Audio revolution blasts record companies

Terry should be studying for finals next week. Instead, he's scouring the Internet for free music in his quintessential college pad, complete with a mega-sound system, mood lamp, and electric guitars draping down livingroom walls.

"I don't have to pay, and I can listen to it as often as I want," says the student at the Massachusetts Communications College in Boston. With a few clicks of a mouse, the Digable Planets surge from his computer-turned-jukebox.

He's one of the millions of Web-savvy teens and twenty-somethings who are skipping trips to record stores and joining a digital-music revolution that has the music industry reexamining its business model.

Terry has downloaded about 20 tracks - everything from the Stone Temple Pilots to the Doors - which he can also play by connecting his computer to his stereo or on a Walkman-like device that costs about $200. Using a digitally compressed format known as MP3 (MPEG-1 Layer 3), which offers near CD-quality sound, Sinay can e-mail songs to friends without a trace. Although there are other digital formats, MP3 is the most widely used (see related article).

Bootleggers prefer MP3

It's become the format of choice for a new breed of bootleggers - digital ones, whose Web sites are proliferating daily.

But pirates aren't the only ones using the technology. Music buffs can legitimately download MP3 files for free or pay about $1 per single from online retailers such as mp3.com or mjuice.com.

The technology has a $12 billion music industry fired up over how it will tune down online lifting that's costing it millions of dollars a year in lost sales. Adding to that, retailers and record labels worry they might get cut out of the deal. They question whether consumers will continue shelling out $16 for a CD, if digital songs are free or cost less. Artists may opt to go straight to the consumer by posting albums online instead of through a separate agent. Rock band Public Enemy, for example, dumped its record company recently, choosing instead to release an album on the Internet.

"We know that there are more than 2 million people each month downloading Winamp," the software to play MP3 tracks on computers, says Duncan Kennedy, vice president of Audio Explosion.

Piracy has gone up since MP3 became popular - although it's hard to calculate by exactly how much, says Steve Marks, a spokesman for the Recording Industry Association of America (RIAA), which represents major labels. As it gathers more converts, MP3 piracy could cut even deeper into profits, he adds. "On any given day, we can find thousands of [illegal] records and [go after] a [Web] site," but policing them online "is almost like playing a game of 'Whack-a-Mole.' As soon as we shut down one operation, another pops up," he says. Copyright penalties can cost up to $100,000 per infringement, he adds.

It's a different operation from making illegal cassette copies, Marks says. "MP3 allows anybody to become a worldwide publisher of virtually CD-quality music. It can be more easily done ... [and] quality isn't lost when copies are made." But the association has been cracking down, and industry executives agree that the answer combines encryption with digital-rights management.

Last year, the RIAA created the Secure Digital Music Initiative, seeking to come up with new industry standards for copyright protection and distribution of music in digital formats. It filed lawsuits against makers of MP3 hardware products, such as the Diamond Rio, a portable MP3 player, alleging violations of the 1992 Audio Home Recording Act. Artists don't receive royalties for music played on the device. While the case hasn't been decided, the association wasn't granted a preliminary injunction to stop the Rio from hitting shelves, Marks says.

But as the industry tries to snuff out digital bootlegging, companies are recognizing the burgeoning influence of cyberspace in building an audience for musicians and selling music.

Microsoft Corp., for example, announced it will launch a software called MS Audio 4.0 to deliver secure music over the Web. And record companies BMG Entertainment and Universal Music Group formed a joint venture this month to create a series of Web sites to promote and sell music. The sites will feature artist profiles, live music broadcasts, and link users to Getmusic.com, a new Web music store.

But while the Internet appears to be making record companies vulnerable, a 10 percent revenue increase last year for record labels may show that the damage isn't as bad as the industry fears, says Eric Scheirer, a research assistant at the Massachusetts Institute of Technology's Media Lab. "It could even be helping them," he adds.

Artists - especially lesser-known ones - tend to agree, arguing there's tremendous value in using MP3 as a promotional tool. Garage bands can give fans a taste of what's coming, they say, and use it to test out new songs.

Since the band Furious IV started posting music on its Web site five months ago, concert-ticket sales have jumped and popularity has spread by word of mouth, says Ian Taylor, singer and guitar player of the two-year-old group from San Diego. "They come to our live show after they listen," he says. "A lot of friends say they download."

Web music will grow

There's no question that Web distribution will flourish in the next five to 10 years, says Randy Weiner, executive producer of new media for LOUD Records, whose artists include hip-hop bands. At a time when more people are shopping online for access and convenience, they'll turn to MP3 or something like it for the same reasons - especially as technology makes digital downloads easier, Scheirer says.

LOUD is taking the digital plunge by partnering with Audio Explosion, a company that just introduced Mjuice, an MP3-based music delivery service. "I don't feel threatened by MP3," Mr. Weiner says. "I'm not threatened by digital downloads either, because I think the music industry will change.... The idea of ownership will change.... There will be more of a radio model."

CD prices may drop as digital downloads take off, but don't expect a utopia of free giveaways, says Bob Zimmerman, general manager of a Tower Records store in Boston. "We've been pushing labels forever to go down," he says. "I think we'd all like to see CDs cheaper, but the market will bear [MP3 piracy]. In the next year or two, labels will make sure it's something they have control over."