BODY: As growing swarms of online pirates continue
plundering music's treasure chests, the $ 12 billion recording industry
could be facing a walk down the plank.
Computer users download an estimated 2.6 billion music
files monthly; most are illegal.
Aggressive legal action, drastic security measures and sophisticated
counterattacks may not be enough to slow, much less halt or reverse, the illegal
downloading that is taking a significant bite out of record sales. In its third
year of slumping revenue, the recording industry has little reason to expect a
turnaround.
"The record companies are
history," says James Hetfield of Metallica, the band that stood up to
file-swapping juggernaut Napster. "They won't be around much longer unless they
get with it and morph into something new that's going to help get music
directly to the masses. The Internet is about as direct as it gets. Putting a CD
in a store is like putting a rotary-dial phone in front of a kid: 'What's that?
There's no antenna.' Downloading is a sobering change."
Some punishing numbers that have labels down for the
count:
* Record sales in the world's top
10 markets declined 6.8% in 2002, according to the International Federation of
the Phonographic Industry. Research estimates that piracy accounts for 40% of
the global decline.
* First-quarter album
sales (144.7 million units) are down 10% from 2002 (160.7 million), according to
Nielsen SoundScan.
* Roughly 1.7 billion
blank CDs were sold in 2002, up 40% over 2001.
* The use of broadband, enabling quick downloads, grew 9% from October
to March.
After early missteps, the five
major labels -- Universal, Warner, Sony, BMG and EMI -- and the trade group
Recording Industry Association of America are pursuing new anti-piracy
approaches that may be too little and too late.
Among the strategies that are taking aim at file-swappers:
Suing them into submission
Strategy: Verdicts have gone both ways so far. A federal court ruled
April 25 that peer-to-peer file-swapping systems like Morpheus and Grokster are
not acting illegally since they don't track traffic. But the decision does say
users are violating copyright law. Another ruling reaffirmed the industry's
right to compel Internet providers to supply identities of suspected copyright
violators. So the legal focus shifts to file sharers.
Last week, four college students sued by the industry
agreed to shut down their campus file-sharing networks and pay up to $ 17,500
each. While it's implausible for labels to chase down every bandit, making
examples of prolific abusers might scare off others.
Drawbacks: Pursuing students is far from cost-effective
and will likely harden attitudes that labels -- whose prices for CDs have never
dropped despite plunging production costs -- are rip-off agents.
Downloaders who wouldn't dream of shoplifting a CD at
Tower blithely swipe songs from cyberspace without a twinge of guilt. Getting
music gratis is only half the thrill; there's also a kick involved in joining a
rebel cult and beating an overpriced system. Creating instant martyrs of file
sharers can only intensify that sentiment.
"The image of record companies is so negative that peer-to-peer users
aren't bothered by questions of legality," says Charly Prevost, former executive
at Liquid Audio, which provides software for secure Net music.
Outmaneuvering them technologically
Strategy: Several trumpeted safeguards are in use or in development,
but labels also are resorting to wily tactics, including "spoofing," or flooding
cyberspace with defective files that confound users. Also possible are more
drastic measures that would lock up users' computers.Drawbacks: Users have
devised ways to skirt file-sharing hurdles. And declaring open war by freezing
computers or Internet connections is no way to win back consumers. Decoy tracks
from Madonna's American Life antagonized fans and prompted hackers to
temporarily disable her Web site.
Rehabilitating them
Strategy: Warner
Bros. Records chairman Tom Whalley says, "I'm pushing for awareness and
education . . . to let fans know that stealing music hurts artists and
people who make a livelihood off music."
Parents also are natural targets for the campaign.
"Years ago, we were under attack for our morality,"
Whalley says. "As a result, we put parental-guidance stickers on records. Don't
parents know their children are stealing from the Internet? The people who spoke
out against record companies are turning their heads in their own households.
It's a moral issue."
Last week, the RIAA
began an instant-message campaign that sends automated warnings to those
distributing or downloading copyrighted music, reminding violators that the act
harms artists.
Drawbacks: It's an
uphill battle. Among Americans 12 and up, 28% have downloaded music, 18% within
the past month, according to Ipsos-Reid marketing research firm. Of those 12 to
17, 48% downloaded music in the past month. And 42% of all file-sharers reported
they copied a CD rather than buy it. An Ipsos-Reid study shows that only 9% say
file-sharing is wrong, and just 20% say it hurts artists. Many
file-sharers consider the RIAA volley a hostile nuisance.
Enticing them to buy
Strategy: Convenience and comfort may be the keys. Internet access
options offer a parallel, says analyst Phil Leigh of Raymond James and
Associates.
"The best way to combat piracy
is to remove the incentive by providing a better alternative," he says. "The
vast majority of us pay for Internet access. You can get it for free, but you
have to live with constant pop-up ads and limitations. Only a tiny fraction of
the public does that. We pay for Internet access because we cannot abide the
annoyances. The renegade (file-sharing) networks have an abundance of pop-up
ads, spyware, decoy files, viruses and sporadic crashes."
Drawbacks: Until recently, label-sanctioned sites were
turnoffs. They were "expensive and the user experience was unsatisfying,"
Prevost says. "All the legal systems were difficult to use."
Apple's newly launched iTunes "is a positive evolutionary
step" toward weaning users off illegal sites, Prevost says. "It's completely
addictive, easier than Amazon. It's easier than the illegal sites. If you go to
Kazaa for a popular track, you find 100 to pick through, and the quality is
questionable. At Apple, it's fast, smooth, no typos, excellent quality."
Apple reports that iTunes sold more than 1
million digital songs in its first week. Competitors Pressplay, MusicNet and
Listen have struggled to attract what analysts say is less than a combined
300,000 monthly subscribers. Apple offers 200,000 tracks at 99 cents each, with
more songs to be posted today.
But
meanwhile, the file-sharing cosmos is expanding. Recordable CDs outsell
prerecorded music CDs by more than 2 to 1. Monster song-swapping service Kazaa
has 218 million registered users. Sluggish dial-up connections, long an
impediment to easy downloading, are on the wane as broadband spreads rapidly
outside the corporate and university sectors to the residential realm, inviting
more throngs into the free-for-all.
Once
dismissed as fringe alarmists, doomsayers who predicted the demise of the music
biz are breaching the walls of denial at labels, where alarming statistics are
forcing a reassessment of old-school leadership and obsolete business models.
To survive, labels have to jump on the
bandwidth wagon, says Prevost. "The delivery of music is critical," he says.
"Labels have to figure out how to use the Internet, not replace it. We're seeing
the end of the beginning of the industry."
Leigh says, "The chances of the labels reversing the trend toward
Internet distribution are about as slim as an Apache Indian being elected pope.
The labels have been intellectually aware of this for two or three years. Now
they're feeling it at a gut level."
Labels
headed for extinction?
Could the giant labels vanish?
Some say collapse or serious shrinkage is inevitable if the perilous disconnect
between corporations and customers persists. It started when labels ignored the
Internet's rise and technological advances that sowed the seeds of online
piracy. They resisted adapting to a changed environment and then fought the
uprising rather than co-opting it early enough to foil thieves and lure loyal
buyers. Says Leigh: "The labels anticipated that Internet distribution would
arrive when Marriott opened a hotel on Mars. They didn't know what to do, so
they proceeded on the characteristic path of litigation and legislation. But
these peer-to-peer networks are as hard to stamp out as the Hydra. Cut off one
head, and two grow in its place."
Established acts are watching profits plunge and prospects diminish as
CD sales, the bread and butter for most recording artists, sink. Linkin
Park took extreme precautions during recording and pre-release promotion of
current album Meteora, and while the effort paid off in preventing leaks,
the disc's entire contents were up for grabs online as soon as the album landed
on shelves. Metallica is braced for a similar brushfire when St. Anger
hits retail on June 10. The band hopes to lure buyers with such incentives as a
DVD of rehearsals, a CD-ROM peek into the band's upcoming video game and an
elaborate booklet.
"The idea was to throw
out a bone that you won't get in a download," Hetfield says. He's relieved that
security measures so far have thwarted leaks. "Recording was like working in a
bank. The hard drives were in a safe. Nothing left the studio. But then you hand
it off to the record company to mass-produce it, and you have to let it go."
Despite precautions, songs from Radiohead's
aptly titled Hail to the Thief, due June 10, are circulating on the Net.
When live versions of songs from 2000's Kid A saturated Napster within
hours of the concert, Radiohead initially was amused that "there was suddenly
this really cool global distribution system," says Adam Sexton of Macrovision's
Audio Group. "Then it sunk in: 'What does this mean to our album?' The business
was a bit caught off guard by the rapid spread of Napster. It was voiced as a
theoretical problem before. By the time they realized they had a problem, it was
already immense, and the genie was out of the bottle."
Internet music looting "definitely got ahead of us," says
Whalley. "We got caught short in the beginning, and now we're catching up. We're
the first industry really hurt by this. The movie industry will benefit from our
suffering."
Tightened in-house security is
preventing pre-release leaks. Of four Warner albums in the top 10, none reached
the Internet before landing in stores.
"Once it hits the airwaves or is sent to retail, we lose control,"
Whalley says. Yet he sees cause for optimism. "The business is reinventing
itself, and I'm excited to take on that challenge. You'll never wipe out piracy;
no industry can. But we have a good chance of reaching the average, honest music
fans out there and turning them around. The future is bright."
In the technology tug-of-war, the industry is gaining
ground. Macrovision, which ships about 10 million copy-protected CDs
internationally each month, helps labels combat piracy by producing "dual
session" CDs that allow music to be played on PCs but inhibit file-trading and
CD burning. The company, in conjunction with Microsoft, can produce protected
CDs that let music be saved on a PC, exported to a portable player and burned
onto a recordable CD but not uploaded and traded online.
"What we basically aim to do is put speed bumps up so that
average consumers will say they might as well just buy it," Sexton says. The new
configuration "gives consumers the flexibility they have come to expect. The
rest of the world has moved ahead of the U.S. and taken an aggressive stance to
protect intellectual property. Our goal (in the USA) is to have some test
releases out in the summer and some major releases this fall so that by
Christmas we'll see widespread use of copy protection on CDs."
Also in development is "controlled burning," in which
songs burned onto a blank CD can't be copied.
"We have got to get music piracy back to a level that the industry can
still survive with, so it's not one copy begets a thousand begets a million,"
Sexton says.
Far-reaching cultural
effects
If industry efforts fail, the fallout will hurt
more than the bean counters and stockholders. A crippled system would send
ripples through myriad businesses and pop culture itself. A marketplace built
around a physical artifact -- the silver disc inside a shrink-wrapped jewel box
-- would shrivel.
"I don't see the day
anytime soon when brick-and-mortar stores will be obsolete," Whalley says.
"People will still enjoy browsing CD bins. But we'll see fewer stores. And the
independent accounts around college campuses have been or are being put out of
business by online piracy."
If piracy
spreads unabated, the very culprits stand to suffer losses as well.
"The industry would not be able to produce
and market the number of new artists it's offered historically," RIAA
president Cary Sherman says. "It would mean far less investment in music. Record
companies make money by selling music. There are very few other revenue streams
available. If they can't sell music because people are downloading or burning it
for free, they'll take fewer risks on fewer artists.
"If it weren't for Norah Jones having a record contract,
her music would still be enjoyed by a few people in Texas at clubs. EMI invested
in her and marketed her music, and now it's enjoyed by people all over the
world. We have one of the most rich and vibrant cultures in the world, and it
would be criminal if all of that disappeared, or contracted, because of
uncontrolled Internet piracy."
Metallica
drummer Lars Ulrich, branded as greedy by some fans for his criticism of online
thievery, says the band fought for principles, not profit.
"It's not the Metallicas and Madonnas and Linkin Parks and
Bruce Springsteens that take the hardest hit, it's the 10 developing bands each
label has on its roster every month," Ulrich says. "That gets trimmed to three.
Instead of getting $ 1 million to make videos and tour, you go home if nothing
happens in the first five minutes of that project. Young artists won't
have a chance."
Hetfield chimes in, "What
about the band that's on the cusp of make it or break it? It's so ironic that a
band won't be successful because the people who really like their stuff are
stealing it."
---
Contributing: Mike Snider and Jefferson Graham
GRAPHIC: GRAPHIC, Color, Sam Ward, USA
TODAY (ILLUSTRATION); GRAPHIC, B/W, Karl Gelles, USA TODAY, Source: Nielsen
SoundScan (BAR GRAPH)
Document 13 of 205. 