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Music on demand
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May 15, 1999: 12:52 p.m. ET
Record companies are gearing up for online distribution of digital music
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NEW YORK (CNNfn) - First, there was fast pizza delivery. Then there was video on demand. Soon, there will be the ability to download songs from your favorite recording artists with a few clicks of a mouse. We're rapidly running out of reasons to leave our homes.
The record industry is well aware of consumers' cravings for convenience - that and the fact that the Internet is rapidly changing the rules of retail. With that in mind, the major record labels are scrambling to make sure the online revolution doesn't leave them back in the vinyl age.
The Recording Industry Association of America (RIAA), a trade group that represents the U.S. sound recording industry, is working with the major record labels and technology firms to develop a security standard that would enable portable devices to play digital files while prevent illegal copying.
The Secure Digital Music Initiative (SDMI) is on track to have a portable device specification ready by June 30, according to Leonardo Chiargilione, executive director of the initiative.
For some companies, however, it seems like summer is too far away. Last week, Universal Music Group, a unit of Seagram Co. (VO), said it was investing in technology to sell and distribute music over the Internet in a pilot-test program by the end of the year - leading to speculation that the label is growing impatient with the RIAA's efforts to develop a secure digital format.
On Wednesday, Sony Music Entertainment threw its hat into the ring, signing an agreement with Microsoft Corp. (MSFT) to provide downloadable music from its massive catalog via Microsoft's Windows Media software.
Also last week, Internet firm RealNetworks Inc. (RNWK) unveiled a product called RealJukebox, which enables users to download music or record CDs in the MP3 format, which produces relatively small digital files in near-CD-quality audio.
Users can play those files in portable units offered by Diamond Multimedia (DIMD) and Creative Labs. Thomson Multimedia plans to offer its own unit, the RCA Lyra, by the fall.
Several established artists, including rap group Public Enemy and pop band They Might Be Giants, agreed to make their music available for RealJukebox.
The RIAA realizes that distributing digital-music over the Internet will change the face of the market. It's merely a matter of when, and what amount of control the industry can wield before it's too late.
"What concerns the record industry is that with the move to digital delivery, consumer behavior changes to where people believe any and all music should be available for free," said Mark Hardie, an analyst at Forrester Research.
Digital additives
Forrester Research predicts the U.S. market for downloading digital music from the Internet will reach $1.1 billion by 2003. Although that's a sizable jump from the negligible market it is today, that figure dwarfs the $13 billion U.S. market of the record industry as a whole.
Representatives from the major record labels were hesitant to discuss online music distribution. But Hardie said the consensus among record companies is that digital distribution will represent about 5 percent of their sales over the next five years.
For a label like Warner Music Group, which reported $4 billion in 1998 revenue, 5 percent doesn't sound like much. But record companies believe that will be enough to start.
(Warner Music is a division of Time Warner Inc. (TWX), which is the parent company of CNN and CNNfn.)
The popularity of online distribution will undoubtedly grow, but it will still be more convenient to pop a disc in a CD player than to download files to a PC, then transfer those files to a portable player.
"The online business is an additive, it's not a substitute for retail sales," said Hilary Rosen, RIAA chief executive officer. "The market that is yet to explode is online ordering of physical products [CDs]."
For the time being, retail outlets and CD-player manufacturers are safe: the Internet won't inspire millions of consumers to toss their $300 machines out the window.
"You need a period of time when people transition from CDs to a digital-storage medium," Hardie said.
"That typically takes about 10 years, and it typically takes place in the younger generation. The older generation takes longer to make the transition - my mother isn't going to go out and start throwing away her CDs to download music from the Internet - but the record companies have to serve both markets."
Crisis? What crisis?
Although some analysts speculated that Universal's attempt to get a leg up in online distribution would rankle some music-industry executives, the RIAA welcomes the company's efforts.
"I think it's a great thing when companies experiment with different models," Rosen said.
That's because RIAA and a consortium of record labels are working on developing an SDMI specification that would provide copyright protection for a variety of digital-distribution formats.
The fact that some record labels may be proceeding with their plans before an SDMI standard is firmly established isn't in itself an issue.
"That would assume SDMI would create the distribution specification," Chiariglione said. "The standard we're producing is a framework that allows different implementations [of digital-music delivery] that can still find a home in a security standard."
Although there will be room in the SDMI framework for several digital-delivery formats, the situation could create confusion for consumers, particularly since many of today's portable players won't support the new formats.
"There are going to be some challenges with interoperability," Rosen said. "But over the next year or two, you're going to see all the major record labels make announcements about market trials. We expect them all to be compatible with SDMI."
The MP3 problem
What has caused the most ruckus thus far throughout the industry is the MP3 format - a compression scheme for making music files small enough for use on a PC.
While the record industry devises a plan to tackle online distribution, MP3 has rapidly changed the landscape, with sites offering largely free downloads of near-CD-quality audio.
Although MP3 started out as a means for unknown recording artists to make their material available for a mass audience, the format is beginning to garner support from more established artists, sometimes to the dismay of record-company executives.
At a press conference last week to introduce RealNetworks' RealJukebox software, Chuck D., leader of the rap group Public Enemy, sounded off on the renegade aspects of the MP3 format.
"Artists will be able to get into the market without having to send demos to some crusty A&R person," he said, referring to artist and repertoire executives responsible for handling the direction of a label's musicians.
Although there has been a lot of speculation regarding big-name artists forsaking their contracts with major record labels for the independent spirit of the Internet, Rosen dismisses any rift between artists and the recording industry, noting that the real problem with MP3 lies with copyright issues.
Although MP3 can work within the SDMI framework, that isn't the case right now. In fact, the RIAA sued Diamond Multimedia last year to block the release of its Rio portable MP3 player, fearing widespread music pirating.
The two sides reached a compromise and Diamond joined the SDMI consortium.
RealNetworks' RealJukebox, for example, allows users to create MP3 files of their CD collections. The product enables users to disable a security feature.
Although RealJukebox issues a warning that consumers are responsible for honoring copyrights and intellectual property, that doesn't necessarily prohibit anyone from distributing those files over the Internet.
Consumers in control over digital-music delivery isn't an idea that sits well with the record industry. The fact that RealNetworks is working with SDMI alleviates some of the industry's concerns, but not all of them.
"Most people think it's not fair to create a jukebox on your computer and upload products on the Web," Rosen said. "I know [RealNetworks Chief Executive Officer] Rob Glaser thinks it's not fair. But companies like RealNetworks have to make a choice of whether they want to make money in piracy or supporting legitimate music." 
-- by staff writer John Frederick Moore
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