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Executive summary

It's only been about three years since a little known extension of an audio
compression technique-MPEG-2 Audio Layer-3 or MP3-opened the door to being
able to send large volumes of CD-quality music over the Internet by pack the
equivalent of several commercial compact disks onto the equivalent of one CD
platter (Lange 01). It also initiated the veritable floor of pirating
activity by an underground community students and hackers. Hundreds of MP3
Internet sites sprung up overnight. At these sites, everything in music from
Mozart to Marilyn Manson is being reproduced (Lange 01). Of course, it's
illegal, but it's free, which has a huge appeal.

Two men summarize the battle that is still raging over this new technology.
On one side there's Val Azzoli, co-CEO of the Atlantic Group, which has
numerous popular artists signed to their label; and on the other is the CEO
of the website, which gives away digitized songs by new artists that
no one has heard of yet (Mardesich 96). While this may not sound like much
of a threat, what lies at the heart of this conflict is the concern of
recording industry that this new technology may chance the balance of power
and if allows the shipment of music directly to the consumer (Mardesich 96).
The five giant corporations that contr ol 80% of the global music
industry-worth roughly $60 billion a year-have taken notice (Wood; D'arcy
42). The following discussion will explore more fully why the record
companies, despite their obvious power, are scared.

Pros and Cons

It is the impressive 12:1 compression ratio of the MP3 that has made it so
popular. While 60 or so Mbytes are needed to store a typical song, once it
is converted to MP3 format it becomes a single 5 Mbyte file (Lange 01). "The
advantages are obvious," commented one executive, "CD-quality sound in a
small package" (Lange 01).

The drawbacks are all felt by the record companies. Artists are likely to
benefit, eventually, if they take advantage of the new technology and
deliver their songs to their fans directly via the Internet (Mardesich 96).
They'l l no longer have record companies making money off from their work
and by eliminating this "middle man" could conceivably earn a great deal
more then they do now. However, for the large record labels, this new
technology could mean real trouble in the future.

Right now, the loss are negligible. For example, Americans spent almost
nothing on downloaded music in 1998, but they spent nearly $14 billion on
music from stores (Mardesich 96). Nevertheless, the Recording Industry
Association of America (RIAA) said that MP3 piracy may have contributed to a

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Related Searches

slight decline in music sold to the 15 to 24 age group (Mardesich 96).

Intellectual property issue and copyright contents/legal and illegal
duplication/ Piracy

In theory, the user can go to the Internet, type the name of an artist or
song into one of the many MP3 search engines, such as Lycos MP3, and find a
seemingly endless list of sites with downloadable music (Ashton 79). In
reality, it's difficult to get a good connection to these amateur sites and
the downloads take forever. However, even if the technology isn't ready to
be a real threat yet, the International Federation of the Phonographic
Industry is ready to treat it as such. This organization has begun
litigation against search engines because they state that they point users
toward sites with pirated music (Ashton 79).

Frank Crieghton, the head of the RIAA's anti-piracy unit, has said that the
"educational steps" that they have instigated to stop on-campus MP3 sites,
usually set up in students' dorm rooms, have been ineffective (Lange 01).
"The cease-and-desist letters we were sending were only so effective. So we
had to go to litigation. We needed to send a stronge r message," said
Creighton (Lange 01).

The RIAA unit has increased their collaborative policing efforts with the
FBI, US Customs, and the US Postal Service and Secret Service (Lange 01).
This activity appears to be paying off as a number of sites have shut down
in order to avoid being litigation targets (Lange 01). However, there are
still those in the underground that think the legal pressures will only
exacerbate the problem (Lange 01).


Even as the recording industry takes on the pirates, the music industry ,
itself, is interested in the intriguing implications of MP3 technology
(Lange 01). After all the design of the Internet and the facility of MP3
holds potential for future distribution of legitimate music products that
could be the wave of the future indicating a "paradigm c hangeover from
atoms to bits" (Lange 01). Commenting on this, David Weekly, founder of the
MP3 Audio Consortium, said, "The fact that people can now download in
reasonable time and listen to audio that cannot be distinguished from a CD
may revolutionize the media-distribution process" (Lange 01).

However, what's really got the record companies concerned is the MP3's leap
off the computer. Last year, more than a dozen vendors came out with
portable MP3 players, which were all priced at the magic $200 mark which
made them perfect for the Christmas buying season (Ashton 79). The best
known of these players is Diamond Multimedia's "Rio," a sub-Walkman-size
unit that plays up to an hour of MP3 files (Ashton 79). Creative Lab's Nomad
can hold two hours of music, and Empeg's Empeg Player, an MP3 player for
your car, can hold a whopping 70 hours of music (Ashton 79). Questions as to
the legitimacy of these players was answer when a US appeals court ruled
that because t here was the possibility that pirated music could be played
on them did make the players, themselves, illegal (Ashton 79).

Proactive role of corporations

In addition to actively pursuing and prosecuting the pirating of music, the
RIAA has been struggling to develop an industry-wide technical standard
called the Secure Digital Music Initiative (SDMI), which would provide copy
protection, limit distribution of music files, and provide royalty payments
to labels and artists (Ashton 79). However, while SDMI development was
bogged down in indecision, numerous record companies that were eager to have
their music commercially available on the Internet before last year's
Christmas season, split from the RIAA and formed partnerships with
individual tech companies (Ashton 79).

Sony Music Entertainment formed an alliance with Microsoft; Universal Music
Gro up and Bertelsmann teamed up with InterTrust (Ashton 79). Then, on June
21, EMI cut a deal to make a vast back catalog of songs downloadable via
Liquid Audio's front-end software (Ashton 79). This means that the record
companies are all competing to deliver music over the Internet with
incompatible formats, which was exactly what the development of the SDMI was
suppose to forestall (Ashton 79).

MP3 and effect on other sectors of the music industry

While the record companies have been concerned with MP3, a new threat has
emerged-Napster, a software program for sharing musical files that doesn't
require a web server (Gurley 326). This technology makes change for the
music industry inevitable (Gurley 326). "The music industry is about to
undergo a change that is ten times more importance than the launch of the
compact disk. Everything will c hange" (Gurley 326). What's more it ha been
predicted that "once the bandwidth becomes available, the "movie and book
industries will be next" (Gurley 326).

Current situation involving the music industry and the Internet

On April 29, 2000, just a few days ago, a federal judge ruled that
had violated copyright law by compiling an extensive online music database
for commercial use (Harmon 1A). Judge Jed Rakoff granted the motion made by
the five major music labels for a judgement against MP3. Com, which is based
on San Diego (Harmon 1A). The judge also said that he would issue a full
opinion within the next two weeks covering the topic of the music industry's
efforts to harness the distribution of music over the Internet (Harmon 1A).
Robertson, MP3 CEO, issued a statement that read "Wh en new, responsible
technologies for delivering music are attacked and shut down, it leaves a
vacuum for other technologies that are not responsible to fill it" (Harmon
1A). He predicted that the record companies would be left with nothing more
then "copyright chaos" (Harmon 1A).

His prediction may be coming true sooner then anyone can imagine due to
Napster, which is different from most consumer Internet products or
services. Typically, we all have to use browsers to access large websites.
Napster uses the Internet-no browser. Napster also users to share
information among PCs rather than through big Web servers (Gurley 326).
Users tell Napster where music files (mostly in MP3 format) are located in
their hard drive, and then Napster shares this information with the world
(Gurley 326). Any Napster user can share music easily with any other Napster

Download Napster, and type in the name of a song and Napster will show you
other Napster user s that have that son on their PC (Gurley 326).
Double-click on the song and it transfers it to your PC (Gurley 326). No
fuss, no muss, and no royalties to the record companies or the artists who
produce the songs. Of course, the record companies want to stop Napster and
this ultra easy way to share MP3 files. However, the question is now-can
they do it. In just six months, Napster has accumulated a remarkable nine
million users (Gurley 326). (That's right, 9,000,000). In comparison, it
took American Online 12 years to accumulate nine million users (Gurley 326).

Corporate management response/ long term implications

It is not clear, despite all the rhetoric, that the music industry or the
press fully understand the size of this movement or it's future
ramifications. In the future, "we will all listen to music via computer
files-either on MP3 players or hard drives. Just six weeks ago, Stewart
Alsop highlighted in his FORTUNE colum n two new MP3 players that use hard
drives-each holds 80 hours of music and fits in your pocket (Gurley 326).
There is no doubt that the compact disk, which in many ways still "feels"
new, is on its way out. While CDs can only be borrowed or traded by friends
and acquaintances, with Napster, nine million users can be electronically
connected through a centralized directory, and the "sharing is mighty easy"
(Gurley 326).

Until just recently, MP3 usage wasn't really that widespread because files
took up a lot of space on a hard drive and required lots of bandwidth to be
transferred (Gurley 326). However these two commodities are becoming more
plentiful and cheaper (Gurley 326). Within a few years, "E-mailing an entire
album of music to a friend will be no different than forwarding a Microsoft
world document today" (Gurley 326).

The obvious question that all this brings up is ñcan the record companies do
anything to stop it? The answer is probably "no." For one thing, the cat-as
they say-is already out of the bag. Every multimedia PC can convert a music
CD to a digital MP3 (Gurley 326). That translates to more than 100 million
encoding devices already in use (Gurley 326). Can new CDs be produced that
are "unrippable," that is immune to copying. Not likely, if you want them to
work in the 200 million CD players that already in homes, offices and cars
(Gurley 326).

Can a new type of CD or encrypted file type be created that can't be copied?
The potential for such a development certainly exists. However, as long as
the CD can be played (which is the whole point) it can also be easily
re-recorded into a digital format (Gurley 326). The music industry appears
to believe that there is a Holy Grail out there that will save the day for
them and they all assume that a technological solution is imminent (Gurley
326). However, it looks like there will be no technological white knight for
the record industry.

How about litigation? The RIAA has sued Napster in order to shut it down.
Napster claims that ñjust like Betamax and the Rio MP3 player, the serve
they provide has appropriate uses and therefore should not be liable just
because some customers may choose to use it illegally (Gurley 326). Lots of
precedent for this defense already exists both in and outside of the music
industry. (It's worked for alcoholic beverage producers for years.) Even if
the RIAA can get a judge to enjoin Napster, there are already five or six
more companies that have already launched similar products (Gurley 326). To
shut down Napster at this point would require the Internet equivalent of
wiretapping, which would undoubtedly send "privacy advocates into a frenzy"
(Gurley 326). Another barrier to stopping Napster is community. Napster's
nine million users are passionate about it and today's young people are
serious about their retaining their freedom to transfer d igital files
(Gurley 326).


There are no consumers with a similar loyalty to a record label. That's
because the record companies have--for years--taken advantage of the public.
CDs can be produced very cheaply and the record companies have been
overpricing them for years. The consumer knows this, and therefore feels no
remorse in obtaining free MP3s. The old status quo is gone, and the record
companies may just vanish with it. When everything settles down, musical
artists may make more money from appearances, sponsorships and product
licensing then from the sale of actual music (Gurley 326) Personally, I
believe that artists will discover that they can sell directly to the public
via the Internet and, thereby, bypass the large record companies entirely.
One thing is certa in-those who adapt and change to fit the times, will
survive and probably thrive. Those who refuse to change and fight against it
will almost certainly condemn themselves to failure because change-very
dramatic change-is a certainty.

Works Cited

Ashton, Richard. "Multimedia: Pump up the volume. The music biz rushes to
bring MP3 to market and reap holiday bucks," Entertainment Weekly (1999): 16
July, pp. 79.

Gurley, J. William. "e-Company above the Crowd: want to stop napster? Forget
it-it's too late," Fortune (2000): May, pp. 326.

Harmon, Amy; Sullivan, John. "Online music site MP3 loses key ruling," The
Dallas Morning News (2000): 29 April, pp. 1A.

Lange, Larry. "MP3 compression opens recording industry's coffers to
hackers-Net pirates plunder the high Cs," Electronic Engineering Times
(1997): 21 July, pp. 01.

Mardesich, Jodi. "How the Internet hits Big Music," Fortune (1999): 10 Mary,
pp. 96.

Wood, Chris; D'arcy, Jenish. "Free music: Record companies face a huge
challenge from the Internet," Maclean's (2000): 20 March, pp 42.
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