October 16, 1998

Music Industry Wrestles With Digital Reality

NEW YORK -- When the rock artist Billy Squier released a new single this week, he and his music company didn't worry about getting prime shelf space in music stores. They offered the song "Lovin' You" on the J-Bird Records Web site, where fans could download it for $1.99.

Squier's career peaked somewhere back in the 80's, so his embrace of online sales isn't going to scare music retailers. But the growing appeal of digital delivery and other uses of the Internet have the music industry in a frenzied state of self-examination.

No crystal ball was used in planning the date for this week's MusicTech conference, organized by the American Society for Composers, Authors and Publishers (ASCAP), which defends music copyrights and collects royalties, and Constellation Ventures, an investment company focused on digital entertainment.

But the timing was strangely fortuitous. On Tuesday, the morning after Congress passed legislation beefing up protection for copyrighted works on the Internet, and in the thick of legal action against the maker of a digital music player, 300 people involved in all aspects of the music industry gathered in New York to talk about the state of their business.

At issue was more than just the impact of the Digital Millennium Copyright Act, or the pending suit filed by the Recording Industry Association of America against Diamond Multimedia, the maker of the controversial Rio player which makes downloaded music portable. The larger concern is the overall state of the industry, arguably one of the businesses that will be most profoundly changed by the Internet.

"The music business is going from bottled water to running water," said Marc Geiger, co-founder of ARTISTdirect, a digitally focused entertainment company based in Los Angeles.

In other words, in the not-too-distant future, consumers will not have to go to a store to buy the latest music. What remains unclear, however, is how the industry will be able to prevent consumers from making perfect copies of songs or albums and distributing them over the Internet. Several companies are developing and promoting copy-protection systems, but online music piracy is already taking off.

Geiger said that the traditionally minded executives who dominate the upper ranks of his industry "are scared that there is an alternative delivery system that they don't control, and it is free, and they are terrified." But, he added, "there is a whole host of new ways to make money, whether it's selling different types of products, advertising, database mining and marketing."

Geiger and other entrepreneurs are hoping to profit from what they see as a long-term shift in the way people consume music. For the first time, he said, the music business can put a face on a music consumer, thanks to the direct marketing made possible by the Web. By promoting and distributing bands directly online, Geiger believes he will be ready for a world where music is downloaded from Web sites and stored on hard drives or recordable CDs in the home or transferred to devices like the Rio.

Others at the gathering, an equal mix of industry executives, artist associations and technologists, seemed to agree on at least one thing: the music industry faces so many complicated issues that it's difficult to assign priorities.

"Music use on the Internet is big, it's growing and it's only going to grow exponentially from here on out," said Christopher Young, the president of Cyveillance, a monitoring service that scours the Internet in search of illegal uses of copyrighted materials. "In order to take advantage of that growth, they've got to figure out what to do about it." Young's company works closely with ASCAP to collect fees from Web sites that use music, to keep them in compliance with copyright laws.
Most of the "several hundred" licenses granted allowing music use on the Web have been to small companies and individuals, said Marc Morgenstern, the first person to hold the title of senior vice president for strategic planning and new media at ASCAP. Policing the several dozen large music sites, mostly owned by traditional, large media companies, is easier, since they are familiar with the concept of paying to use music and are closer to ASCAP.

"We've been regulating radio and TV for decades," Morgenstern said. "Now, we have an entirely new class of music user. We need to educate them about what rights are. There is a feeling on the Web that music is free. There are individual composers who make a living creating music. Music is not free and the people who created it need to be compensated."

Part of the challenge, said several panelists at the New York conference, is convincing small Web site operators and consumers that what they pay for when they purchase music is not just the disc and its packaging, but also artist development, marketing and intellectual property.

It is a challenge that is not likely to go away. A Jupiter Communications report predicts that by the year 2002, online music sales in the United States will account for nearly 8 percent of industry sales, or $1.4 billion dollars -- up from 1 percent, or $88 million, this year.

"The entire distribution of music is changing radically in the online environment," Morgenstern said. "Everyone is wrestling with what that means."

Geiger added, "It's all changing and you either anticipate or adapt, or you have what Darwin said."

Copyright 1998 The New York Times Company