software companies trying to create technology specifications, including watermarking (see the sidebar, “Hidden bits”), to prevent digital music from being copied.
“People have been used to getting a lot of things for free on the Internet. It has to change, because those who had provided free content are disappearing one right after the other.”
Michel Darnaud, Enition |
|
Such a change in technology would require an immense shift, both by industry players and the public, which will be difficult to achieve in the near future. After all, popular media-playing software applications, programs that record CDs, and consumer-electronics devices will all need to adhere to the same standard, and even with the utmost in cooperation, the process will take considerable time.
There is no single leading candidate for the file format, and the likely struggles among companies will likely delay industry adoption of a standard. RealNetworks is touting its RealAudio 8 format. Microsoft is pushing its own Windows Media Audio format and reportedly planning to limit the sound quality of MP3s playing on Windows XP in order to goose things in its own direction. AT&T, Dolby Laboratories, Sony, and Fraunhofer Institut Integrierte Schaltungen have put forth the Advanced Audio Codec.
Vendors can only adopt what consumers are willing to buy. So far, that continues to be MP3 files, which companies could treat with a watermarking technology, if only the industry could agree on a standard.
“People seem to be very much in favor of MP3 files,” White says. “The content industry—the major labels that own 80 to 90 percent of the content people want to listen to—have been reluctant to do something [with MP3]. It’s very difficult to sell something that others are giving away.”
Variations on a theme
There is not much time to convince people that payment is reasonable. “People have been used to getting a lot of things for free on the Internet,” says Michel Darnaud, general manager for Enition, which provides systems that let companies charge for content. “There was an expectation that it would continue forever. It has to change because those who had provided free content are disappearing one right after the other.”
Some companies think that changing the basis of a business model makes more sense than trying to change consumer inclinations. InterVideo is trying to make otherwise free music files valuable enough to buy.
“A transportable file format is the key,” says White, whose company is currently working with MP3.com. “It may not be MP3 files forever, but right now it is. What we looked at was the ability to add additional content that was something you could not view or access over the CD [or online].” Examples would include such information as artist biographies or song lyrics. A file could even contain links to special offers on related music. By adding the data to MP3 files, consumers who had a special player would gain access to the premium content. Those who hadn’t paid would still hear the music on a regular MP3 player. “By adding these extra pieces of content, suddenly that is a unique experience that someone might want to buy,” White says.
Others hope that advertising might prove successful. Visiosonic, for example, offers a software-based MP3 player with buttons that link to things that might appeal to listeners, such as videos and music news. “We put ad banner technology into the product,” Vangieri says. “What we were selling for 49 bucks, we give away.”
“For retailers and traditional distributors, digital distribution must seem like something out of a Halloween B movie.”
Andy Grundy, Spun.com |
|
To help sweeten the pot, Visiosonic also has paid offerings for DJs, who get access to a “record pool,” a downloadable source of music not available to the general public. These are pre-release versions of music that labels make available in return for reports back on the popularity of the tracks. For the companies, a record pool is a cheap way of promoting music.
Another company, Nextlec Broadband Solutions, is proving that people will also pay for streaming music. The company, working with Broadwing and MCI/WorldCom, provides audio and video streaming to niche music markets. Brian May, vice president of media services, says both live and archived streams are finding a market. And at a cost of between $20,000 and $25,000, Webcasting a show can turn a profit.
Which of these many models will prevail? Most likely, online music success will involve all of the models outlined here and more. “Music is a very rich economy,” says Talal Shamoon, executive vice president for business development at InterTrust Technologies, a rights-management vendor. “There’s a $40 billion value chain behind it. There’s going to be experimentation with different business models. There will be a hundred ways of buying a song.”
|
Who’s in bed with whom
Here are some of the alliances that are forming to address digital music.
Bertelsmann, which owns BMG, home of RCA and Arista, has agreed to license music to Napster.
Vivendi Universal SA, owner of Universal Music, and Sony have created a music service called Duet. Yahoo! will make the service available, at first offering streaming music, and eventually downloadable titles.
Bertelsmann, EMI Group, and AOL Time Warner (Warner Music) are licensing their songs non-exclusively to MusicNet, which is owned by these three companies as well as RealNetworks.
AOL Time Warner is also working with Vivendi and Sony to make a subscription service available.
Microsoft, through MSN, is planning an Internet-radio service.
Musicbank, which had agreements with all the major labels, ran out of money and folded, although its site was still up at the time of writing.
|
|
Musical chairs
Aside from confusing consumer behaviors, unstable technical platforms, and unproven revenue models, there is a fundamental reason for the difficulty the digital music industry is having in establishing online businesses. To wit, the music industry represents one of the most complex, confusing sets of interrelated corporate entities ever to grace the carpet of a boardroom.
Most industries selling products to consumers have essentially well-defined roles. Manufacturers make products, either for their own consumer customers, or on a contract basis as the manufacturing arm for another company. Products move through distributors who, in turn, sell directly to stores or to wholesalers that then peddle products to the stores. Consumers shop at the stores, and the money flows back upstream.
In the music industry, there is no single manufacturer. One or more people generally write the songs, then make them available through publishers. Performers, most often not same people as the writers, choose material, go to studios, and record performances for a record label, to whom they contract. The label, which is the publisher of the recorded performance, reproduces the performances on a variety of media, including CDs and tapes. They sell the media to distributors, which, in turn, sell to the retail outlets that provide the consumer with music. As with most industries, the money moves back up to the labels, which are like manufacturers. In the case of music, the labels must pay portions of their revenues to the performers as well as to the music publisher, which then pays the composer and lyricist.
A problem occurs when the music is no longer tied to physical media, but moves over the Internet, potentially changing the entire distribution chain. Labels can either directly deal with the public or make deals with each other and online presences that embody the direct selling of a retailer and the extensive inventory capability of a distributor. But digital distribution means that the recording artists can also distribute music directly, as can the composer and lyricist.
In addition, the various entities in the music business have traditionally been wary of each other. Artists often complain about the way labels treat them. Composers and lyricists are wary about their work being used without them seeing any money for it. Labels are interested in making some profit while a performer is popular, in hopes of recouping the money it spent to promote the artist. Negotiations between groups regarding business arrangements will reflect these historic tensions.
Furthermore, the largest labels are divisions of bigger entertainment and telecommunications companies. Any distribution or reselling arrangements may be sweetheart deals between one division of a corporation and another, adding additional potential for mistrust into a system that will ultimately require cooperation if it is to work.
|
|
Hidden bits
Preventing unauthorized copying of digital music is difficult. There is no physical medium that can inform a player (hardware- or software-based) that a copy is legal or pirated.
Authentication data could be appended to the beginning or end of the files, or even inserted into the middle. That, however, highlights the existence of the data and makes it easier for someone to decipher and break the anti-copy scheme. Instead, companies are looking toward watermarking—the secret marking of files.
Watermarking is a form of steganography. The term is derived from the Greek steganos (sealed to be water tight) and graphos (writing). In steganography, one message is hidden within another. For example, a message could be encoded into a document using the initial letter of the fifth word in each sentence. Digital information provides entirely new places to place secret content.
At the heart of digital audio—or video or images—is a clever approximation. A series of bytes takes the place of the analog waveforms that our eyes and ears understand. In each byte, the bits typically vary in importance from one end of the byte to another. By choosing carefully, it is possible to change the values of some of the least-important bits in some bytes without perceptibly altering the sound.
Watermarking hides information in these least-important bits. The trick in thoroughly hiding the information is to scatter it throughout the file. Otherwise, someone could examine the least important bits as strings and look for non-random patterns that seem to have some meaning. Programs such as MP3Stego and S-Tools can hide information in a variety of file types, including WAV and MP3 audio files. To make things more difficult for prying eyes, a company may encrypt the data before inserting it into the audio file. That way, even if a snooper found the information, it would be useless.
Copy protection is not the only use developers can make of watermarking. Some companies are looking at placing other data, such as URLs, artist biographies, and recording session information, into the tracks. Digital files thus treated would offer value unavailable in a plain audio file.
|
|
We are the music makers
All the talk of record labels, distributors, and other companies leaves out the people who create the music in the first place. Musicians are trying find their fit in the new order.
Traditionally, many have had less than satisfactory relationships with their record labels. “I can tell you from contact with other musicians that it is difficult to work with the major record companies unless you’re a superstar,” says Aaron Rosand, a classical violinist who has been recording for decades.
Rosand has a “tremendously effective” Web site. “It’s like a one-stop shop, because everything is included,” he says. There is a discography, a biography, and links to buy his CDs. “I think that the free samples have stimulated a lot of sales in different parts of the world,” Rosand says. “[My] recordings in many parts of the world are not well distributed. Performing in Italy or other parts of Europe, people will say, ‘We can’t find your CDs in the shops.’ Now with the Internet, they can order it and receive it in days. So from my point of view, it has been a tremendous boon to my record sales.”
One of the appeals of the Internet for musicians has supposedly been the ability to directly market to people without help from a record label. But Rosand is an established artist with more than 40 years of recordings. Newer musicians don’t have the running start, nor the money necessary for the promotions and advertising that actually do sell CDs.
For those with some business savvy, though, the Internet offers some benefits. “Digital music is a tool,” says Vivek Tiwary, president and CEO of StarPolish, a company that provides guidance and management tools to musicians. “It’s not the be all and end all, but it’s a very powerful tool.” Artists can put together virtual listening parties for the cost of time and a computer. “Artists can get access to all those things and use all those things to build their careers in ways that weren’t possible before,” Tiwary says. By building their popularity, musicians also gain more leverage for negotiations with recording labels.
|
Author information
Contributing Editor Erik Sherman (esherman@reporters.net), when not pursuing writing or photography, longs for the days of the reel-to-reel tape recorder.
|
