A Crisis of Content

By ADAM COHEN

Jim Hedgepath, president of Pegasus Originals, was vacationing in the Rockies last summer when he got a tip-off via e-mail. Internet users were flocking to a new website and furiously downloading his artists' copyrighted work for free. The site shut off the downloads when Hedgepath threatened to sue. But within days the same bootlegs were circulating on an underground, members-only site. All this easy Internet piracy made Hedgepath despair for the future of his craft. "Many artists have gone, and many more will go," he sighs. "I've talked to a lot who are looking for something else to do."

Something, that is, other than designing cross-stitch needlework patterns.

Hedgepath's company doesn't deal in music, as so many injured copyright holders do these days. It sells ornate stitching patterns, and the files that are being traded Napster-style are templates for hobbyists looking to make pillows decorated with cuddly dogs and flowery pastoral scenes.

Duplicating patterns may not seem like a terrible crime. Your mom may even have copied one or two in her time rather than pay a few dollars each to buy them from companies like Pegasus. But pattern pirates are on the loose on the Internet, and the middle-age crafts crowd has begun to demonstrate the same deeply held sense of entitlement felt by 17-year-old Limp Bizkit fans downloading free MP3 tunes. When Hedgepath challenged the piracy of one outfit, brazenly named PatternPiggies, the online postings in response were downright defiant. Shouted one user: "Ladies, this is war, and I'm out for blood."

Make no mistake: the implications of the peer-to-peer file-sharing movement that Napster pioneered go way beyond pop music. There are already Napster-like services for videos and full-length feature films. Books, blueprints, vintage comics and stock photos may be next in line. Even newspapers and magazines are worried. (Hey, you did pay for this article, didn't you?) The fact is--as the stitching-pattern makers learned the hard way--there's no corner of the so-called content industry, no bit of intellectual property, no idea, that isn't in danger of being Napsterized. "The hype is justified," insists Jupiter Communications analyst Aram Sinnreich. "Network file sharing has profound implications for the business model of the entire entertainment industry."

Epic battles loom in a war that will stretch from courtrooms to boardrooms and back. On a practical level, the conflict is being fought, as Stanford law professor Lawrence Lessig has observed, between two sets of "codes." There's the legal code, or set of laws, that could end up endorsing file sharing or driving it into the criminal underworld, and there's the software writer's code, or computer instructions, that can create programs for sharing copyrighted information or encrypt files so they can never be shared.

And the gladiators themselves? They tend to adhere to one of two rival information-age ideologies: the info-anarchists' rallying cry that "information wants to be free" or the entertainment industry's insistence that content creators must get paid or there will be no new art to download.

Yet to think of Napster as just a way to steal intellectual property is to miss the impact it has already had on a music industry that many feel was ripe for revolutionary change. Napster makes music available a la carte, one tune at a time--a welcome relief to fans tired of having to pay album prices to get their hands on one or two good songs. It also unlocks--and makes available for download--the greatest music library in the history of the world, much of it all but forgotten by the major labels. A few clicks of that mouse, and in streams bootleg Led Zeppelin or Ani DiFranco's instrumental version of the old communist anthem Internationale or--Joe Lieberman, take note--Hebrew prayer chants from the world's leading cantors.

There is no underestimating the threat that all this free file sharing poses to existing business models. There are as many as 1 billion music files available on Napster users' computers--a good chunk of the music backlist that record labels own and have traditionally profited handsomely from. Forrester Research last week unveiled a study predicting that within five years the music industry will lose $ 3.1 billion to piracy and the newfound independence of musicians. The music labels tried for a while to convince themselves that online piracy was a young person's sport, something that would be outgrown, like binge drinking and graffiti writing. But the truth is not so reassuring. A Pew Internet & American Life Project study found that more than half the downloaders are over 30. They're not just copping hip-hop.

It is this palpable threat to their survival that has led content creators to move aggressively into court--led by the major recording labels. Although copyright laws are clear and well established and the legal system seems likely to back the music industry, the results in court have so far been mixed. In July a San Francisco district court issued a sweeping order that would have all but shut Napster down. That ruling was immediately stayed pending appeal. In the meantime, a federal judge in New York earlier this month slammed a crippling fine on MP3.com--a company that was trying to operate within the rules of copyright. Judge Jed Rakoff awarded Universal Music Group damages of $25,000 for each copyrighted CD stored on the popular My.MP3.com service--a total that could reach $250 million.

Next week the Napster case could come to a head when the two sides appear before a panel of appeals court judges. The record companies say they are confident they will prevail. "Napster is a temporary phenomenon," insists Hilary Rosen, president of the Recording Industry Association of America.

Perhaps. But peer-to-peer file sharing, it's now clear, is here to stay. Even if Napster is driven out of business, there are new, even more intractable sharing systems--notably Gnutella and Freenet--that allow files to be traded directly from PC to PC, without going through a single website like Napster's. These renegade services would be harder to shut down because they have no centralized plugs to pull, no company officers to sue. Former Public Enemy rapper Chuck D got it right: trying to stop file sharing over the Internet, he says, "is like trying to control the rain."

Does this mean the legal war on Napster is a waste of time? The music industry thinks not. The labels' immediate goal isn't so much to stop all online piracy--something even they would concede is impossible--as to decommercialize it by convincing venture capitalists that it's not in their self-interest to fund it. "When we win the Napster case, my hope is people will see it as more productive to work with the creative community than to constantly test the law," says Rosen.

It's a tactic that seems to be working, at least in some venues. The Motion Picture Association of America filed suit in July against Scour, a Michael Ovitz-backed file-sharing site that was designed to let users download newly released Hollywood movies. This month Scour announced it was laying off two-thirds of its staff. Reason: the litigation had prevented the company from raising next-round capital.

Meanwhile, the music industry, having learned from the Napster experience, is struggling to reinvent itself for the new era. At the forefront of this effort is the Secure Digital Music Initiative, a consortium of record labels, consumer-electronics companies and information-technology firms trying to develop new standards for digital music and the devices that play it--standards more to its liking than the unprotected MP3 files being so freely traded. Through a combination of encryption and watermarks--technology that controls the way in which digital music is replayed--the SDMI hopes to combine the ease of use and freedom of choice of Napster while protecting the interests of artists and their distributors.

It's a laudable goal, but one that will be difficult to achieve. For one thing, encryption is a tricky, cat-and-mouse game; as soon as one programmer creates a new software lock, an army of geeks working out of dorm rooms and dotcoms starts trying to pick it. It's getting harder and harder for the codemakers to stay ahead. A few days after Stephen King's e-book Riding the Bullet was released, hackers broke the code and posted a copy on the Internet--even though King's book had been available for free on Amazon.

The other problem with encryption is that no matter how well protected the disc, at some point it has to be played. And at that moment, it's unencrypted and can be recorded again. (It's the same principle that allows you to copy your favorite songs from the radio with a built-in cassette player.) Even if digital music could be made 100% secure, as soon as it is released on a CD it can be "ripped," or copied, onto a computer.

Watermarks may offer another layer of security. These are digitized instructions, encoded within a musical recording, that identify the computer it was initially downloaded to and put limitations on what can be done with the data in the future. If the watermark limits a recording to a single computer, for example, another SDMI-compliant device wouldn't be able to play it.

All this, however, rests on the assumption that SDMI will replace MP3 as the consumer standard. That won't come about easily, given how popular and deeply entrenched the MP3 format has become. Think Beta vs. VHS, only several orders of magnitude more complex.

Ultimately, the best defense against Napster may be a good offense. If the recording industry can offer audiophiles a better product or a more satisfactory experience, either online or in music stores, its companies may be able to compete--and even prosper--in a market in which the same music is available free.

This may not be as hard as it sounds. For one thing, it's a lot easier and more convenient to walk into a music store and buy a CD than it is to go on the Internet and master the technology of MP3 file exchange. Napster may be relatively easy to use, but the process of finding music on another person's computer, figuring out what it is, downloading the compressed file and turning it into playable music takes more patience than many think it's worth.

Even when you've mastered the tricks of trading peer to peer, there are all sorts of hidden pitfalls. Files can take forever to download. Servers can crash or go offline before you finish. Files advertised as containing one song may hold another. Or they may contain a so-called cuckoo egg--a gotcha message posted by anti-Napster activists. Last week Napster users downloading the new Barenaked Ladies single, Pinch Me, and got a version implanted with a "Trojan horse": a spoken message from the band telling fans to buy the song instead. Worse still, P2P files may harbor a file-eating computer virus. The advantage of a record company's official site is that it has quality control; its files can be guaranteed free of cuckoo eggs and viruses.

The major record labels are also exploring ways of making the music experience they provide for paying customers deeper and richer. "For decades, we've been artificially constrained by the format of vinyl, by the two sides that play on a record player," says Charles Jennings, CEO of Supertracks, a digital-music distribution company. "That framework is going to be blown away."

The details are still vague, but record companies are talking about offering such extras as bootleg songs, outtakes, early access to new releases and more biographical information than can be squeezed onto a CD's liner notes. They are also talking about doing something about their pricing structure. "It won't be $16.99 an album," promises Jennings. Jeff Alger, who works on e-books for Microsoft Reader, believes bringing down the cost of CDs is key. "The surest protection against piracy," he says, "is to make sure there's a high volume of quality, low-priced items on the market."

What will that new, post-Napster music industry look like? In some ways, it will be comfortingly familiar. There will still be CDs and music stores for some time; not all consumers are going to leap onto the Internet to meet their musical needs. As BMG Entertainment CEO Strauss Zelnick puts it, "People like packaged goods."

And despite talk of Internet "disintermediation"--the elimination of middlemen--there will probably still be agents, producers and even record companies to sign up new artists and market their work. Digital-music service providers--the much touted alternatives to traditional record companies--will probably have a harder time than major labels taking an album to gold or platinum. "We'll be fine," says Atlantic Records Group co-chairman Val Azzoli. "There will always be new music, and it's our job t o figure out what people want to hear and when they want to hear it."

But how that music will be delivered--and how it will be paid for--is still very much in flux, especially if it's delivered online. Today, music on the Internet is either "streamed" (delivered in real time, like radio) or packaged into files that are downloaded all at once. In the future, companies may charge for these files through subscription (a fixed fee, like a cable-TV bill, that includes a wide array of musical offerings), or they may charge for each track separately, either every time you listen to it (pay for play) or just once (pay for download).

The momentum right now seems to be swinging toward the subscription model, in which you pay a single monthly fee. In one form, it might work a lot like cable television. A standard package might give you access to, say, Top 40, country, hard rock and rap. There will probably also be premium services--similar to HBO or Showtime--for more esoteric fare such as classic jazz or more sought-after music such as recent releases by top acts.

Consumers will enjoy all the benefits of digitized music that Napster provides, however it's delivered. Once the file is on their computer, they can make perfect copies (at least for their own use) and listen to them on a wide variety of new devices, from digital jukeboxes to pocket-size players that hold hundreds of songs. "A file liberates music from the limitations of the real world," says Jupiter Communications' Aram Sinnreich. "With digitized music you'll be able to listen to music without having to lug it around."

The early skirmishes in the file-sharing wars have centered on music. But any industry that trades in intellectual property is at risk. Scour already offers digital downloads of animations, short films and movie trailers for feature films. But audio-video files are big and data-rich and difficult to exchange, even over the fastest Internet connections. Unless bandwidth improves by several orders of magnitude, Hollywood's Napsterization is still some years away.

Book publishing, on the other hand, is feeling some heat today. Words compress efficiently in computer files, and there are dozens of classic titles--from Beowulf to Pilgrim's Progress (neither covered by copyright)--available on sites such as Project Gutenberg www.gutenberg.net) If e-books take off, the number of titles available online could multiply dramatically. All it would entail would be for some hacker to crack the code on a new e-book, put the text on a peer-to-peer service and launch it widely into cyberspace. For that matter, there's little to stop someone from scanning a newly released title and "blasting it [by e-mail] to 100,000 people," concedes Steve Cohen, a senior vice president at St. Martin's Press.

That hasn't happened yet because digital reading just isn't much fun. E-books, for all the hype, are still clunky and unappealing. No one seems to want to read anything much longer than a few paragraphs on a computer screen, and printing a whole book out on paper is ridiculously expensive and time consuming. You may be able to get a free version of Beowulf online, but if you're going to plow through the thing you'll probably want to buy the paperback.

Book publishers, however, are convinced they won't be spared, and unlike the music industry--which spent much of the 1990s in a defensive crouch--they are busily preparing for the inevitable. From Random House to McGraw-Hill to Simon & Schuster, publishing houses are racing to digitize their valuable backlists. Some are also investing heavily in the technology of paper-thin, flexible screens that could someday be bound into e-books that look and feel so much like real books you might actually get cozy with them.

The only thing that is certain in the content business is that everything is up for grabs. The Internet has turned traditional business hierarchies upside down. In the pre-Internet era, Rosen observes, the electronics industry would select a new format for music--albums, cassettes, eight-tracks or CDs. The record labels would record to that format, and consumers would buy the end product. "In the future, the cycle will be working backward," she says. "Consumers will be dictating the business models, and we'll be adopting them."

It's a lesson Jim Hedgepath has learned. File sharing has permanently changed the needlework-pattern business. In part because of piracy, Pegasus Originals has pared down from nine pattern artists to two, and its Australian distributor has gone bankrupt. But Hedgepath has chosen to see the disruption as an opportunity. He's branched out into Web design and is working on creating encrypted stitching patterns that people will pay to download and that can't be passed from computer to computer. If the volume of sales is large enough, Pegasus could make even more money than it made before. The rise of PatternPiggies was a rude shock, but it was also a wake-up call. "I used to tell pattern sellers to think about where the Internet was going to fit in their lives," he says. "Now I tell them to think about where they are going to fit in the Internet."

--With reporting by Mike Eskenazi/New York and David E. Thigpen/Chicago

For more on Napster, Gnutella and other music-sharing software, go to time.com

With reporting by Mike Eskenazi/New York and David E. Thigpen/Chicago