Pandora's box

Even if the courts shut down Napster for good, the music industry has been irrevocably changed by digital downloads

by Laura A. Siegel

At three o'clock last Saturday morning, the music-swapping service Napster was essentially supposed to shut down under orders from a US District judge. The company won an 11th-hour appeal, but its future still looks bleak. The Recording Industry Association of America (RIAA), which brought the suit against Napster, has declared victory over those who would share music for free. But actually, the decision hardly matters.

If Napster falls, there are dozens of other file-sharing programs ready to take its place -- programs like Gnutella (which has no central server and no controlling business that can be sued), Scour Exchange, Napigator, iMesh, and Freenet, which gives users complete anonymity. More than a million people flocked to one Gnutella portal for the first time in just a few days following the Napster injunction last Wednesday. And more programs are sure to follow. "It's sort of like parents when they find out kids are having sex," says Michael Bracy of the Coalition for the Future of Music, which advocates for independent musicians. "They say no, don't do this. But it's too late for abstinence."

Music is going online, and the established music industry is losing control of it. In their panic, the major labels are suing left and right. The much-publicized lawsuits, against not only Napster but also MP3.com and, now, Scour Exchange, just show how frantic the labels are. "This notion of focusing on [Napster] is a sign of the recording industry's complete and utter desperation," says Dave Marsh, a music critic and the editor of the monthly music and politics newsletter Rock & Rap Confidential. "What the record companies are asking for is prohibition until they can control the technology."

The termination of Napster -- if that's what's decreed at the next hearing, in September -- is only a short-term solution at best. The record industry can't stem the tide of free-music services -- especially those run not-for-profit by networks of individuals -- any more than the film industry was able to stop videotaping. Meanwhile, the business is flailing to catch up with the technology and co-opt it -- but so far, with little success.

THE INDUSTRY has good reason to be scared. In one year, Napster has made it easy for anyone with an Internet connection to steal music on an unprecedented scale by finding songs stored as MP3s -- compressed digital audio files -- on other users' computers and transferring them to their own. More than 20 million people now use Napster, according to the company -- double the number at the end of April.

Piracy has been around as long as recorded music, but never have the technologies been so high in quality, so easy to use, and so far-reaching. People who would never steal a CD from a store happily download the same album. It doesn't feel like stealing, there's no obvious victim, and people don't seem to fear getting caught. If Napster use were to continue apace, music analyst Michael Nathanson of Sanford C. Bernstein & Co. told Billboard, by 2002 it could cost the music industry 16 percent of US music sales -- that's $985 million. As many as a billion MP3s are available through Napster alone, according to the Pew Internet and American Life Project.

And the technology is getting better still. Right now, most listeners play MP3s on their computers. But the market is growing for CD writers, or burners, which let users put MP3s on CDs. Portable MP3 players are also available, and as they become more widely used, they'll probably make digital music files even more popular. The music industry knows this: when the first player came out in early 1999, the RIAA sued the manufacturer -- and lost.

Napster claims free downloading hasn't hurt CD sales, and some musicians and merchants agree. "The more people are downloading an artist freely on the Web, the more likely we are to see a lot of sales on that artist," says Derek Sivers of CD Baby, a site that sells independent-label CDs. "People come in to buy CDs of artists they hadn't heard of till they discovered them on MP3.com or Napster." But if MP3s are sparking CD sales right now, it's because CDs are still easier to use and more portable. As technology improves, that's likely to change.

"I've talked to many people who have MP3s who don't buy records at all anymore," says John Flansburgh of the band They Might Be Giants, confirming the industry's worst fears. "Why did people move from vinyl to CD?" adds Steve Curry of EMusic, a site that sells music downloads. "It was an easier way to listen and to manage and to enjoy your music collection, and downloadable music is the same way."

You can find a study -- or three or four -- to prove either point. Peter S. Fader at the University of Pennsylvania's Wharton School found that more than 91 percent of Napster users buy at least as much music as they did before they used Napster, with 28 percent purchasing more. That leaves nine percent of Napster users buying less music. But the Field Research Corporation found that more than twice that number -- 22 percent of Napster users -- admit they now buy fewer CDs. Both studies were cited in the Napster hearing, by opposing sides. The conflicting results show how unmapped this terrain really is.

But two things seem clear. First, CDs aren't going to disappear soon, given that not everyone jumps on the latest technology as soon as it appears -- after all, a third of music listeners still buy cassettes rather than CDs. Second, the future of music, ultimately, will be digital.

START-UP MUSIC COMPANIES, record labels, and college kids get the press. But the people who have the most at stake get overlooked: the ones who make the music. If people don't buy CDs or pay for MP3s, artists may not make any money from their recordings anymore.

"When the Internet became commonly used by artists the thought was `Hey, this is great, we can bypass all the middlemen,' " says Jon Sobel, a musician and founder of the Society of Independent Musical Artists (SIMA). "Lost in the shuffle was the idea that the music really has value."

Not all artists agree that online music is bad for their livelihood. Even within each of the industry's three basic tiers -- major-label, independent, and unsigned musicians -- some see the Internet as a way to succeed outside the established system. But others see it as an opportunity for people to take the fruits of their hard work without paying.

Courtney Love is one successful artist who's thrilled that major labels are losing control of music. "Record companies stand between artists and their fans. We signed terrible deals with them because they controlled our access to the public," she told attendees at an online-entertainment conference last May, in a now-famous speech in which she slammed the major labels that account for 85 percent of CD sales in the US -- Warner, Universal, Sony, EMI, and BMG. She's not alone. Chuck D, Cypress Hill, and surviving members of the Grateful Dead, among others, have aligned themselves with Napster.

A million-dollar advance doesn't actually mean a band gets a million dollars, Love said, explaining just what is so bad about those deals. The band is responsible for the costs of producing, distributing, and promoting its album -- not to mention paying its manager, lawyer, and business manager. If a band got a million-dollar advance and a 20 percent royalty rate, then sold a million CDs at full price, said Love, the musicians would still come out with next to nothing. But the record company would net $6.6 million in profits. In contrast, authors of books get to keep their advance as personal income, and are responsible for hardly any of those costs.

Recording contracts are generally so unbalanced, especially for new artists, that most musicians never profit from CD sales. So Love, for example, is leaving her label -- and getting sued for it.

Love can easily leave the labels because they've already helped propel her to fame, but artists who dream of hitting it big need the major labels because they control the promotional network. As the popularity of independent Internet radio stations and video sites rises, though, that's changing. "Now artists have options," Love said in her speech. "We don't have to work with major labels anymore, because the digital economy is creating new ways to distribute and market music."

And that could give artists more leverage when they negotiate with labels. "I don't think there's any doubt that the contracts that get done between artists and record companies will change," says Larry Miller, head of Reciprocal Music, a digital-rights-management company in New York. "They'll have to be [better] as artists become more empowered with technology to self-distribute."

But if music lovers download songs for free instead of paying for CDs, established artists in the current system have a lot to lose. Plenty of artists are battling the companies, Web sites, and even listeners who are distributing or taking their music without paying.

Even artists who have rebelled against the major labels often object to free trading of their music. In 1993, the Artist Once Again Known as Prince famously replaced his name with a symbol and tattooed SLAVE on his face to protest the "institutionalized slavery" of his contract with Warner. But in March 1999, he sued several Web sites for unauthorized use of his music, lyrics, and symbol. Metallica, which rose to fame through free tape-sharing, gave Napster a list last May of more than 300,000 people who were sharing their songs electronically and insisted that the users be banned from the service. Metallica and rapper Dr. Dre also joined the RIAA suit against Napster.

And on July 11, a group called Artists Against Piracy launched a series of ads in major newspapers; under the headline IF A SONG MEANS A LOT TO YOU, IMAGINE WHAT IT MEANS TO US, the ads implored consumers to respect artists' intellectual property rights -- that is, to pay for music. Signers of the ad included Alanis Morissette, Barenaked Ladies, Bon Jovi, Faith Hill, Garth Brooks, Hanson, Natalie Imbruglia, and Sarah McLachlan.

But independent musicians -- those on independent labels, and those signed to no label at all -- often have a different take from the big stars'. As Ani DiFranco told the magazine Rockrgrl, "90 percent of all music, art and culture in our country exists below the radar of the mainstream." Plenty of musicians such as DiFranco, who started her own Righteous Babe label, are making a living without any help from the major labels.

By lowering the barriers of distribution and promotion, the Internet puts independent labels such as DiFranco's on a more even footing with the majors. It also helps artists promote themselves. Giving away music has worked for They Might Be Giants, which has an online music archive and e-mails MP3s to its fans. "Finding our own path to having people hear our music has always been key to getting over," says the band's John Flansburgh. "You don't get anywhere in the music business by being stingy. The music culture is about sharing, and that's why MP3 resonates so much with people conceptually."

Probably the biggest fans of Internet music distribution are unsigned musicians. These artists -- who often produce their own CDs, and who often don't make their living from music -- use the Net to get their music out, to build a fan base, and to tell fans about shows and new recordings. "I've got national distribution now for basically nothing, which used to be the ultimate goal for an artist," says Jody Page of the unsigned Detroit-based band Lost Youth.

They may not even care about getting paid, in the short run. "That's not the goal," says bassist Mike Scarlata. "Exposure is number one." Scarlata, of the unsigned North Carolina band Neglected Sheep, even put his own music up on Napster, under file names like "Sounds like Pearl Jam."

"In the past, if you're an independent musician, you're not making money anyway, but at the same time no one's really hearing your stuff," says Cole Gentles, a New York musician who records under the name the Count. "This way, at least people are being exposed to you."

But just because independent artists use the Web for promotion doesn't mean they like listeners swapping tracks freely. "If I put my music on a site and I'm deciding I'm giving this away for free, it's a little different from someone buying my CD and putting it on the Internet and trading it with someone else," Page says. And Aimee Mann echoed the feelings of many musicians when she told Salon, "Artists should get paid for their work."

THE ONLY way to prevent people from trading music files is to encrypt them -- to encode them so only people who paid for them can play them. But that's not easy. The biggest hole in the system is the CD -- the very object the music industry depends on for profits, and the original source of most files exchanged on Napster. CDs are completely unencrypted. Anyone with a CD-ROM drive and free software available online can easily copy a CD onto a personal computer, encode the songs as MP3s, and share them online.

Encrypted CDs could be made, but no one knows whether they would play on today's stereos. Right now the best the music industry could do would be to "watermark" CDs, so files made from them could be traced back to the discs' owners. And though CDs may eventually lose market share to digital music, they'll still be around for a long time.

For digital music files, the music industry has been trying to develop a universal encryption standard through the Secure Digital Music Initiative, but that effort hasn't gotten very far. And available technologies have proven unpopular -- they're restrictive, take too much work on the part of the listener, and aren't all compatible with the same computer-based and hand-held players. MP3s are still much more universal and easy to use -- not to mention available for free. "[The record labels] want to maintain control of what you do with the music after they sell it to you," says Eric Scheirer, media and entertainment analyst at Forrester Research in Cambridge. "It's never going to work."

Even if technology overcomes those obstacles, nothing is totally secure. "The only music you can't copy is music you can't hear," says Brian Zisk, director of business development at the entertainment site iCast and a co-founder of the Coalition for the Future of Music. Already there's software that makes it easy to take even streaming files, which play over the Net but don't normally get stored on computers, and convert them to MP3s. And any encryption is still vulnerable to hackers, like those who cracked DVDs' supposedly secure format last winter. "People can unencrypt anything that can be encrypted," says the coalition's Michael Bracy.

PEOPLE WOULD pay for digital music if they could, says Ric Dube, an analyst at the Cambridge-based new-media research firm Webnoize. "One of the reasons Napster is so popular is that's where the content is," he explains. The independent music scene has flourished online, and copies of major-label music have swamped Napster and its cousins. But until very recently, there's been no way to get most popular music legitimately on the Web.

Now the labels are betting that if they offer a legitimate alternative, people will choose it instead. They may be right -- in a Webnoize survey of thousands of college students, more than half said they would pay $15 a month to use a service like Napster.

But the industry is way behind the times. "This moment has made a lot of people in the record industry lift their heads up off their desks for the first time in 10 years and realize they have to make a format that works," says Flansburgh.

If we bought music online, we wouldn't really be paying for the music itself, but for features that free services can't yet offer. Guaranteed file quality and virus protection are the top two reasons consumers would pay for downloading music, according to a study by Jupiter Communications. People might also pay for convenience and user-friendliness -- the free software can be difficult to use, especially for people with little computer experience.

The major labels have already started to partner with online companies. No one has yet figured out how to make money from selling downloaded music, but here are some ideas they're trying:

* Selling individual downloads. Artists have long sold MP3s through their own Web sites, and EMusic sells MP3s by independent musicians and shares revenues with the artists. In addition, CDNow and other sites sell downloads in a secure format. But EMusic has already run into trouble -- it has suffered $100 million in losses and recently laid off 40 of its 210 employees to cut costs.

The major labels are rushing to throw music onto the Web: EMI will soon launch a digital downloading service, with 100 albums available in encrypted formats, and Sony was the first label to sell downloads on its site, offering about 50 songs. But these preliminary efforts are doomed to fail. Sony is charging exorbitant prices -- $3.49 for a single song -- and requires listeners to go through several complicated steps before even hearing the music. Universal will launch something similar this month. "That, to me, is an example of a business model that simply isn't going to fly," says Forrester's Eric Scheirer.

* Subscription services. On July 24, EMusic switched tacks and launched a subscription service, which will provide access to a collection of 125,000 MP3s for a flat fee of $19.99 a month, or less for long-term plans. And MP3.com just launched subscription channels for classical music, children's music, and stories. Paying users can download as many songs as they like, without having to pay for each one. That's a lot closer to the Napster experience than buying individual downloads, and more likely to work.

But EMusic has about one-hundredth of one percent of the number of files available through Napster. A system like this would have a chance of succeeding only if a user could get a wide variety of music, including songs by top stars, through one convenient service. It might happen: Sony and Universal recently announced plans to start a joint subscription service, and Warner and EMI are talking about similar ideas.

* Ad revenues. The just-launched company Tag-Email sticks audio and video ads onto legitimate MP3s and pays artists from the proceeds. And MP3.com shares some of its banner-ad revenues with artists, using a secret formula. But audio ads might prove too annoying for consumers to tolerate, and hardly any artists are making more than spare change off MP3.com's program right now.

* Tips. Jay Fenello has a plan: to give away music, encourage people to trade it, and ask them to send money only if they like it. Fenello is confident that his brand-new business -- ths- Music.com, which stands for The Honor System -- will turn a profit in less than a year, despite the lack of any way to make people pay. "We're on the verge of a new consciousness," he explains. "People will come to realize that being completely selfish in everything you do hurts everyone." Betting on the end of selfishness doesn't seem like a strong business model. But his idea has a time-honored precedent: tipping.

"I live on tips," Courtney Love said in her May speech. "Giving music away for free is what artists have been doing all their lives." It might work for musicians who are able to build a strong, loyal following. Many musicians believe their fans would pay them even though their music would be available for free. "I came to music out of idealism and out of love for music, and I don't think that relationship between artist and fan can be discounted," says Jenny Toomey, a musician and co-founder of the Coalition for the Future of Music.

* Selling other stuff. Although Fenello acknowledges that not everyone will tip his artists, he sees other benefits to distributing music for free. "This paradigm says, Go ahead and put your music out there, and the rewards will follow," he explains. "As you become better known, you end up with opportunities for better tour-performance attendance, opportunities for endorsements."

For all the hype over the new, this technology might be taking us back to old ways of using music. Offering music as a way to gain fans, then making money on performances and merchandise, isn't a novel idea. Just look at the Grateful Dead. "Till after World War II, recordings were primarily a way of increasing your value as a performer," says critic Dave Marsh. "For the typical musician -- as opposed to the superstar -- that remains true. The reality for most musicians in the United States is that they make their money not from recordings, but from live performances."

Not everyone agrees, though. "That's flat-out wrong," says Bracy of the Coalition for the Future of Music. "We really can't get into a situation where all the artists who work so hard are forced to give everything away for free, just because the tech community says so." And record labels, whose profits come from CDs, not from T-shirt sales, are unlikely ever to allow music to be totally free.

NO MATTER how the music industry adapts to these changes, the issue of protecting intellectual property won't go away. As John Perry Barlow, a former Grateful Dead lyricist and co-founder of the Electronic Frontier Foundation, said in a famous 1994 Wired article, "Digital technology is detaching information from the physical plane, where property law of all sorts has always found definition." That means that all industries that depend on ideas -- from music to film and publishing, just for a start -- are going to have to figure out new business models, and the government will need to write new laws, to ensure that intellectual creation still has value.

Music is just the canary in the coal mine. It's been hit first because songs are easy to transmit digitally. But as technology improves, every kind of content industry is beginning to face the same problems. Already, Gnutella and Freenet can be used to trade any kind of file, not just music. Stephen King just released a book entirely online, bypassing publishers and asking for voluntary payments of $1 per installment. Disney, Time Warner, and several other companies are suing a man who distributed taped copies of TV shows through his Web site -- a service that attracted 100,000 users in three months despite poor video quality and no marketing.

Watch the music industry as it stumbles along. It will hold clues to what lies ahead.

Laura A. Siegel can be reached at lsiegel[a]phx.com.