You've Got Music!

By Karl Taro Greenfeld

A music mogul should love this picture: frat boys and their dates at the University of North Dakota dancing on a beer-slick living-room floor to music blaring over a p.a. system. They are, after all, the music business's target demographic--18-to-24- year-olds in touch with the trends, loving the latest tunes. Yet this archetypal collegiate partyscape has turned into a music-biz nightmare. That's because no one is paying for the music.

Jason Zotaley, a 19-year-old pledge, downloaded the dance jams for free over the Internet. Zotaley estimates he has 1,300 songs on his computer, everything from classics by Van Morrison to the latest by the Beastie Boys. And he has never paid for a single song. "I don't know how legal that is," he says with a shrug, but free songs sure are "a good investment." His rap, techno and swing titles go directly from a laptop to the house's deejay booth. These digital music files have replaced compact discs entirely when it's time for the fraternity house to get jiggy.

Millions of teens and twenty-somethings like Zotaley have joined the digital revolution, downloading music from the Net and skipping that trip to Tower Records, thereby saving the $16.99 they would have spent on a CD. On college campuses that offer students fast T-1 connections to the Internet, up to 75% of students are music pirates.

This is a sour note for the $12 billion-a-year music industry, which is belatedly taking a long, painful look at its endangered business model. The industry is losing millions in revenue to the digital pirates, who use a readily available (and free, of course) software program called MP3 (Mpeg1 Layer 3) to receive and send music over the Internet. The pirated tunes have sound quality comparable to that of CDs, and can even be channeled through conventional stereo systems. "The Internet has made music so vulnerable," says Record Industry Association of America (RIAA) general counsel Cary Sherman, "[that] if it were left to go unchecked, you would eventually reach a point where the pirate market would supplant the real market."

One problem is that many of the techno-savvy fans lifting tunes online are unaware that what they are doing is illegal. Or they simply don't care. They grew up ripping off the latest Microsoft software; why should the music industry's software be any different? "We are violating laws," admits Lukas Hauser, a 22-year-old Web designer who hosted pirate MP3 servers while an undergraduate at Brown University, "but the laws are painfully obsolete."

Perhaps painfully inconvenient might be a better way of putting it. Experts point out that without intellectual property laws, musicians won't get paid for their work. And stealing someone's intellectual property is no different from stealing his bicycle, right? "People just view intellectual property differently," says Dan Lavin, research director for IV Associates, an entertainment-industry consulting firm. "Morality is what the community consensus decides is morality. And they're a tribe of cannibals out there." A typical consumer is American University freshman Jaymin Patel. "I've had MP3s for about two years now," he says. "I first learned about them from a hacker friend who told me I'd never have to buy a CD again."

Critics say the RIAA and the major labels are intentionally dragging their heels rather than facing the vertiginous digital future. Until last week, the RIAA response consisted of hounding sites that offered pirated songs and sending "informative" letters to university administrators. So far, three college students have been expelled and others suspended over the issue. The RIAA has also sued, unsuccessfully, hardware makers like Diamond Multimedia, whose stylish portable Rio Pmp300 player holds up to an hour of MP3 music. "They just look like a bunch of lawyers trying to hold on to age-old or outdated business practices," says Mark Hardy, senior analyst at Forrester Research.

The industry's sales approach could use an update too: no standard, digitally secure format exists to make legal online transactions a convenient if costlier alternative to MP3. Dozens of formats--including Liquid Audio and AT&T's a2b--are jockeying in the digital marketplace. "No one wants the consumer to have five different players on the desktop," says Dick Wingate, vice president of Liquid Audio.

Seeking a solution, the industry last week announced the Madison Project, a consortium of IBM and the major record labels (including Warner Music Group, which is owned by TIME's parent company) that will be testing a method for secure transfer of music files online. Says Rick Selvage, a general manager at IBM. "We think this is the ultimate end-to-end solution."

But the futuristic-sounding Madison Project--relying as it does on the widespread availability of broad-band-cable-TV modems that have larger capacities than regular phone lines--is a few years from becoming anything like a household reality. And the plan still requires consumers to imprint their own CDs at home--just another way of selling CDs, carp the critics. "No matter what they say, they are all focused on preserving the $16.99 CD price," says Michael Robertson, CEO of mp3.com whose site is a major gateway for pirating, although it also offers legitimately "free" music.

Indeed, it is unlikely that any moves by the RIAA or its Secure Digital Music Initiative, a consortium of technology firms and music companies, will be able to stem the growth of MP3, because it is the one format that is already out there and widely popular. "You can't clean the Web up," says Mark Mooradian, senior analyst of Jupiter Communications. "MP3 is here to stay. The music industry is already too late."

MP3 advocates point out that the open-source nature of the format makes it a cheap alternative for performers looking to bypass the major-label system. To them it represents not the pirating of music but the democratization of it. And despite the RIAA's alarm, there's nothing inherently illegal about MP3, only about the way it's used to break copyright law.

Yet MP3's outlaw flavor may actually be part of its appeal. "MP3's got kind of a cool, countercultural image," says Justin Frankel, 20, the developer of Winamp, a popular MP3 player that has been downloaded more than 10 million times. "It's always going to be what's used by pirates and what's used legitimately, because it's not really designed for copyright controlling."

That means the music industry's problems are just beginning. Or, as rapper Chuck D of Public Enemy posted on his website, "The execs, lawyers and accountants...are now running scared from the technology that evens out the creative field and makes artists harder to pimp."

If there's a bright side for the industry, it's that millions of young music fans are already in the habit of getting their music online. And certainly online sales will constitute a huge percentage of the record business of the future--as much as $4 billion a year by 2002, according to Forrester Research. But for the industry, the trick now is to convert everyone to "pay to play" mode, and in the process wrestle this funky, free distribution system back from the kids who created it.

--With reporting by Michael Krantz/San Francisco, Mark Shuman/Chicago and David Thigpen/New York

With reporting by Michael Krantz/San Francisco, Mark Shuman/Chicago and David Thigpen/New York