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The music revolution will not be digitized | 1, 2, 3

When did everything start falling apart? Historians will no doubt pick over the remains of the early days of the Internet for decades to come, but it's probably fair to say that the success of Napster signaled the beginning of the end. Napster singlehandedly turned millions of consumers on to the world of MP3s. Before Napster, MP3 usage was steadily rising but still far from widespread, since mainstream music was hard to find. The advent of free, all-you-can-eat music changed that forever: with a few clicks, you could access the world's music, anywhere, anytime.

Napster got the recording industry's attention. Previously, the labels eyed the Net warily -- releasing the occasional downloadable digital single, chasing down the wayward MP3 pirate, lobbying Congress for strengthened copyright laws. But after an abortive start -- the RIAA's first online music-related lawsuit, aimed at stopping Diamond Multimedia's Rio MP3 player in 1998, failed -- the industry kicked into action. In Dec. 1999, the RIAA charged Napster with copyright infringement.

The courts, it would soon become clear, were the recording industry's preferred method for dealing with the upstart digital music industry. Mere weeks after Napster received its summons from the RIAA, a similar lawsuit was filed against The online MP3 search engine came next, followed by Scour, a rival P2P service backed in part by ex über-agent Michael Ovitz.

In retrospect, the money spent by the RIAA and the recording labels appears well spent. shut down its file-sharing service and sold the remains of its assets to a joystick company called CenterSpan (it has yet to relaunch). Napster sought cover by selling a controlling stake in itself to Bertelsmann -- usage of the service, according to the online entertainment news site Webnoize, has plummeted at least 25 percent. settled with the Big Five labels for an estimated $160 million. Post-lawsuit, still had some cash in the bank, and saw profit potential in increased fees from its 150,000 artists (including the cost of on-demand CDs and a subscription fee for artists who wanted to participate in the Payback for Playback program), but the battered pioneer of the MP3 movement finally gave up on the idea of going it alone. On May 20, Michael Robertson sold the company to Universal, his former adversary, for $372 million.


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The recording industry's approach to the digital music business appears to have been to wallop the competition with lawsuits until they gave up -- and then pick up the bruised remains to use to their own advantage. "The music industry looked at legal maneuvers as simply a business strategy," says Robertson. "And, quite frankly, years of lobbying have helped them construct a labyrinth of laws and rules and complexities and advantages. When you look across the digital music space, they've outmaneuvered Scour, Napster, -- I don't think we're the only company that has suffered from being sensitive to legal maneuvers."

Even those start-ups that did manage to evade lawsuits haven't done well. Launching revolutions turns out not to be all that cheap. After the venture capital is gone and the stock price is under water, many impoverished music start-ups had to shut down or sell out. Sold to Universal. Sonicnet? Bought by MTV, and subsequently dismantled by layoffs. IUMA? Bought by Emusic, and eventually shut down (although its remains are being revived by Vitaminic). Musicbank? Closed before it even opened. Purchased by Bertelsmann, where it joins CDNow and Napster. And those companies that can still boast of independence, such as ArtistDirect or Launch or, are bleeding staffers and pinching pennies and on the verge of being delisted from NASDAQ.

What does it all mean? It'll cost you, big, to have a new idea in the entertainment distribution business.

"There is right now a climate of oppression among inventors, who are unable to market, fund or even freely distribute their work," complains Johnny Deep, the founder of Aimster. "As [RIAA head] Hilary Rosen has said, quoted by Larry Lessig, 'unless we approve, your idea will not be permitted. It will not be allowed.'"

Without recording industry support and music licenses, distribution platforms like or Napster or Launch have no major artists to (legally) distribute and therefore, no mainstream customers. The record labels have been notoriously stingy with those licenses; and even when they do grant the rights to their music -- for example, in the case of the LaunchCast radio station -- the labels are quick to employ the industry-friendly Digital Millennium Copyright Act to micromanage exactly how the music is listened to.

"There is no place for a small company to pull off a monster vision in digital music," says Robertson. "If you're making a tiny widget that's a bolt-on feature for listening to music, fine -- that can be a small company. But if you want to be the grand vision, the place where everyone stores their music and listens to it wherever they go, that's a very big undertaking and a small company simply cannot do that. What you're witnessing on the digital music front is that all the small to medium companies are going away. The window of opportunity is over."

. Next page | In the end, the customer pays ... and pays ... and pays
1, 2, 3


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