Music on the Internet: the free ride is over
By Michael Bertin, Fri., Aug. 17, 2001
This story isn't about Napster. Napster, as you knew it, is dead. You can log on yourself and find that out pretty quickly. There's not much music to download anymore. Napster will continue to exist, but the free ride is over.
This story is about the world after Napster. In this new world order, the big five music labels -- BMG, Sony, Warner Bros., Universal Music Group, and EMI -- take back control, or at least attempt to take back control, of their artists' music and how you, the consumer, download off the Internet.
That will, in all likelihood, happen through two different Internet services, MusicNet and Pressplay, scheduled to debut in the near future. First, though, a caveat. Changes in this new world order -- as in acquisitions, mergers, partnerships, technology announcements, or anything that could seriously impact the shapes of these services -- are not only possible in the short interval between this story's writing and its publication, they're quite likely.
It might be easiest to describe Pressplay first, since there's almost nothing to describe at this point. Originally called "Duets," the service was first announced in the spring of 2000 as a joint venture between Sony and Universal Music Group. A year later, however, there still isn't much of a sense of what Pressplay will be.
And Your Bird Can Sing
"We haven't really seen any business model out of [Pressplay] other than the acquisition of companies that would be key," says Lee Black, analyst for Internet-based news site Webnoize.
Black foresees Sony's role as being primarily software enablement (portable MP3 players, etc.) and the architecture behind the services. Universal, on the other hand, has been busy outfitting itself with technology and getting access to a lot of music-swapping traffic, companies like Emusic and GetMusic. One of the biggest surprises in the arena of Internet music was Universal parent company Vivendi's recent purchase of MP3.com for $372 million.
Speculation is that, with technology in place and a substantial name-recognition quotient to boot, MP3.com will become the primary portal for Universal, and hence Pressplay, to distribute the label's music over the Web. However, Pressplay already has an agreement with Yahoo! to distribute songs once it launches.
The MP3.com deal itself isn't as sweet as the delicious irony that accompanies it. In January 2000, MP3.com began offering an online locker service called My.MP3.com. The company offered users access to a database of more than 80,000 songs via any computer with an Internet connection. All users had to do was verify they had permission to access certain songs, usually by having the service digitally match songs from a user's CD to files in its database.
In other words, by putting a copy of, say, the Beatles' Revolver into your computer's CD drive and surfing to My.MP3.com, you could "tell" the service you have a right to listen to those songs. Once that's done, you simply put those songs in your locker and gain access to "She Said She Said," "For No One," "And Your Bird Can Sing," or any other song off Revolver from any computer that was hooked up to the Net.
Then again, since MP3.com never bothered to get the licenses for said music, they got sued by all five major labels. In April 2000, a federal judge ruled against MP3.com, and the service shelled out more than $160 million in damages. The irony is that Universal was the only label that refused to settle, and in November 2000 was awarded damages estimated around $53.4 million, an amount believed to be well in excess of what the other labels received by settling.
The other major-label service, MusicNet, the Bertelsmann/EMI/AOL-Time Warner cooperative, is more of a known entity at this point. And at this point, it looks like a music-rental service. It's also worth noting that MusicNet is a business-to-business play, not business-to-consumer. In other words, MusicNet sells itself to other businesses, who then deliver the music to consumers, essentially managing the licenses for the music and the access to them.
Freddie the Freeloader
Basically, the setup will work as follows: For a nominal monthly fee, $10-$15, you'll get access to X number of songs. For a month, then, you can listen to or "stream" (not download) those songs as often as you want. The next month, pay your fee, get another batch of songs.
"Basically, the way they positioned it, it's like kind of the video-rental market," Webnoize's Black says. "You can rent the video as many times as you want, you just have to pay for it each time. In this case, you just pay a subscription and have a set limit of songs."
Additional services will have additional fees. Want to upload the song to a portable MP3 player? That will cost an additional fee. Want to burn the song to a CD? Another fee.
Then there's the Napster component to the MusicNet equation (okay, this story is a little bit about Napster). In early June, MusicNet cut a licensing deal with Napster that would make their major-label content available through the song-swapping service. The problem with this is that Napster had already planned on rolling out a paid version of its service late this summer, where subscribers could trade files from independent artists as well as legit Napster partners like TVT Records and Edel Music. The recent deal with MusicNet requires an additional fee on top of Napster's basic service fee.
Another hitch is that MusicNet is already aligned with RealNetworks as its technology arm, meaning that even within Napster, MusicNet content requires a RealPlayer for playback. So there are technology issues, as the Real file format differs from the MP3 standard of Napster (see "MP3 for Dummies," right). Here's the really bad news for all the impoverished college kids and other freeloaders: Both types of files will be, theoretically at least, protected to prevent users from copying them to CD.
In fact, Roxio, who with their Easy CD Creator and Toast software products pretty much own the CD-burning software market for both Mac and Windows, just cut a deal with EMI to work on technology to prevent unauthorized burning of MP3s to CDs. They are currently in discussions with the other labels as well.
Also, the MusicNet-Napster arrangement does nothing to deter the Recording Industry Association of America in its copyright infringement suit against Napster. That will proceed because the RIAA wants to set the precedent.
This puts Warner Bros., EMI, and BMG in an awkward position, because at the same time that the MusicNet participants are jumping into bed with Napster, they're also suing them via the RIAA. Bertelsmann (BMG) is in an even stranger position, as they defected from the Party, so to speak, and loaned Napster $60 million last fall to help them develop a means to legitimately pay royalties to rights holders.
Head spinning? Like a CD probably.
So what does all this mean to you? The answer depends on who you are -- consumer, musician, Microsoft. Regardless of which category you fall into, there are as many questions as answers.
The Chicken Dance
Starting with consumers, it looks like you might be paying more and getting less. Given that the average consumer buys six CDs a year, spending about $90, a monthly service costing $15 a month means twice the annual outlay, and still might only gives you "rental rights" for a limited number of songs. At least when you buy a CD, it won't disappear at month's end.
Moreover, if MusicNet and Pressplay don't cross-license each other's catalog, you might end up paying multiple fees for multiple services. Want Napster? Pay again.
Vivendi Universal vice-chairman Edgar Bronfman Jr. recently testified to Congress that Universal had every intention to "license broadly." Members of the House Subcommittee on Courts, the Internet, and Intellectual Property, however, were concerned enough to express the possibility of legislation ensuring cross-licensing and fair competition in the marketplace.
As MusicNet and Pressplay vie to become the dominant Internet music provider, it's almost as if they're playing a game of chicken to see who will cave in first. Consumers, for their part, can take a little comfort in Black's assertion that if neither service cross-licenses, "business practice will teach them otherwise quickly."
If you're a musician, there's really only one issue: Where's the money? How are you going to get paid for your music being downloaded? That, of course, is still TBA. Jay Cooper, lawyer for the likes of Sheryl Crow and Joni Mitchell, surmises that at least some monies collected from digital media services will fall under catch-all clauses in record contracts.
"Lacking anything else," he explains, "there's generally a provision in most record contracts that gives artists 50% of all other net revenues."
That doesn't mean artists are going to split half the cash these services generate. Instead, artists will probably be entitled to half the licensing fee paid to MusicNet and Pressplay for use of their content. Both entities are, of course, free to negotiate those license fees with individual carriers.
According to Cooper, licensing fees will hinge on the way things are structured. MusicNet and Pressplay are set up as separate corporations from the labels backing them, so the manner in which licensing fees are accounted for depends on whether those fees are being paid to a third party or not. In other words, should MusicNet pay license fees to BMG for its music even though it's partially owned by BMG?
"We'll have an issue, I believe, as to whether Pressplay and MusicNet are licensees or it's the labels themselves," says Cooper.
Regardless of how that shakes out, it would likely only cover streaming, as opposed to downloading. The former is roughly analogous to traditional radio, where a song plays on your radio and leaves nothing tangible behind. Here, the stream of digital data sort of evaporates as the song is pumped out of your computer speakers. Downloading results in actual song files on your hard drive you may access at will.
According to Cooper, record contracts usually account for downloads by assigning it the royalty rate. Meaning, if your record contract pays you 15% of a CD's suggested list price, then that's your royalty rate for a download as well. (Prorated, of course, as you're only selling one song and not an entire $17 CD.) But what about a fee paid to move a song to a portable MP3 player? Is that a download? What if the file times out, meaning it's only playable for a certain period of time?
Speaking of royalty rates, as things now stand, the musician's end of thing are subject to all sorts of deductions -- packaging, free goods, etc. But is there any packaging for a digital file? Will artists continue to take that hit, just because they always have?
Down the Road Apiece
"These are issues that are going to be fought over for a long time," acknowledges Cooper.
Another point of contention is whether these, or any services that stream music over the Internet, will be considered webcasters or interactive services. This is actually a nontrivial issue and an important distinction to make.
In the Digital Millennial Copyright Act (DMCA) of 1998, a sizable piece of legislation that impacts almost anything comprised of ones and zeroes, Congress granted musicians a performance royalty for songs that are webcast. That means for noninteractive webcasts, artists get money when one of their songs is played. How much they get paid has yet to be determined by the U.S. Copyright Office.
Both the RIAA and the Digital Music Association (DIMA), which represents webcasters, have filed petitions with the Copyright Office on what that rate should be. The RIAA submitted that webcasters should pay a license fee of $.004 per song per listener, or 15% of gross revenues from such transmissions. DIMA countered with a figure 30 times lower. As of this writing, no decision had been made.
Since the United States is the only industrialized Western nation that doesn't pay artists a performance royalty for songs played on the radio (songwriters and publishers are covered), there's no analogous performance royalty for radio broadcast. Which is to say, this is a new revenue source that artists haven't had before. Even better, unlike royalties from album sales, which are usually held against recoupable costs, performance royalties are not.
However, this new performance royalty is only for noninteractive webcasts. The DMCA spells out well-defined criteria as to what qualifies as noninteractive -- e.g., only so many songs by one artist in a certain time frame, programming cannot consist of substantially requested recordings that are played within an hour of their request, and other Byzantine restrictions.
If Pressplay, MusicNet, or any other service are streaming music but not technically webcasting, artists aren't going to get a performance royalty from those services. Sure, they still get paid by webcasters, but again, if MusicNet and Pressplay become the dominant way people consume music from the Internet, then artists are unlikely to see much tangible financial benefit.
According to Noah Stone, executive director of the Artist Coalition, an organization that represents recording artists, the trend across the Web is toward interactivity, which may be great for consumers but not so good for artists.
"Basically everyone's moving down the interactive road," answers Stone. "And the second a service becomes interactive, artists lose that performance right. So all of a sudden, it goes back to the language of the recording contract, and while there's not a whole lot of language that deals with it, generally it's somewhere in the neighborhood of 5%-10%, and that's subject to recouping. That means an artist, once again, for these types of uses, doesn't get paid."
Stepping back from the details for a moment, how artists will benefit from online services could simply boil down to one thing: size.
Standard of St. George
"The question," according to Cooper, "is going to become whether this is more revenue streams or is this a reduced revenue stream in the following sense: If people can get all of their music from downloads by paying monthly fees, will that increase the business or will that reduce the business? There are a lot of arguments on that both ways. I don't know the answer."
Stone, on the other hand, has a dim outlook about the impact on artists.
"I do believe that labels are going to be able to get music online in a way that consumers want," he says. "However, I just don't see that it's moving in a direction where artists are going to be compensated properly for it."
One more enormous issue is waiting to sort itself out: ownership of the technology behind the music. That means talking about Microsoft.
As it stands now, there are two primary players in this arena: Microsoft and RealNetworks. It might help to think of this battle as analogous to the browser wars of a few years back, only in this case, Netscape is RealNetworks, and Microsoft is, well, still Microsoft.
When you download music into your computer via the Internet, it's in a certain format (Windows Media, Real, MP3, QuickTime), and you need the right software to play that music. Part of what complicates this turf war is that the big five labels want control over how the file can be used; security that prevents you from sharing, capturing a stream, or opening the file after a certain amount of time, and the like.
Thus, files will need some sort of encryption or other digital protection, accomplished by a Digital Rights Management component, or DRM. It's an oversimplification, but the DRM is essentially the lock on a song, and the player itself, the application on your computer that opens the song files and plays them, will be the key.
Microsoft's Windows Media Player and RealNetworks RealPlayer both have DRM technology in place, and both are trying to position themselves as the standard for delivery of media content over the Internet. Why? Well, there's a ton of money at stake here.
Both companies make money licensing their software as a platform for delivering music. If the overwhelming majority of consumers cotton to your standard, then everybody who wants to provide content to those consumers will likely use your platform and your DRM. With the music industry a $40 billion business worldwide, there's stacks of money to be made in owning the standards. Currently, Real appears to have an advantage simply because they're in business with MusicNet.
"Certainly in the music space, as content and security become indistinguishable, Real is in a better position right now, because they've basically got 60% of the content simply by their association with MusicNet," Black notes.
That 60% figure comes from the fact that MusicNet has three out of five major labels as partners. In reality, though, those three companies only control about 40% of the U.S. market, while Pressplay principals Sony and Universal have about 43%.
And even though Microsoft doesn't currently have a deal with either service, it still owns the consumer desktop. In a manner very similar to the way it steered consumers to use its Explorer Web browser over Netscape, it could again leverage its position into making the Windows Media format what people use, simply because it's there. Moreover, an anonymous source close to MusicNet was quoted in CNet News as saying, "If MSN wanted to license MusicNet, they could do it in Windows Media."
Scary possibilities for lovers of competition in the marketplace? Maybe. The reality is that many music-biz players are wary of getting in bed with Microsoft. In launching its own music download service, BMG decided to use DRM technology from IBM and InterTrust as well as Microsoft. That decision alone put more choice in consumer hands. And even Real is engineering its player for interoperability with multiple standards -- although doing so while pushing its own standard.
While multibillion-dollar companies jockey for various market shares, they all seem to be forgetting one very important thing: The tools that made free music on the Internet aren't going anywhere.
Something for Nothing
Legal issues aside, if Napster proved anything, it's that people love getting something for nothing. And if the services that have sprung up in Napster's wake -- Aimster, BearShare, etc. -- prove anything, it's that people still love getting something for nothing. According to Webnoize's Black, MusicNet and Pressplay fail to address that fundamental problem.
"The mistake the labels have been making," explains Black, "is that they're so worried about protecting their online content, but really, most of the illicit content that's being traded online came from traditional packaged content. So, it's kind of like, 'Why are you spending so much time trying to secure this down when really the CD, that's where it's coming from?'"
Even when MusicNet becomes a reality later this year, and Pressplay probably sometime after that, people can still take regular ol' store-bought CDs, rip and encode the tracks to MP3s, put them on their hard drive, and through any number of file-sharing clients, trade music across the Web.
"That's what the industry has to come to terms with -- that the future of this may not be as much about the music," says Black. "Most of the profitability, or the way the business structure works, is that you have a song, and the price of the song is pretty much decided.
"Say that song is worth $1. Well, that $1 is divided up amongst a bunch of people. What they've sort of had to come to terms with is that songs aren't worth $1, they're worth far less. And they've had to re-configure their entire business model to capture revenue from this new peer-to-peer stream."
As opposed to simply selling music, the big-five labels might soon be in the business of monetizing their artists. In that business, music is only a part of the picture. For instance, you the fan might subscribe to an artist, and by doing so, you get access to that artist's catalog. For another fee, you might be able to stream all of the live shows from that artist's summer tour. Another premium gets you a DVD copy of a show, or maybe a chance to purchase concert tickets before the general public.
So why all the dire forecasts when all this technology probably means more music will be available, as well as more ways to experience it? Because much remains to be seen. Stone, who's surrounded by these issues everyday, reads the writing on the wall, and to him at least, the news doesn't look good.
"We all kind of assumed that the Internet was going to mean infinite shelf space and infinite webcasting," he says. "Now, it looks like the labels are pushing the retailers out of the game, and they're becoming the retailers. They're also pushing the broadcasters out of the way, and becoming the broadcasters themselves.
"From my perspective, the whole thing is a little bit more depressing. It was exciting there for a moment, because it looked like the Internet was going to break apart the consolidation and give the independent artist a way through. And now, I just think an incredibly hard battle is harder still."
Next week: Radiohead, Dynamite Hack, Too Much Joy, and the shocking revelation that downloading music may not affect record sales. Stay tuned ...