July 5, 1999

NEWS ANALYSIS

Record Labels Assert Control in Cyberspace

By MATT RICHTEL

ALO ALTO, Calif. -- When it comes to portents of gloom, doom and despair, the record industry has lately been ticking off a litany of threats, real and imagined, posed by the Internet: Bands selling new albums directly over the Net; independent artists and labels posting thousands of music files online; music piracy on the Web, and online audio sites creating vast libraries of tunes.

And yet, the major labels show no signs of ceding their reign over the music business. In fact, despite a few early setbacks and some critical hurdles ahead, the recording industry now seems intent on taking a leading role in digital distribution.

That fact was underscored by the announcement last week that recording, technology and consumer electronics companies had agreed to standards for protecting music copyrights in online music sales. In the last 18 months, the major labels have waged a remarkably successful war against piracy on the Net, using their music libraries and stables of popular artists as tools to persuade technology companies to cooperate, and have positioned themselves to dominate the digital music era.

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"Eighteen months ago, people in the tech community told me I was crazy to think we could develop an online music business" that protected copyright interests of artists and labels, said Hilary Rosen, president and chief executive of Recording Industry Association of America, which represents the five major record labels -- Sony, Universal, Warner, BMG and EMI. But today, she said, it was clear that "we're moving out of the piracy era into a more legitimate marketplace."

Michael Nathanson, a music industry analyst with Sanford C. Bernstein & Co., said the standards announced last week by the Secure Digital Music Initiative, a consortium representing the recording, consumer electronics and computer industries, would not mean a "slam dunk" for the labels to sell music online. Still to be resolved, he noted, are pressing business model and technology questions. But, he asserted, the industry had managed to dominate the debate with its agenda.

"The collective good of these five companies overruled any other competing interest," Nathanson said.

That will become more apparent to consumers this fall, when the major labels, which sell 85 percent of music in the United States, begin putting their libraries online. They hope to have their products in place for the Christmas season, when portable digital players hit the market en masse, signaling the movement of online music into the mainstream and creating new demand for downloadable tunes.

But that has not quieted cries from the nearly $14 billion record industry that Internet piracy -- illegal copying and downloading of music in cyberspace -- is costing labels and artists tens of millions of dollars.

The announcement last week of the consortium standards -- guidelines for preventing portable devices from playing illegally obtained music -- complements the recording industry's continuing effort to educate the public about music piracy and to crack down on it.

In the last two years, the industry has spent more than $1 million on an information campaign, predominantly at universities, in an effort to persuade campuses to take steps to prevent piracy and to persuade students not to participate in illicit swapping of music files. Ms. Rosen said more than 200 universities had joined RIAA's effort to discourage students from using campus computers or Internet connections to make illegal copies of recordings.

The industry has also wielded a stick. Ms. Rosen said RIAA had forced the shutdown of some 2,000 sites offering pirated copies of music -- songs copied from commercial compact disks and uploaded to the Internet -- by sending cease and desist letters to the Internet service providers that hosted the sites. "It used to be each day our surfers would come and there would be hundreds of sites to go after," she said. "The number is significantly lower."

To others, the state of piracy remains a matter of debate. Joanne Marino, chief executive and editor of Webnoize, an online new-media and music industry publication, said last week that piracy facilitated by Web sites appeared to have declined significantly. But she said it was growing in other Internet channels, including songs being exchanged as e-mail attachments or made available in chat rooms or on Internet file-transfer, or FTP, sites.

Ms. Marino said a recent Webnoize survey of 2,000 college students showed that digital downloading of music was increasing. She said that from December 1998 to April, the survey found a 3,000 percent jump in the number of students who said they had downloaded 250 or more music files.

But a more persuasive restraint to piracy than any single effort by the music industry is consolidation in the online entertainment industry, with larger, more established companies buying smaller Internet start-ups. Among recent deals, America Online acquired the online radio site Spinner.com; MTV's parent, Viacom, purchased Imagine Radio, and Yahoo announced plans to acquire Broadcast.com.

Mark Morgenstern, senior vice president for new media at the American Society of Composers, Authors and Publishers, or ASCAP, which collects royalties for copyright holders, said that these bigger companies were eager to play by established copyright rules. And, he added, "As more and more start-ups are interested in going public, they are likely to take care of the rights situation."

That transition is likely to be sealed by the consortium standards.

So how did the music industry persuade technology companies and consumer electronics makers to play along?

Technology companies say they realized that the online music market could become huge -- but only if the music companies agreed to participate and to put their libraries online. That meant acceding to the industry's demand that portable devices and desktop computers be prevented from playing music downloaded illegally from the Internet.

The alternative was to "change the power structure of the industry," said Phil Barrett, senior vice president for media technologies at RealNetworks Inc., maker of Real Player. "I'm not sure it's a good thing, and it's not an easy thing. Creating a marketplace that's easy is paramount. Without it, you don't have an industry."

Barrett, who sat in on the consortium talks, described them as "surprisingly cooperative." But not all parties walked away with a good taste in their mouths. Some Internet music companies that post songs of independent labels and musicians said the major labels had co-opted computer and electronics companies to brake the momentum of the Net as an alternative source of music.

"It's an attempt to maintain control of distribution," said Steve Grady, vice president for marketing for Emusic.com, a Redwood City, Calif., company that sells 6,000 tracks by independent artists. Grady said the industry may find that the train has already left the station and that it will not be simple to create technology that protects copyrights without hindering the tremendous flexibility the Net now provides in permitting people to trade, download, store and play music.

"The Internet consumers have already chosen the operating system for downloadable music. Right now, that's MP3," he said, referring to a type of audio file that has frustrated the music industry because it can be easily pirated.

While members of the recording industry are expressing newfound optimism, they also assert that the technological and business challenges ahead will be steep. Larry Kenswil, president for electronic commerce for Universal Music Group, the largest record company, said the company planned to be online by Christmas but that a "full-fledged launch" might happen only next spring.

"It takes an amazing amount of work to prepare the content," he said.

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Related Sites
These sites are not part of The New York Times on the Web, and The Times has no control over their content or availability.

• Recording Industry Association of America

• Secure Digital Music Initiative

• Webnoize

• American Society of Composers, Authors and Publishers

• RealNetworks Inc.

• Emusic.com

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Matt Richtel at mrichtel@nytimes.com welcomes your comments and suggestions.

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