Burn, Baby, Burn
By Chris Taylor/San Francisco
The last time the music business fell into a slump, Madonna was a Cyndi Lauper wannabe, the theme from Miami Vice was a No. 1 hit and the rising star known as Prince still had a name that didn't look like a typo. The year was 1985, and although shipments of recorded music were down 4%, the worst the industry had to worry about--hair spray and tight pants aside--was that some listeners liked to mix their own cassette tapes with favorite tunes from the latest Phil Collins or Duran Duran albums. Record companies dealt with this casual piracy by printing a skull and crossbones on the backs of tapes along with the claim that HOME TAPING IS KILLING MUSIC. If that was the case, then it was the compact disc, which really took off in the mid-'80s, that brought the music industry back to life. Sure, you could hook your cassette recorder up to a CD player, but you couldn't copy that wonderful hiss-and-squeak-free digital fidelity--not yet. So everyone had to buy the Beatles and Beach Boys all over again. Result: a 15-year-long sales boom.
Now that party is over, and the guests are stampeding for the exits. For the first time in the format's history, CD sales are dropping globally, according to a tally released late last month. At the same time, companies such as Apple and Gateway are pushing the power of computers that help users create personalized mixed CDs. Consumers love these innovations, which give them what they want--easy access to favorite tunes anywhere they choose. They are clearly willing to pay for this convenience, as shown by the $1.6 billion they spent last year on CD burners, blank CDs and digital-audio players, as reported by the tech-research firm NPDTechworld. And fewer and fewer music lovers are willing to buy the music industry's shopworn business model: $17.99 for a recorded CD that contains only a couple of tracks they like.
Rather than seeking new ways of pleasing customers, however, the Big Five music companies (AOL Time Warner, Bertelsmann, EMI, Sony and Vivendi Universal) are focusing on making it harder for consumers to get what they want. Although the connection between home copying and lost sales is as tenuous as it was in the '80s, the industry is pushing controversial anticopying technology into the marketplace--while entrepreneurs are assembling new business models for selling music in the digital age.
You can hardly blame Big Music execs for getting jumpy. Worldwide sales of recorded music fell 6.5% last year, according to the London-based International Federation of the Phonographic Industries. That meant a drop in revenue of $1.7 billion, the worst in the annals of the industry. Sales in industrial countries like Japan, Germany and Canada took an average 9% hit, while those in developing nations such as Brazil and Poland--drained by an epidemic of professionally pirated CDs--fell as much as 28%. In the U.S. not one album sold more than 5 million copies last year; in 2000, seven albums did. Blame the global recession or a lackluster lineup of singers, if you like. But the industry doesn't. It blames you.
"In 2001 more people listened to more music than ever before," says Jay Berman, chairman of the I.F.P.I. "We just weren't getting paid for it." In other words, the party reconvened at a free establishment down the street. That place is not Napster or any one of the dozens of free online music-file-swapping services like Morpheus that sprang up after the Big Music labels had Napster shut down by the courts. That place is your home.
Consumers, it seems, can't get enough of ripping (that is, copying a CD to their computer's hard drive) and burning (creating a new CD from scratch). In the U.S., last year saw a whopping 90% rise in the number of owners of computers with a drive that burns CDs (called a CD-RW drive, short for recordable/writable). A third of all PCs have one; 54% of new computers come with one installed. Half of CD-burner owners, reports Forrester Research, create at least one disc a month. Blank CD-Rs (discs on which you can record only once) bought in bulk cost as little as 25[cents] each. Making your own CDs--from your collection, from friends' discs or from downloaded tunes--is easier, cheaper, faster and more satisfying than any '80s mix tape ever was. Millions of music lovers who don't (yet) own a CD burner are enjoying often eccentric collections of tunes created by friends and colleagues.
This trend has Big Music running scared, at a speed that makes its fight against Napster look like a stroll through the easy-listening section of Sam Goody. Hilary Rosen, the tough-talking president of the Recording Industry Association of America (R.I.A.A.) who led the legal charge against Napster, feels almost nostalgic about 2000, when file sharing was the sole problem. After all, only 11% of Napster users ever transferred their stash of tunes onto a CD; the rest kept them on a computer. Since piracy has gone portable--and local--it is perceived as more of a threat. "It used to matter whether there was some bad guy in a Chinese manufacturing plant sending out thousands of counterfeit copies," says Rosen. "Now people at home can have the same impact."
Case in point: Linkin Park's Hybrid Theory, the biggest-selling album of 2001. About 4.8 million people bought it, and the same number, it is estimated, got hold of it free--either from a friend or online--and burned it themselves.
The scale of the home-burning business, however, does not by itself prove that sales are being leached away. A report released last month from research giant Jupiter Media Metrix says the picture is more complex: many burners buy more recorded CDs than they used to. After all, if you really love listening to an album, you're going to want the real thing--lyrics, liner notes and all. Chances are it is the so-so albums--the ones from which you want only one or two tracks--that are suffering.
The Big Five labels are taking no chances. They are pressing ahead with the technology they feel is best placed to combat piracy in the short term--copy-protected CDs, which have built-in encryption that is supposed to prevent you from copying the tunes more than a set number of times (usually once, which is the labels' nod to the concept of "fair use" copying in copyright law). "Our goal is a level of protection that will keep honest people honest," says Paul Vidich, an executive vice president of Warner Music (like TIME, part of AOL Time Warner).
The market has been seeded with dozens of copy-protected CDs, often without the consumer's knowledge. Most, like Natalie Imbruglia's White Lilies Island, on Bertelsmann's BMG, were released in Europe, but in the U.S., if you bought a copy of Universal Music's More Fast and Furious, the second volume of the sound track from the movie, or Enter the Life of Suella by an artist named Pretty Willie, then congratulations!--you're a copy-protection guinea pig. Critics of copy protection say its side effects are potentially disastrous: the discs may not work at all in car stereos, portable CD players, some older CD components or Macintosh computers and may cause some computers to crash.
That doesn't seem to worry EMI chairman and CEO Alain Levy, whose Latin America and Asia divisions are testing the technology. "If some kids who try to do 10 copies for their friends get their computers to crash and hate the record companies, well, too bad," he says. Early results from the field indicate that problems from copy-protected discs are rare. Universal Music says it has seeded 2 million copy-protected CDs (mostly outside the U.S.) among the 500 million it distributed last year and has received only about 200 complaints--a percentage roughly comparable to store returns on regular CDs.
On the other hand, independent Music City Records released a copy-protected CD by Charley Pride with no sticker to warn users of possible problems. That led to a lawsuit by a Marin County, Calif., woman who discovered the disc wouldn't work on her PC. Music City settled the case without paying damages and agreed to label copy-protected CDs. More significant, Philips--the company that co-owns patents on the CD and licenses that ubiquitous "CD audio" logo--says it is considering yanking the logo from all copy-protected CDs.
The very idea makes Rosen go ballistic: "It's the height of arrogance for Philips to worry about its patent royalties when we're worrying about the health of the industry," she says. But if an industry giant like Philips distances itself from copy protection, the whole enterprise could be counterproductive. A logoless, warning-labeled CD is not going to look as attractive to customers as its unprotected counterparts. Besides, who wants to run even a slight risk that a disc might not work in all machines? "We're hearing that kids have slowed down their purchases of music CDs because they're not sure which ones will crash their machines," says analyst Rob Enderle of the Giga Information Group. "The fear may exist even if the problem doesn't."
In Silicon Valley, copy protection is seen as folly. Not only do geeks treat code cracking as a contact sport, but the software industry has been trying--and failing--to combat piracy for years. "Copy protection is theoretically impossible," says Marc Andreessen, lead inventor of the Netscape browser and currently chairman of the Web-services firm Loudcloud. "All you need is a piece of software that ignores the restrictions. These things are trivial to break."
When the industry came up with a supposedly secure format called sdmi, it took Princeton computer-science professor Edward Felten only two weeks to crack it. For several months he was prevented from presenting his paper on the subject by a legal challenge under the controversial Digital Millennium Copyright Act. However, the recording industry relented, and he published his paper in August.
CD burners have the enthusiastic backing of a couple of top tech companies. Apple started things rolling last year with its "Rip, Mix, Burn" ad campaign, and CEO Steve Jobs has been telling anyone who will listen that "piracy is a behavioral issue, not a technological one." Gateway took the idea a step further last month with its ad campaign featuring CEO Ted Waitt and the company's signature Holstein cow singing along to a burned CD--backed up by CD-burning advice on gateway.com When the R.I.A.A. seethed that the ad was a cynical attempt to cash in on piracy, Gateway happily conceded that CD burning was a cash, uh, cow. "It's a killer app for us," says vice president Brad Shaw.
Not all tech companies think copy protection is futile. StreamCast Networks, the company that owns Morpheus, sees value in the idea. That might seem ironic, given the lawsuit filed by the R.I.A.A. against StreamCast, which is heading for a likely trial in October. But the kind of copy protection on show in Morpheus 2.0, a new version of the file-swapping software to be released in the next few weeks (and distributed free at musiccity.com will probably give music executives ulcers because it allows artists to cut out the music-label middleman.
The technology is called CintoA, shorthand for Content into Application, and it acts as a kind of secure digital wrapper for anything an artist might want to seed among Morpheus' 60 million users. The artist pays $500 up front, then sets the price users will have to pay--say, $1 a song--and the rules they will have to obey to unwrap a song or album, including whether they can copy it to a CD. Morpheus takes 30% of the revenue; the remaining 70% goes to the artist. Not bad when you consider that the average songwriter barely makes a dollar from the sale of her CD in a store. Of course, if you happen to download free music and want to compensate the artist anyway, you can always go to fairtunes.com (see box).
Rap singer Chuck D has turned his website Rapstation.com into what may be a model of the future. It serves as a Napster-style source for MP3 files (the kind of music files most often burned onto CDs) of some 4,000 rap artists, 15% of whom are signed to labels. Users may download a raw MP3 with no copy protection and burn it onto a CD if they want. The site features a store that sells Rapstation.com merchandise, and artists may link to the site to sell their CDs. "Technology giveth, and it taketh away," says Chuck D. "You have to be realistic. The public's choice is MP3, and all these systems the major labels are coming up with fail to realize that." A spokeswoman for Chuck D says the site is on track to turn profitable by the third quarter of next year.
The major labels' systems include the online services Pressplay (owned by Vivendi Universal and Sony) and MusicNet (EMI, AOL Time Warner, Bertelsmann and the software firm RealNetworks). Initially hyped as the legitimate alternatives to the original outlaw Napster, these services have flopped with consumers--especially where CD burning is concerned. Pressplay charges $9.95 to let you burn 10 tracks a month--barely enough for one CD. MusicNet offers no burning capabilities, but EMI seems to have belatedly recognized the need, at least for fans of Sharon Riley and Faith Chorale. You can now burn up to 20 tracks from EMI's Christian-music catalog for $9.95 a month. Then there's the new version of Napster, which, with the aid of BMG, plans to sell a subscription service as soon as it can strike licensing deals with the other labels.
The industry is greeting these first forays into online services with caution. Doug Morris, chairman of the Universal Music Group, calls Pressplay "an exercise in trying to understand what's going on." There may be plenty of money to be made from selling raw MP3s and unlimited CD-burning privileges. But with major media companies so wedded to the old ways of selling music--nearly 40% of Vivendi's operating income flows from its media business--allowing users to burn from their catalog seems akin to dragging a large wooden horse into their boardroom.
Yet in the long run, turning Trojan might be Big Music's best strategy for a return to growth. Given that the established music industry of the day has alternately resisted and then succumbed to every new technology since the player piano in 1896, users would seem to have the weight of history on their side. "A business strategy that alienates your customer base isn't a good strategy," says Andreessen. "The most productive way to solve the problem is to satisfy demand." CDs saved music in 1985; perhaps some modest fencing around the cash cow of CD burning can save the industry again in 2003. --With reporting by Daren Fonda/New York and Jeff Chu/London
With reporting by Daren Fonda/New York and Jeff Chu/London