By now, it's obvious that online music file-sharing hit the major labels like a sneak attack. "The truth is, none of us were prepared for this, and we all got hurt," says one label VP who requested anonymity.
Coupled with other factors -- including a sluggish economy and what industry watchers acknowledge as a period of artistically weak big-label releases -- peer-to-peer file-sharing has contributed to an overall decline in CD shipments of 26 percent and a decrease in sales of 14 percent over the past three years. From 2001 to 2002 alone, 62.5 million fewer prerecorded compact discs were sold, according to SoundScan, which tracks retail sales. Altogether, labels' CD business has fallen by $2 billion since 1999.
Until then, CD sales had risen nine to 10 percent annually for several years. Not coincidentally, 1999 is when Napster set the music-file-sharing world aflame. A new study by Forrester Research indicates that file-sharing is responsible for almost $700 million of that $2 billion decline.
Music fans haven't had much sympathy for labels. "The record business has got a bad reputation," Palm Pictures chief executive Chris Blackwell told me last year. Blackwell noted that the industry's lack of competitive online alternatives at the time, as well as its campaign to get consumers to stop burning CDs -- another practice at which the labels' trade association, the Recording Industry Association of America (RIAA), has taken aim -- was part of a recent pattern that riled its customers.
Further, 25-to-50-year-old listeners, who were raised on rock 'n' roll, were alienated by the flood of teen-pop recordings. And the RIAA's argument that file-sharing is copyright infringement took a hit when a diverse group of artists, including the Eagles, Sheryl Crow, Elton John, Ozzy Osbourne, No Doubt, the Dixie Chicks, and Korn, came together in 2002 under the banner of the Recording Artists Coalition for a series of well-publicized L.A.-area concerts. Their goal: raising money to battle major labels over copyright ownership, intellectual-property rights, unfair accounting practices and rules governing contracts.
Then there's the pricing of music CDs, which has been debated almost since their inception. The issue sizzled again earlier this year, when consumer advocates noted that soundtrack CDs are often priced higher than DVDs of the films they accompany. In an attempt to stimulate sales, Universal Music Group announced that it will cut prices for new CDs by 30 percent beginning October 1, but at this point that may be the equivalent of applying a Band-Aid to a decapitation.
The result of all this has been significant shrinkage in what some file-sharers call "the Evil Empire," the five remaining major labels: Sony, Universal, BMG, Warner Music Group and EMI. Thousands of jobs have been slashed, labels have peeled back their artist rosters and executive heads have rolled. Sony Music Entertainment boss Tommy Mottola was axed last year after the company lost more then $132 million. So was Jay Boberg, who led Universal's MCA Records.
But now, the Empire is striking back. The hail of lawsuits filed against individual peer-to-peer (P2P) sharers by the RIAA is part of a counterattack that began when labels started licensing significant amounts of their music to Web-based streaming companies, including the Sony- and Universal-developed PressPlay (which was recently bought by the restructured Napster), in 2002. That set up a legal alternative to file-sharing, although committed computer jockeys have balked at these services, branding them "too little, too late."
Xeni Jardin, an L.A.-based tech writer and event developer, calls label-sanctioned services like PressPlay, RealOne Music, Full Audio, Buymusic.com and Rhapsody "clunky." File-sharers, he says, "want a deep reach across as wide a spectrum of material as possible, and they want it quickly. In my opinion, people will pay a reasonable fee per song or per month, but the labels haven't given fans access to an unlimited catalogue of music, and that's where P2P has them beaten. There's an unwillingness to put the consumers' needs first, and that's why consumers gravitate naturally to what are essentially rogue applications."
Understanding exactly what each licensed streaming company offers is complicated, too. Some provide downloads that self-destruct when subscriptions lapse. Some allow CD-burning and transfer to MP3 players and the like, but may restrict the number of times a song can be burned or transferred. And there are other variations.
There's also the content issue. Until Aug. 18, when the Rolling Stones debuted on the RealNetworks-owned Rhapsody, their music was not available legally online. Other superstars, including the Beatles and Madonna, are still keeping their songs offline, and, in effect, compelling computer-based listeners to seek their music from illegal P2P sources.
Digital rights have been a major obstacle in getting major-label music online. For example, EMI, which holds the Stones' post-1971 catalogue, did not have digital rights to those recordings until they were negotiated into the new contract the band inked with the label in July, according to Rolling Stone.
"I can't tell you how complex it is to clear the rights to every song in our catalogue," says EMI vice president of corporate communications Jeanne P. Meyer. "You can't just turn a switch when there are millions of contracts governing our business. Every song has a myriad of rights for songwriters and publishers, and different relationships exist between the label and every artist and manager. I think we've actually moved pretty quickly to get into the market."
Regardless, the question of whether consumers pampered by the availability of music on P2P networks will buy into sanctioned services remains. Josh Bernoff, a music-industry analyst at Forrester Research, believes the answer will ultimately be "yes." In the research for his recent report From Discs to Downloads, Bernoff found that 49 percent of music consumers aged 12 to 22 had downloaded at least one song in the past month. Twelve percent of older consumers had, too. Ten percent of file-sharers said they buy fewer CDs because they download. Sharers 22 and younger in Bernoff's survey got an average of 23 songs a month via computer and burned 3.8 CDs. Their older counterparts ripped and burned slightly fewer. Bernoff found that these groups together also account for 13 percent of current CD purchases. That figure would be higher if they didn't share files. And he arrived at another interesting statistic: 68 percent of file-sharers say that fear of jail or a fine would stop them. So the RIAA lawsuits may, indeed, take much of the steam from file-sharing.
"If the industry had gotten the courts to rule against [P2P system] Kazaa early on, that would have slowed things down dramatically," says Bernoff. "As it is, the music industry has moved faster than any industry we've ever seen when it was threatened by a new technology -- but not quite fast enough to get ahead of the problem.
"Slowing down piracy will have no effect by itself on sales," Bernoff continues. "There's no guarantee the people who are stealing music now will go back to buying it. They've learned over the past three years that they can get access to any piece of music or album they want at any time and can copy it onto a CD or portable player for free.
"I think the 'for free' part is negotiable, but everything else is not. They are not going to accept music that can't be delivered whenever they want it and be copied onto CDs or portable players. There's a fair amount of label interest in encoded CDs, but that won't matter. All you need is one copy of music in digital format for it to be spread on the Internet. Unless people are ripping a lot of CDs, the problem is sharing, not copying."
Mike Dreese, CEO of the Newbury Comics retail chain, agrees. "Copying CDs becomes an issue of fair use," he says. "Fair use clearly extends to your immediate family and close friends. If you're making five or 10 copies of an album you love for your friends, that's fair use. But in my opinion it stops at the level of a local frat house. If you have 25 people living together, are you allowed to make 25 copies of the Bob Marley box set? You could argue that the frat house is a community, and say that constitutes some kind of brotherly definition of fair use. But clearly a 20-story dorm wouldn't qualify. And when you post a song on your hard drive that can be accessed by file-sharing, you're literally making it available to the world."
One thing labels, retailers, analysts and even file-sharers agree on is that the way music typically gets into listeners' hands is changing. Bernoff predicts that CD sales will continue to slump and will be down 30 percent from 1999's level by 2006. "But if you're a BMG or Sony, there are going to be some positive things in the future: the end of declining sales and the beginning of growth and increased profitability," he says. "It's going to be much more profitable to send music to consumers down a network than to print CDs, ship them out so people can buy them, and, if they don't, ship them back to the warehouse. On the other hand, if you're a retailer, this is bad. Every person who gets their music from iTunes or another online service is a lost customer, so in the future, disc-centered media stores will close by the hundreds."
So far Apple's iTunes Music Store, which was launched on April 28, seems to be the most viable of the online providers. "Music services need three things to meet the 'Consumer Bill of Rights,'" Bernoff says. "Those are broad selection, flexible payment terms and a technology that permits CD-burning and downloading to portable players. ITunes meets that criteria, although they still don't have the Beatles." Bernoff predicts that by mid-2004, at least 10 more Windows-based providers will emerge. Sony has already announced plans to unveil its own music-downloading system next spring. And Rhapsody is said to be developing an & agrave; la carte music-buying menu much like Apple's.
However, Bernoff forecasts that & agrave; la carte purchases will ultimately be too costly for consumers, and preferences will shift toward subscription services. He expects subscriptions and downloads to equal $1.4 billion in sales in a revitalized $12.8 billion music industry by 2006, up from a projected $10.7 billion in 2003. He anticipates that 33 percent of music sales will be online by 2008.
Music fans may reap benefits other than convenience in the coming digital-music boom. Lower distribution and zero manufacturing costs should make it easier for artists to release concert recordings and archival material -- whether they're superstars or unsigned bands. There will also be an explosion of digital-playback devices.
"What we're seeing right now is really exciting in terms of inventiveness," says Dreese. "Just think of how far we've come since the advent of recording in how we listen to music. Now it's a matter of the law and certain legal rights catching up with technology. We're living in an accelerated world, so what we're experiencing now with the lawsuits, some universities considering a student fee for downloading music, and other possible solutions might have taken much more time. After all, it took something like 40 years of litigation to get the music on radio licensed. Now, within the span of about five years, we're going to have a completely new technology and possibly new laws in place for an industry. That's remarkable.
This article first appeared in the Boston Phoenix.