The catalyst for a paradigm shift in the recording industry

By Barry Neil Shrum & J. Eric Crupi

This article originally appeared in the print edition of Law on the Row, Volume 1, Issue 1 on September 9, 1999, as a harbinger of things to come.

To MP3, or not to MP3?
That is the question.
Whether t’was nobler in the mind
of record label executives
to acquiesce to the whims of the public
and adopt MP3 as a distribution standard,
or to join forces with RIAA
and take arms against
the sea of MP3 files
proliferating the Internet,
and, by establishing opposing standards,
attempt to end them.

First, an apology is in order for slaughtering a beautiful stanza of Shakespearean prose for the purpose, albeit appropriate, of mere sophistry. Clearly, however, the question facing the music industry is “to MP3 or not to MP3?” More specifically, should the recording industry accept and embrace the technology and develop methods of incorporating it into its business model, or attempt to eliminate or replace it?

After months of tension and quarreling between the recording industry, its artists, and technology companies regarding the mainstream emergence of sound recordings in the MP3 format on the Internet, the record labels seemingly have accepted the reality that MP3 cannot be dismissed as a mere fad, but rather potentially represents the future of music distribution. Although the industry did initially “take arms” against the MP3 technology, it has since retreated from its aggressive position as a result of its loss in the highly publicized legal battle with Diamond Multimedia Systems, a technology company which manufactures hardware that plays MP3 music. Instead, the recording industry has chosen to work in cooperation with its artists and technology companies in order to create a competitive alternative to the “unsecure” MP3 format. This strategy is the development and implementation of an architecture of universal specifications for the secure delivery of digital music via the Internet. Although MP3 technology is still in its infancy, the recording industry’s response to its growing popularity manifests its potential to become the catalyst for many positive changes in the current industry paradigm.

For our readers who are not already familiar with the MP3 format, a brief explanation of the technology is appropriate. MP3 (short for MPEG-1, layer 3) is a digital, audio compression format which allows exact duplicates of digital files to be reproduced. The format was originally created as the audio “layer” of motion picture film. But if it is merely a file format, is it really all that earth shattering? The answer is a resounding yes for a number of reasons.

The Technology

Arguably, the most significant benefit of the MP3 format, and the recording industry’s primary concern, is that it produces first generation-quality, digital music that any person can transmit to an infinite number of friends with the mere click of the “send” button in an electronic mail program. The transmitted copies are generated without the slightest loss of quality. The recipients can then create additional copies that are identical in quality to the original MP3 data and share them with their friends — and so on and so on. Unlike the transfer from traditional CDs to cassettes, there is no degeneration in quality, even after a file has been copied thousands of times.

MP3 files also can readily be downloaded from the Internet and stored on a hard drive. While standard uncompressed CD audio has, until recently, been somewhat protected by the sheer size of the resulting file, an MP3 file is eminently more portable. It is one-tenth the size. In addition, rampant on the Internet is free software which allows any pimple-afflicted teenager with a personal computer, a recordable CD-ROM drive, and an attitude to create MP3 files from standard music CDs. In popular lingo, this is referred to as “ripping” a song. That same geek can download images of the album or the artist from multiple sources on the Internet and burn them onto the CD, completing the aesthetic aspect of the pirated copy. Suddenly, that lonely computer nerd has many friends!

Furthermore, the Diamond Rio (not to be confused with the popular country band of the same name), which was introduced on the market in late 1998, is a portable Internet audio player that allows a computer user to download MP3 files directly into the unit’s onboard memory. The most current model as of the date of this article allowed for the storage of up to sixty minutes of digital-quality music. Imagine carrying around a self-recorded compilation of your favorite songs on a unit that not only fits in the palm of your hands, but also never skips because there are no moving parts. Until recently, however, the recording industry was exceedingly nervous about the lack of any anti-copying features in such convenient technology.

The Wave

MP3 technology hits the recording industry right where it lives — distribution! According to a recent survey by the Recording Industry Association of America (RIAA), the proportion of music purchased by the 15-24 year old age group dropped from 32.2% in 1996 to 28% in 1998, the year that MP3 and the Rio Player hit the market. The RIAA identifies the Internet and MP3 as contributing factors to this decline. But a more disturbing aspect of this trend for the recording industry is the emerging realization that MP3’s popularity is not solely grounded in the early-teens to mid-twenties age group, as the RIAA perceived, but rather extends to all market groups, regardless of age.

With an estimated eight million songs and song clips containing MP3 data on the Internet, the reality is that MP3’s popularity is entrenched in the mainstream. One of the largest and most popular commercial catalysts of the MP3 technology is, appropriately enough, MP3.com, an Internet site offering free songs for download from over 7,000 unsigned bands. Michael Robinson, the site’s chief executive officer, stated in a recent New York Times article that the most popular file being downloaded from MP3.com is a classical rendition of Beethoven’s Moonlight Sonata, performed by a 66-year-old pianist from Cincinnati. The article explains that the file was downloaded almost 100,000 times in March 1999, primarily by people with Internet addresses in corporate offices and government agencies — NOT college campuses. How many times does a major label distribute over 100,000 copies of a classical composition in one month?!

Further evidence of the technology’s pervasive popularity can be found in the explosive profits recently experienced by online companies that sell downloads of MP3 music. One such company is EMusic.com, which has quickly established itself as a clear leader in the rapidly expanding market for downloadable music. California-based EMusic.com sells its collection of over 10,000 tracks for 99¢¢ per track or $8.99 for an entire album. From one fiscal quarter to the next, the company recently increased its sales from $400 to $20,000, a profit growth of almost 5000% in just three months! At the Jupiter Plug-in Conference in New York on July 21, 1999, the company announced that it has entered into a licensing agreement with Thomson Consumer Electronics (the inventors of MP3) for an extensive portfolio of MP3 patents, which will allow EMusic.com to continue encoding, distributing, and selling even more music via the Internet.

Sparked by the widespread news of MP3’s commercial success, of which EMusic.com’s tremendous profit upturn is representative, the world’s largest performing rights organization, the American Society of Composers, Authors, and Publishers (ASCAP), recently granted MP3.com a comprehensive license that will allow the web site to transmit unlimited, interactive performances of over 4 million copyrighted musical works from its master catalogue. In return for this license, MP3.com will offer unaffiliated songwriters and publishers valuable exposure to ASCAP’s services, including an online membership application. In addition, the site will host webcasts that showcase works owned by ASCAP members.

And finally, Speilberg’s DreamWorks Nashville label recently announced plans to offer country starlet Jessica Andrew’s debut single in “Mjuice” format, Audio Explosion’s secure MP3 format. Mjuice.com will be the first and only site to offer Ms. Andrew’s debut release. The DreamWorks Nashville partnership with Audio Explosion, much like the joint venture between ASCAP and MP3.com, is just the tip of a very large cyber-iceberg.

MP3’s popularity and significant earning power are direct results of combining the technology with a well-developed entrepreneurial spirit. The record industry has come to this realization and wants to blend its own combination of these two ingredients for success. Such a recipe, however, will require a departure from the current status quo in music distribution.

The Current Industry Paradigm

The traditional power of the record labels resides in their seemingly unlimited supply of money in combination with their singular access to major distribution channels and radio programming. The major labels provide dollars to fund recordings, advertise and market the music, and allow the artist to tour. The major labels “grease the wheels” of radio and make the music popular. They get the music heard. They deliver the music to the listener. Because the record labels possess this power, they generally attract the best and brightest of creative talents. Whether they be producers, musicians, songwriters or artists, their ultimate hope and lofty dream is to obtain the elusive deal with the major label.

Under this traditional paradigm, there was simply no other way to get your music distributed to the masses. Now there is. Suddenly, MP3 and the Internet offer an attractive alternative.

The Imminent Shift

As technology like the MP3 format continues to emerge and flourish, the power that the recording industry possesses will diminish or, at the very least, shift dramatically. Then, other avenues will be available. When a talented musician can distribute music to millions of people via the Internet, what purpose will be served by giving up royalties to affiliate with a major label?

A growing number of independent labels and artists across the globe are quickly discovering that all of the traditional hallmarks of power for the recording industry — marketing, distribution, and public performance – are easily reproduced and obtained on the Internet at little or no cost. The one thing an artist cannot currently do online is tour. With increasing bandwidths and compression techniques, however, that obstacle may soon be eliminated as well.

Combine this knowledge of the Internet’’s colossal marketing power with recent trends among the major labels to focus on profits by cutting back their roster of artists, drawing from a select pool of creative talent, and promoting only the top level artists, and you create a volatile atmosphere that threatens to erode the very foundation of the recording industry. An increasing number of music fans are searching for alternative (a term that is so mainstream these days) forms of music and, as alternative means of distribution become easier, cheaper, and more accessible, an increasing number of creative talent will be drawn to independent distribution over the Internet as a viable alternate means of reaching those fans. The bottom line is that the nexus of power may begin to shift away from the major labels into the hands of the people.

The Industry’s Response

The recording industry’s initial response to this impending shift was retaliatory. In October 1998, the RIAA tried to stop the distribution of the Rio Player, but a federal district court judge refused an injunction and the Rio hit the shelves in November 1998.

In December 1998, a coalition of over 110 companies, including the major record labels and a broad spectrum of technology industries, formed the Secure Digital Music Initiative, a cooperative forum for these industries to develop secure “standards” for downloading music. On July 13, 1999, Phase I of the SDMI’s collaboration was published in the form of the Portable Device Specification, a voluntary framework that manufacturers of portable music devices can implement — all just in time for the holiday shopping season!

Phase I devices will be capable of accepting music in all current formats, including legal and pirated MP3 music files. However, when Phase II is implemented, Phase I device owners will be required to upgrade their players if they want to enjoy new, SDMI-compliant music formats. Pre-existing legal and pirated formats, including MP3, will not be affected by the new technology. Although a precise technology has not yet been chosen, the upgrade will essentially filter out all illegally copied SDMI-compliant music with a screening device known as a “digital watermark.” The watermark is embedded digital data, or tags, that can be detected by the player as either a “fingerprint” or a “signal.” The industry desperately hopes this new framework will lead consumers away from the unrestricted MP3 format towards the newer, potentially profit-generating variety.

Future Implications

In its initial encounter with new technology, the recording industry, ala RIAA, overreacted and tried to suppress its value. Perhaps to its credit, or perhaps as a result of profit motive, the recording industry has since chosen to modify its strategy and co-develop innovative means of exploiting technology’s benefits while protecting the value of the music as intellectual property. What is clear to everyone, however, is that it is time for a paradigm shift – i.e. a major refocusing of values, belief structures, and the industry’s perception of its role.

Currently, the Big Five record distributors- WEA, Sony, UMG, BMG, and EMI- spend 80% of their resources on manufacturing and housing physical objects and moving them from one place to another. In the future, however, intellectual property will no longer be physically constrained to CDs, books, and video tapes, but delivered in electronic format. Through its instrumental participation in SDMI, the record industry has begun its journey down a road that quickly merges with the technology of the information superhighway. If it continues to embrace the coming virtual world where the value of intellectual property does not reside in the tangible medium on which it is conveyed, but rather in the demand for it as a thing of value in and of itself, the recording industry will steadily move closer to effectuating the shift in paradigm necessary to carry it into the twenty-first century. To survive, the recording industry must develop new strongholds of power to attract the talent. Soon, the Goliath may not be strong enough to withstand the stones of David.

It all begins with a song. The value, and the power, of the product is in the song itself (something Nashville has had to relearn over and over again), not the physical medium which delivers the song to the customers. Good music will always be valuable. The medium on which it is distributed, on the other hand, has always been a mere novelty — a secondary element. Recall the demise of such great devices as the vinyl record, the reel-to-reel, and the 8-track tape. Remember Betamax? The industry knows this all too well — when CDs began saturating the market, every record with any modicum of success in the previous few decades was repackaged and resold. The Eagles’ songs sounded better on CD than they did on vinyl!

Developing and cultivating a broader variety of artists that create good music is something the major labels can still offer the consumer that cannot necessarily be obtained for free over the Internet. Let the consumers tell the industry what they like to hear rather than being so committed to the opinions of a select group of radio programmers. The value is in the music. Develop good music and the world will always listen. In essence, to survive the paradigm shift, the industry should return to the basics.

As a final note, existing copyright laws, though perhaps not perfect, are applicable to the creation, distribution and performance of digital files. Thus, diligent enforcement of these laws as they apply to MP3 and future music formats is a critical task. It is, of course, also critical to work with state and federal legislators to develop more comprehensive and applicable laws addressing the new frontiers of copyright protection.

To MP3 or not to MP3? That question has already been answered in the grassroots swell of public popularity. The industry must now determine its own fate.