Online Armageddon for Record Labels

Song pirating proves hard to resist, harder to snuff out

Story by David A. Fox

University computer systems across the country are choking under the strain of students' downloading music from the Internet at no cost. But what's loved by users of free online music programs Napster and Gnutella is despised by those who see their revenue streams vanish.

Students at Belmont University are no doubt a studious, Internet-savvy lot. But are they bookish-enough to slow down the school's computer system with their online research? Hardly.

A week ago Friday, computer-systems experts at the Baptist-affiliated university found a way to free up as much as 50% of the system's recently constricted bandwidth. They blocked Napster.

Napster

If you're asking yourself, "What's Napster?," you're not in the 14-21 year-old age bracket and you're not in the music business. If you were in either, you would know that Napster allows users -- including teeming numbers of college students across the country -- to download digitally recorded music from the Internet for free.

Napster is a free program that lets users type in the name of the song they want, reach into the hard drive of another Napsterite who already has the song's digital file on his computer, and transfer a copy for their own listening pleasure.

No software fees. No compact disc charges. No royalty payments.

Then no recorded music industry?

"I think this will totally break down the system," says Jim T. Graham, chief executive of GrooveTone.com, a Nashville-based purveyor of Americana-style music that lets visitors freely download one digitally recorded song in MP3 format from each of its artist's CDs. "The old school of music distribution is about to be shattered into a million pieces and the mainstream labels don't want to face it."

The mainstream industry's clearest response so far has been to have its trade group, the Recording Industry Association of America (RIAA), sue Napster for "not less than $100,000" for every copyrighted song whose intellectual property rights they believe have been infringed. With more than 5 million Napster users and a couple hundred thousand songs downloaded each day, the potential award would amount to a few billion dollars more than Napster's 19-year-old founder -- whose nickname is "Nappy" -- likely has in his checking account.

Not that silencing Napster would end the matter. Just a few weeks ago, another program called Gnutella got loose in the Ethernet that also allows users to share recorded music online. But Gnutella has no central server and its users are nearly untraceable. That makes it a tough target to sue.

The recorded music industry, which is a prominent component of Nashville's diverse business community, is facing what some economists call a "paradigm shift." How it reacts to this change -- either by embracing the new technology or merely by seeking to protect the status quo through the courts -- promises to determine the industry's future health, and, some say, its future existence.

The industry didn't have to be so vulnerable so quickly.

"At the time CDs were coming to market, I was a big proponent of developing encryption or encoding, but it fell on deaf ears and the record companies chose not to take advantage of it," says veteran music industry executive Larry Rosen. Such techniques, Mr. Rosen says on the telephone from Florida, would have allowed record companies to better control access to their music and demand fees for themselves, performers and songwriters. He was in a position to know. He created, along with jazz musician Dave Grusin, CD-only label GRP Records. Later he founded N2K Inc., which owned online CD sales web site Music Boulevard before merging a year ago with CDNow Inc.

Without encryption protection, the entire library of digitally recorded music is at risk of pirating. But why would an average, decent music listener engage in something many regard as illegal, or at least unethical?

"People have no conscience about trading Internet files because they don't think their thieving is any worse than the thieving by the industry," opines Paul Schatzkin, general manager of Songs.com, an online promoter and marketer of independent musicians. "A company makes a record for $1, sells it for $16, and the artist gets $1, so what happens to the other $14?"

Of course, some listeners are concerned enough about the new technology's legality to be mindful of the RIAA's lawsuit and its outcome. One prominent entertainment lawyer has no doubt that either the RIAA will win its lawsuit or laws will be passed that make Napster, Gnutella and its cousins illegal.

"There is no interest at all in Washington (D.C.) -- given the companies involved -- to see copyrighted works donated to the public," says Michael Sukin, who maintains offices here and in New York. To support that view, he notes that just 18 months ago Congress passed legislation that extends copyright protection.

The RIAA's political power should be sufficient to dampen -- at least for a while -- the surging popularity of Napster and similar programs, says Jim Beavers, who works in sales and marketing for country label Virgin Records Nashville.

"The number of stakeholders -- distributors, retail outlets, performers -- who stand to lose is just too large not to have it stopped," he says.

Not so, counters GrooveTone's Mr. Graham. The major labels "assume that if you get a big enough lawyer you can beat down the problem. But there are thousands of 15-year-olds out there who will keep the labels' so-called "problem" very much alive."

What the heads of the major labels really expect of Napster's affect on their business plans is hard to know. NashvillePost.com attempted to reach Joe Galante of RCA, Tony Brown of MCA and several other leading label chiefs, but found none available to discuss the topic.

Instead of fighting the inevitable, Graham says he's adopting the new technology and planning to upload the songs of GrooveTone artist Walt Wilkins to Napster himself. "Look, it's like the Grateful Dead tapes," he says of the band's celebrated tolerance for allowing fans to record the Dead's music and send it to their friends. "That's the best PR there is."

What revenue is lost in pirated singles will amount "to just pennies" compared to what will be made from additional full song catalogs people will buy after listening to tunes online, says David Pullman. That's an important calculation for his company, New York-based The Pullman Group LLC. Pullman was the first to securitize artists' entertainment royalties through the sale of what are now known as "Bowie Bonds." Artists can receive a chunk of their future royalties up-front by selling bonds that divert future royalties to repaying investors their principle with interest. That category of bonds -- which now include such performers as David Bowie and James Brown and songwriters Holland-Dozier-Holland -- depends on there being adequate future revenue available after the effect of free music downloading.

N2K founder Mr. Rosen warns against letting the free-downloading movement get too far in the name of its marketing usefulness. "Lest people think -- and some people do -- that maybe music is not meant to be purchased, that it is strictly for promotional purposes and that some other source of revenue can be generated to support the artist -- I'm not a proponent of that.

"If the recording companies and the artists don't get paid, there isn't anymore music business," he says.

Even Napster-fan Mr. Graham acknowledges that songwriters' livelihoods may be threatened with a new free-downloading business model in the industry. "That's the biggest downside. Let's pray that they will figure out a way to get songwriters their little pieces of change on every song."

Music group Metallica isn't waiting on prayer. Last week the group sued Napster and three universities that permitted students to use their servers to gain access to the site.

"We go through a grueling process to achieve music that we feel is representative of Metallica at that very moment in our lives," drummer Lars Ulrich said in a written statement. "From a business standpoint, this is about piracy -- a.k.a. taking something that doesn't belong to you…trafficking in stolen goods."

The best way to ensure that songwriters, performers and labels get paid for recording songs in the future is to begin using encryption and encoding for digitally recorded music, Mr. Rosen suggests. With encryption and Secure Digital Music Initiative (SDMI) compliant products -- featuring codes on both music software and hardware -- revenue on future recordings could be protected. "As far as music already in existence, I don't think there's much anybody can do about it. With Gnutella, music travels peer-to-peer, so there's no central place to shut down."

Agreeing that "waging war on Napster is akin to closing the barn door after the horses have escaped," Mr. Schatzkin of Songs.com sees Napster as the "early iteration of the Celestial Jukebox." The term Celestial Jukebox, coined by Stanford law professor Paul Goldstein, is a vision of entertainment's future where listeners no longer collect their own music recordings, opting instead to tap into an orbiting satellite or land-based signal that instantly can connect them with every song ever recorded.

Revenue in such a scenario might come from subscriptions based on royalties, presumably protected through encryption. However people pay for their music, the new economics will transform the "music industry" into the "musician business," Mr. Schatzkin predicts. Musicians will regain control of the system and will recognize that their best opportunity to make money will flow from dealing directly with their fans.

This implies a shift away from recorded music to live music, says Clyde Rolston, an assistant professor at the Curb School of Music Business at Belmont. While it will unfold more slowly than some expect because of a lack of fast Internet connections to download the large digital music files, it ultimately could sink the record labels.

"In the long run, it will be hard for record companies to survive," he says. "You'll see (artist rights organizations) BMI, ASCAP and SESAC get a lot larger, and the record companies get smaller."

So what career advice does Mr. Rolston offer his undergraduate and graduate-level students? "I try to encourage them to take computer classes, to be entrepreneurial.

"They need to look at opportunities other than the record companies, though they appear to be quite glamorous. I'm telling them to look at publishing, touring and performance. In the long run, those will probably be healthier."