File Sharing and the Music Industry

A current Internet scandal, perceived as a huge and ongoing problem, is music piracy via the internet, largely facilitated by Napster between 1999 and 2002. This chapter means to explore the phenomenon from a more rational perspective - but given the scope, a number of related topics (peer-to-peer file sharing, CD/DVD burning, personal video recording, etc.) will be purposefully omitted, nor are the extensive arguments over the very topic of copyright versus freedom of expression.

The Traditional Music Distribution System

Distributing music recordings was historically an oligopoly, dominated by six major record labels (Capitol-EMI, CBS, MCA, Polygram, RCA, and Warner). The system was "tremendously profitable," but also highly uneven, with the artist generally gaining little from the distribution of music and the recording company getting the lion's share. Only tremendously popular artists had the leverage to negotiate a better arrangement, and the majority made most of their income from concert revenues rather than royalties on recordings.

The equipment needed to create and reproduce a music recording was fairly uncommon and expensive until 1990, at which time it was feasible to produce a quality recording in a small studio with relatively inexpensive equipment, but the distribution channels remained tremendously complex, and it was not possible for an artist to "push" their recording through the channels to retail distributors without the backing of a major record label, not was it feasible for most artists to create pull by generating customer demand in sufficient quantity, especially against the marketing machines of the big six.

Underlying Technologies

Until the 1980's music was entirely analog: phonograph records and analog tape recorders. Digital recordings began in 1981 (with the compact disc) and overtook record sales in 1988. The advantages of the CD were its smaller size (for retail inventory), physical integrity (logistics), and lower production price (manufacturing), all of which led the big six to muscle distributors into carrying CDs and discontinuing records.

On the other hand, the CD format did not degrade over time (as magnetic tapes and vinyl albums do), were less subject to being damaged, and maintained their fidelity (a copy of a copy of a copy would be as good as the original). Interestingly, the recording companies considered mechanisms (such as watermarking) to prevent CDs from being copied, but decided against doing so - the equipment was perceived as being too expensive to produce CDs as one-offs or in small lots.

Several technological innovations changed the situation:

Each of these innovations made it easier to digitize, copy, transmit, and use digital versions of recorded music, rather than a physical artifact (tape or CD) produced and distributed through the traditional channels.

Early Legal Foundations: The Sony Betamax Case and the AHRA

Some legal precedent had been set for copying recorded entertainment, albeit in the video industry. In this instance, it was Sony (the manufacturer of the device) who led the battle against motion picture studios.

A landmark case in 1976 concluded that "noncommercial home recording for personal use" fell under the fair use provisions of the copyright law. This case was overturned in the appellate courts, but the original judgment was ultimately upheld by the US Supreme Court.

Meanwhile in music recording, the big six had largely been indifferent to piracy: pirated copies were generally made using audiocassettes, of limited durability and inferior quality, and copies of copies resulted in increasing degradation; and their most aggressive action was in making their albums in odd lengths (such that a 90-minute tape could not hold them, and a 120-minute tape would contain a great deal of blank space).

Later, Sony developed digital audio tape (DAT) recorders, which finally got the attention of the big six. The RIAA pressed congress to create legislation to effectively ban the technology, and attempted a sequence of lawsuits for "contributory copyright infringement," but they ultimately failed. However, the delay in introducing DAT technology to the market and the refusal of the music industry to adopt the medium for legitimate music distribution resulted in DAT never gaining much ground in the market.

Early Uses of the Internet for Marketing and Sharing Music

Music "sharing" did not begin with the internet. As early as 1968, fans were making "bootleg" recordings (primarily of concerts), which were copied and distributed outside the traditional system. The Internet merely facilitated this, making pirated music available to a larger audience. IUMA, the Internet Underground Music Archive, became a distribution point for these concerts.

There were also a few experiments done by record labels (Capitol Records is an example) where MP3 versions of music were used for marketing purposes, but found that users would download copies and post them on other Web sites, so they discontinued.

A few other early experiments are documented, such as Todd Rundgren who experimented with distributing tracks to enable fans to experiment with mixing his music, a few other bands who attempted to distribute selected tracks via the Internet, and small bands who gave away their music in an attempt to attract attention.

Until 1997, the sense was attempts to use the internet to market or share music was very sporadic, experimental, and small-scale.

Streaming, Encryption Circumvention, and the DMCA

In 1998, the Digital Millennium Copyright Act was passed, pushed forward by entertainment companies (music and movie) in response to the phenomenon of streaming audio and video, developed by RealNetworks. It had been around for a few years before then, but the quality of the broadcast significantly improved, as well as the compression technology to delivery CD-quality music via modem-speed connections.

Meanwhile, production and manufacturing companies attempted various techniques to encrypt of copy-protect their media, most of which were miserable failures in that it was extremely easy for individuals to circumvent these attempts.

And so, the company turned to legislation where their R&D efforts have failed, authoring the DCMA, which was intended to illegalize piracy (to make it a criminal rather than a civil matter), or to develop or distribute technology that would circumvent encryption, etc. The author documents a flurry of court cases that followed, and in most cases the courts ruled in favor of the music and movie industries.

There is also documentation of various other initiatives undertaken to improve encryption, none of which have been successful. To date, there has been no form of encryption that could not be circumvented., and the practice is fairly widespread, in spite of the fact that it remains illegal to do so.

Creating an Internet Music Business From MP3 Technology

Aside of the illegal music trade, there were some attempts to build a legitimate business online:

In all, there were a lot of experiments, but there was not a clearly successful business model for online music distribution.

Napster and File Sharing

While the music industry struggled to find a way that they could distribute music legally, in a controlled manner, there were many ways for individuals to distribute music illegally.

Since an MP3 file is just like any other computer file, it can be posted to a Web site or an FTP server for others to download. Many pirates used GeoCities as a method of sharing music - and while GeoCities objected to the practice (largely due to bandwidth consumptions), the pirates stayed a step ahead of them, changing the file extensions, compressing or encrypting files, or fragmenting them to avoid automatic detection.

The problem really exploded with the advent of peer-to-peer file sharing. The most infamous was Napster, which was a Web service that indexed files on a P2P sharing network. None of the MP3 files were stored on the system, but it served as a central database with pointers to a wide array of clients who were using its software. Various record companies filed suit against Napster for various reasons - and it's worth noting that none of these cases were won, but the expense of fighting them (and being prevented from earning revenue by injunctions and restraining orders that temporarily closed down the site, on several occasions), the firm eventually went bankrupt.

However, this was not the end of P2P file sharing, only the end of it as a business. Whereas Napster earned revenue for providing a central directory, other P2P solutions (Gnutella, Hotwire, Limewire, etc.) were purely peer-to-peer, with no central server - hence no single source to pursue.

Music companies could go after individual users - and have done so, on occasion, hoping that the punishment of some would discourage others - but the problem of file-sharing remained widespread.

There is some history of the music industry attempting to pursue the creators of the P2P file sharing software, but neither has that been successful. In some cases, the software is developed by overseas firms in countries where international copyright laws and the U.S> legal system have no authority. In others, it is difficult to track down the "creator" or "originator" of such software - and even then, there is the claim that the software is created for legitimate file-sharing purposes, and its use in pirating software, music, and movies is a choice made by individual consumers.

There is some history of the music industry attempting to pursue the creators of the P2P file sharing software, but neither has that been successful. In some cases, the software is developed by overseas firms in countries where international copyright laws and the U.S>

So in the end, peer-to-peer file sharing has been a pernicious problem, and one for which the big six have, to date, been unable to find a solution.

The iTunes Music Store

Apple developed the iPod portable music player, which had some degree of success, but to push it forward to the mass market, the company realized that users needed the ability to access a wide selection of music at a reasonable cost - and this led to the creation of the iTunes music store.

Getting music industry executives to sign off on the idea too a great deal of "hammering" by CEO Steve Jobs. The suggestion is that many in the music industry saw his idea as "another in a long line of experiments with digital music" and did not predict its success.

In the first week alone, there were over a million downloads, and the business has been a phenomenal success, overtaking many retail outlets and eventually becoming the largest distributor on music, including over 80% of all digital music sold.

Record companies are reportedly not entirely happy. While they are making money (2/3 or the revenue from each tune sold) without having to incur any significant expenses, they do not have the degree of control they would like. In particular, they would like to increase revenues by differential pricing (newer releases at a premium, older ones at a discount), force whole-album downloads rather than allowing customers to get specific tracks, and other such controls - but they have negotiated away their power in this area, and Apple has grown to the point where it can do more damage to the record labels by refusing to sell their items than it would suffer if any label threatened a boycott.

It is likely that apple will retain its hold on the business for some time: there are no major competitors, and none that can beat its price. It is purported that Apple is making next to nothing on the business, some even speculate it is run in the red, as the company's main source of revenue is the iPod players.

Attitudes Toward and Impacts of the Internet on the Music Business

There is some disagreement on the degree to which the Internet "harmed" the recorded music industry. Most sources indicate that their revenues have dropped, but the amount of this "loss" varies between 3% and 39%, and some suggest that there are causes other than music piracy that have led to this decline.

Regardless of the actual effect, the record industry has been hostile to the potential new threat to their established business model. If anything, their response to legal/legitimate challengers has been more focused than their response to illegal music piracy: there are far more instances in which the DCMA was invoked against a competing technology than any who were in flagrant violation of copyrights, and have even lashed out at those whose activity had nothing to do with either competition or piracy (individuals who posted a database of song lyrics, or guitar tablatures).

The computer and personal electronic industries, meanwhile, have been very large supporters of the Internet music boom. As providers of physical devices, their revenues were largely unaffected - and, in fact, product sales were driven or supported by the availability of digital entertainment online.

Musicians and composers remain deeply divided. Most of the "star" musicians who have achieved success through the assistance of the traditional recording industry are opponents of illegal file sharing and are seldom supportive of technological experimentation. Smaller artists tend to be more friendly toward technology, and see it as an alternative to signing away their rights over their own music (and a great deal of the profits from it) to the big six.

One example, the band Metallica, had encouraged its fans to make bootleg recordings of its concerts, trade tapes, and help tune others into their music in their early years. Once the band achieved success, it did a complete turn-around, becoming a proponent of file sharing and pursuing companies and individuals through the legal system.

Individual music listeners have found the file-sharing phenomenon to be an unmitigated boom. The high volume of traffic to file-sharing sites and widespread use of peer-to-peer networks demonstrates a high level of indifference toward the traditional music industry's objections. There are few vocal opponents, who express a distaste for the institute of intellectual property, and who feel that the traditional system is exploitive of the artists. However, it is suggested that this widespread ambivalence is not so much a political statement as simple ambivalence: customers choose the easiest path to obtain what they want, and the fact that "everyone is doing it" outweighs the marketing campaigns intended to create awareness that piracy is, in fact, illegal.

It has also been suggested that music sharing habits are slowly changing. Some basic statistics:

The preference of individuals for digital entertainment (as opposed to music and video distributed on hard media) is growing (no statistics are provided to back this assertion).

Finally, there is a look to the future, when individuals are empowered to be not only consumers of entertainment, but producers of it. In much the same way as the blogosphere is eclipsing commercial media, some futurists predict a time when personal entertainment eclipses the traditional entertainment industry - however, the "privatization, convergence, and customization" of entertainment is in its infancy, and it is left to "future historians" to consider its evolution.