Internet swaps shake up music industry, put pressure on prices

MILL VALLEY, Calif. - It is far more than a David-and-Goliath story for the dawning Digital Age: Suddenly empowered by Internet technology, music lovers the world over are now able to obtain and share their favorite recordings for free.

With digital formats like MP3 and music-swapping Net services like Napster Inc. poised to render CDs and other recording industry media archaic, the question arises: What is music worth?

Sony, Warner, BMG, EMI and Universal - the Big Five of the music industry - earn more than $14 billion in revenue a year in the United States alone on all those $16.99 compact discs.

But their tight grip on the music market is rapidly loosening.

Already, more than 11 million Americans have downloaded tunes for free over the Internet, evidencing a copyrights-be-damned attitude that could eventually consign CDs to history's bargain-basement bin, along with $7.99 vinyl albums, $6.99 cassette tapes and $4 eight-track tapes before them.

Unless, that is, the brick-and-mortar music sales business gets hip to music's inevitably chaotic digital future.

''To me that's the exciting part, if I'm a record company executive. (Consumers) love music so much they're willing to steal to get it. There are very few products about which you can say that,'' says Eric Scheirer, an analyst with Forrester Research.

Although as an industry they've sued Napster, the Big Five know that file-sharing programs are a juggernaut they can't stop even if they succeed in putting out of business an Internet clearinghouse like San Mateo-based Napster.

So the recording industry is itself responding to the desire for digital downloads. Sony now offers 50 songs for online purchase, at $3.49 per song, all of them encoded with security measures to guard against unauthorized duplication and distribution.

Both BMG and EMI plan to follow suit with similar schemes this month.

Kevin Conroy, a vice president of marketing for BMG Entertainment, says the company is choosing the technologies and vehicles that will give it ''the greatest possible reach and provide consumers with the best possible experience while protecting our artists' rights.''

But at what price for the consumer?

The most likely business model would be a subscription service that allows people to buy tailor-made selections of music downloads, Scheirer said.

That may not sit with listeners who are voraciously bootlegging music via Napster, where terabytes of music are swapped daily. A quick log on to just one of Napster's more than 100 servers last week revealed 7,300 users sharing more than 801,500 MP3 files.

One longtime independent record store owner thinks the recording industry has only itself to blame for the free-for-all.

''The record companies have done this to themselves and now they're reaping the whirlwind,'' said John Goddard, who has owned Village Music of Mill Valley since 1968. ''They spent 25 years converting music into a commodity. Now they're upset because people don't consider it an art form.''

Goddard has focused on vinyl in his store, a focal point for people seeking rare copies of 33 1/3, 45, and 78 rpm recordings.

He says his clients - who include Carlos Santana, Van Morrison, Elvis Costello, B.B. King and Mick Jagger - come for the love of music, for art they can't find anywhere else.

But Goddard worries, also, that digital distribution could mean death for the album format: ''People don't want to pay $17 or $18 for two songs they love and a lot of filler.''

Indeed, some Napster users appear increasingly unlikely to buy CDs.

A recent study by VNU Entertainment Marketing Solutions found that CD sales fell 4 percent in stores within five miles of college campuses over the last two years. College students are notorious for clogging their schools' computer networks with music file traffic.

College student David Pack of Livermore, Calif., a Napster user, says he would pay for digital downloads of music, but it would have to be cheap: ''Two bucks at the most. But being a miser, I'd rather pay a buck.''

Some Internet companies already offer music in Pack's price range. sells tracks off not-quite-mainstream Angry Johnny And The Killbillies' new album ''Hankenstein'' for 99 cents each.

Better-known artists such as Bush and Phish also sell via EMusic, a publicly held company founded in 1998. But the Big Five still haven't made most popular music available online.

''I think they're coming to grips with a new architecture,'' said Napster CEO Hank Barry. ''They need to find ways to work with both Napster and other services.''

While Napster's 19-year-old co-founder Shawn Fanning crunches computer code for the next version of the company's software, Barry is still trying to translate its popularity from a venture capitalist money sponge into earned income.

For the time being, Napster remains in beta - and in court.

The company is defending itself against a copyright infringement lawsuit filed by The Recording Industry Association of America, which the next hearing set in U.S. District Court for July 26.

Heavy-metal band Metallica and rapper Dr. Dre have lodged their displeasure as well, demanding that Napster block access to a list of users that have traded their songs. Napster grudgingly obliged, but booted users can simply sign up anew under a different login name.

For millions of music fans, a few taps on a computer keyboard is a small price to pay in the face of CD prices.

So what has kept CD prices so high? CD sellers.

The Big Five recording companies admitted as much in May in a settlement over price-gouging that the Federal Trade Commission says has cost American consumers $480 million since 1997.

The average CD costs less than 25 cents to manufacture, according to Christian Haseleu, chair of Middle Tennessee State University's recording industry department. Artists' royalties typically account for about 12 percent of the CD retail cost, he said.

If CD prices drop, though, how is a record label going to pay for promotions and advertising? The Internet has a solution for this, too.

Web sites such as, and are positioning themselves as feeder systems into the big leagues of rock and roll, getting bands to sign up and watch their popularity unfold, albeit slowly.

On these sites, bands can upload songs in MP3 format.

Visitors to and can sample the music for free and purchase the full CDs. In August, plans to introduce an e-commerce service for artists to sell their own CDs, hats or T-shirts online.

In the meantime, technologies are being developed by companies including Reciprocal and InterTrust that will embed downloadable music with computer code that would limit the number of times users can play songs and prevent them from making digital copies or trading them online.

But would the public really embrace that? Does it have much sympathy for the recording industry?

''I'm perverse enough that I love it,'' Village Music's Goddard said of the music industry's turmoil. ''Anything that brings down the major companies is fine with me. I don't know if music should be free. I don't think they can stop it.''


On the Net:

Recording Industry Association of America:

Napster, Inc.:

Village Music:

Middle Tennessee State University:


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