Digital Dysfunction in New York City

A report from the 2003 Plug.In conference on the digital music business.
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The wildly successfullaunch of Apple¹s iTunes Music Store was the talk of theconference."Art is anarchy," saidJim Griffin of Cherry Lane Digital. "The challenge is monetizing theanarchy, not controlling it."Apple¹s Peter Lowespeaking to the conference about the iTunes MusicStore.Roxio is resuscitatingNapster, albeit in a very different, and legalform.Left to right: JoshuaMatthew Dern of Atlantic Records and music attorney Ken Hertz on the"Saving the Music Industry" panel.

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Deep in the heart of New York’s Times Square district, a groupof record industry insiders, Internet technologists, and new-technologyentrepreneurs got together recently for the eighth-annual JupiterPlug.In conference. This two-day sit down highlighted the possibilitiesand immense obstacles that the record business faces as it tries toshed its old-and-tired business model and remake itself for the digitalage.

Sponsored by Jupitermedia, an Internet research firm, andBillboard magazine, Plug.In featured speeches and frequentlyacrimonious panel discussions that highlighted the incredible diversityof opinion among the participants about how the music business shoulddeal with illegal file sharing and putting together a workable modelfor digital distribution. This year’s confab was in a smallerspace than in past years, perhaps reflective of the downturn in therecording and Internet businesses.

SURVEYING THE LANDSCAPE

To better understand what went on at the conference, let’slook back over what’s been going on in the arena of digital musicover the past year. Illegal file sharing, through peer-to-peer(“P2P” in the jargon of the business) networks like Kazaaand Limewire has continued to have a negative impact on CD sales. Tofight against the theft of its property, the RIAA (Recording IndustryAssociation of America, a record industry trade group) launched ahighly publicized group of lawsuits that targeted individual P2P users.(The RIAA mainly went after those who were uploading lots of songsrather than targeting occasional downloaders.)

The legal action has had a chilling effect on some downloaders, butthe practice is still rampant. (According to a Jupitermedia researchreport, 17 percent of “online adults” report having cutback on their illegal downloading as a result of the RIAA actions.)What the RIAA lawsuits have also done, however, says Mark Mulligan ofJupitermedia, is to cause, “a massive radicalization of thefile-sharing community.” According to Mulligan, the RIAA’slegal efforts are driving the downloaders further underground, andcausing them to seek new technology that will block so called“Spyware” from detecting their identities as they sharefiles online.

Meanwhile, Apple launched its iTunes Music Store back in April, which gave Macusers the ability to easily and legally download songs for 99-centsapiece and $9.99 for most albums. The service has been wildlysuccessful, within the relatively small universe of Mac users, and hashelped spur the development of a number of new legal download services,aimed at the much larger Windows market. In fact, just prior toPlug.In, a new service, BuyMusic.com was launched to serve that exactmarket. In the next few months, several more such services arescheduled to debut, including a familiar (and to some infamous) name inthe file-sharing world that announced it too, was going into the legaldownload business. More on that later.

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To set the scene a bit more, Jupitermedia reports that in the last12 months, 2 percent of those they surveyed paid to download music, and1 percent paid for a subscription service. Whereas 62 percent boughtCDs from traditional CD retailers, and 25 percent purchased physicalCDs over the Internet (such as from Amazon, Tower, etc.).

“The CD is not going to be replaced anytime soon,”reports Jupiter’s Lee Black, but overall CD sales have droppedprecipitously in the last year. Not only that, over 1200 “brickand mortar” CD retailers went out of business in the last year.Strangely, however, there was almost universal agreement that interestin music has never been higher among the general population. PanelistKen Hertz, a music-business attorney put it this way: “The musicindustry is in great shape; the record industry is in thetoilet.”

Black also reported that in the next five years, Jupiter estimatesthat legal digital distribution will grow from roughly 4 percent ofonline music spending this year to 27 percent in 2008.

GETTING PLUGGED IN

With all this action in the digital-music arena over the past sixmonths, there was certainly no shortage of topics to discuss at theconference. And by the time the talking was done, two major themes camethrough: First, and most importantly, the record industry is finallycoming around to the idea that digital delivery over the Internet issomething they can support. Instead of fighting the idea ofdownloading, and trying to preserve their out-of-date brick-and-mortarbusiness model, the record types now appear to be trying to embracedownloading technology and make it their own. Speaking onPlug.In’s second day, Universal’s Larry Kenswil said that2003 is a “turning point” for the record business; the yearonline music goes “mainstream.”

And that brings us to the second point. Even though there is nowstrong support to make Internet delivery of music a major part of thebusiness, nobody seems to be able to agree exactly how to do it in aviable way. There are so many competing interests at work—recordlabels, music publishers, artists, Internet companies, ISPsetc.—that getting anybody to agree on anything seems a task ofHerculean proportions (The only thing that everyone could agree on wasthat Apple’s iTunes Music Store was a resounding success.)Kenswil urged the various interests to get together and agree on waysto move the business forward. “We’ll have plenty of time tohate each other in the future,” he joked.

Despite Kenswil’s (and many others’) hope of unifiedaction, it appears that’s a long way off. A multitude of ideas,models, and paradigms were put forth during the conference, but thereseemed to be no clear consensus about any of them. On the first day,Jim Griffin of Cherry Lane Digital, spoke passionately about theneed to come up with a solution akin to that of how ASCAP, BMI, andSESAC, the performance rights organizations, pay their member artistsand publishers.

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“A pool of money, and a fair way to split it up,”proposed Griffin. He envisions a future in which ISPs will have to payfees to some sorts of performance rights organizations, and that poolof money would be split up among artists, labels, and publishersaccording to predetermined formulas based on sales numbers and otherfactors. (Undoubtedly, the ISPs would pass the cost of these fees on totheir customers.) The customers would then be free to trade music atwill, and the artists, publishers, and record companies would becompensated.

This approach was ridiculed by others at the conference, principallythe record company people, who said that would be tantamount toartificial price fixing. What the industry is really afraid of islosing their control over the market and the profits. During theconference, the record industry was the biggest advocate of maintainingthis control through so-called “digital rights management”or DRM, which is industry jargon for copy protection.

How much copy protection to use was a point of contention. How manyburns should customers be allowed? Can they transfer their downloadedfiles to portable players, and if so, how many times? Heavyrestrictions on these types of rights helped stunt the growth ofprevious industry-sponsored downloading services like MusicNet and Pressplay.

Under the Apple system, users are allowed unlimited burns, andunlimited iPod transfers, but are restricted to playing their file backon three different Macs. This seems to be a good model and it’sclearly been well received by the general public. However, somespeculate that the record industry gave Apple the rights to offer sucha generous deal because Mac users represent only a small portion of therecord-buying public. And if BuyMusic.com is representative of what PCusers will have to deal with, they’re going to have to navigate amuch more variable set of usage rules (sometimes on a song-to-songbasis) when downloading music.

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Some panelists still wondered how it’s possible for any legaldownload service to compete with “free,” meaning theillegal P2P services. Others made the point that copy protection isessentially useless as long as physical CDs are out there, which can becopied at will and uploaded to the Web. (The industry hasn’t beenable to come up with a successful copy-protection scheme for CDs.)“We feel that the best way to get rid of the illegal file-sharingservices is to compete with them,” said Apple’s Peter Lowe,during a keynote speech on the second day of Plug.In. Apple’sapproach is to make the iTunes Music Store competitive with freedownloading sites by offering better quality (Apples AAC format issonically superior to MP3), better reliability, and album art.

Lowe also reported during his speech that Apple was on course tolaunch the Windows version of the iTunes by the end of the year. Itshould be interesting to see how it differs in policies andavailability of music from the Mac-based iTunes.

IT’S BACK…SORT OF

Napster, a name that sent fear into the hearts of record executivesis reemerging, albeit in a totally different, and legal form. ChrisGorog of RoxioInc. (the company that specializes in CD burning software such asEZ CD Creator, and Toast) spoke on the first day of the conference, andannounced the company’s imminent launch of Napster 2.0, a legaldownload and subscription service.

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The new service not only rises from the ashes of Napster but also ofPressplay, the industry sponsored download service that never was ableto gain much traction. Roxio bought the assets of both those companies,and put them together to form Napster 2.0. (Peter Lowe of Apple laterpointed out that there actually was a Napster 2.0 release duringNapster’s heyday as a P2P file sharing entity, but who’scounting?)

In his speech, Gorog said that Roxio’s research shows that 97percent of online users recognize the Napster brand, 73 percent havepositive feelings for it (obviously that 73 percent doesn’tinclude record execs or artists), and 47 percent will pay to use thenew Napster. Napster 2.0 will incorporate both the a la carte methodmade popular by iTunes, and the subscription model. The new entity willalso feature Internet radio (presumably with a“click-to-buy” option), original programming (both audioand video). It will also help push new artists. Gorog told the audiencethat Roxio is working with original-Napster founder Sean Fanning andsome of his engineers.

The new Napster will offer 350,000 tracks from all five major labelsand “all the major independents,” Gorog said. He evenhinted that somewhere down the road, “We may very well return tothose [P2P] technologies.”

EFFECT ON NEW AND INDIE ARTISTS

So how will all this industry change impact up-and-coming and indieartists? It seems pretty clear that the major labels aren’t aboutto go away, and that they will still have a lot of clout, even if theirprimary role becomes one of marketing rather than selling of physicalproduct.

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“The idea that the average artist will record in their homestudio and then eventually make their way onto Letterman is a littlebit far-fetched,” cautioned Joshua Matthew Dern, Vice-Presidentof New Media at Atlantic Records during the “Saving the MusicIndustry” panel. He did however, think that digital distributionwill help to invigorate the indie world. Others brought up thepossibility that in the future, more musicians will be successful, buton a smaller scale. “I think the future in this business is alarge number of musicians selling a smaller number of products,”suggested Tim Westergren , the co-founder and President of Savage BeastTechnologies.

During the New Music Marketplaces panel, Philip Wiser, ChiefTechnology Officer at Sony Music Entertainment said, “The way offinding new talent is changing. Bands are now building followingsthrough the Net. Bands should be aggressive about marketing themselvesonline.” It was clear, however, from the words of the major-label executives that the “Big Five” had no intention ofgiving up their dominance of the market.

Also of interest to independent musicians was the discussion of newmarkets in which music will be needed. The biggest of those iscell-phone ring tones. At present, most ring tones come in the form ofMIDI files, but more and more phones will be equipped to handle audiofiles in the future, opening up another area for fights anddisagreements between competing interests in the music business.

Video game soundtracks are another area where songs are being usedmore and more, and while this promises to be another arena dominated bymajor artists, there may be some opportunity for indies, as well.

UNPLUG

To sum up, Plug.In attendees were given a taste for both thepotential for growth, and the incredible morass of problems faced bythe music business as it stumbles into the future. The movement towardsbetter and more plentiful legal downloading is a step in the rightdirection for the record industry. As they see their brick-and-mortarretailers closing left and right, the Big Five finally seem to havecome around to the idea that digital downloading—with reasonableusage rights for the customers—is not the devil, as long as itcan be controlled.

However, the conference also demonstrated just how wide thedisagreements are between publishers, labels, artists, ISPs, andvirtually everyone involved in the industry. It will be veryinteresting to see the affect of the slew of new downloading services(including iTunes for Windows) on everybody’s willingness tonegotiate. If the success of iTunes can be translated by one or all ofthese services on to the Windows side—where most of the usersare—it could change everything.

Mike Levineis a senior editor at ElectronicMusician.