Music industry races to stop Net freeloading

By Alan Deans

New York view

As technology widens access to cyberspace music piracy, recording companies rush
to beat the Net whizzes at their own game by developing encoding systems.

Computer and software company executives love to warn businesses that they could become extinct if they don't get hip and use the Internet. There is a dollop of salesmanship in such views, but there is also a large element of truth that explains why online companies everywhere are now so highly prized.

The Web may never mean much to owners of corner dairies, but even small bookstore owners in the United States are garnering new sales by offering books online. The breadth of opportunity is enormous, and is growing by the day. So, too, are the risks for those slow to act.

Look at the music industry. Global giants like Sony, EMI, Warner and Universal have cornered the recordings market by signing up megastars and consolidating their distribution networks. But they know that they need a smart Internet initiative pretty quickly, or else they could lose significant sales from the $US12 billion ($22 billion) annual pie.

It is not that an Internet retailing giant like Amazon is emerging to challenge the heavies. Rather, revenues are threatened by millions of individuals who are using digital technology to pirate music by downloading it onto their personal computers. For music lovers, the result is like buying blank cassette tapes and recording a friend's record album. We've all done it, and cheered at gypping the big labels.

But this was never much of a threat, even if the industry didn't like it. Such pirating was tedious, yielding substandard recordings that people would not waste time with in today's CD digital age. What is happening now, however, is that software companies have designed ways to turn recorded music into computer files available free from thousands of Web sites regardless of copyright. From computer hard-drives, these files can be burned on to CDs and used on any audio player.

Seattle-based RealNetworks is the largest audio software company, 55 million people having registered to use its programming. Many are American university students, young people who keenly follow the music scene and who, critically, have lightning-fast Internet access. This northern summer, the college network of radio stations, which boasts hundreds of millions of listeners, is working on a new Internet initiative that will broaden the attraction of Internet music.

Next autumn's new intake of students will be rearing to go.

Understandably, the big guns can't sit back any longer. Hard-up students will be eager for free recordings, and once they get used to it why would they ever pay again? Even if the record companies launch an all-out attack based on copyright laws, the Internet offers a great distribution channel for musicians who have not signed recording contracts - giving the Internet power similar to that wielded some decades ago by pirate radio stations.

Big music is trying, therefore, to fashion an all-encompassing system knowing that they don't have much of a stick to shake. The Recording Industry Association of America has formed a group known as the Secure Digital Music Initiative which is working with all interested parties, including software, communications and Internet companies, to come up with a voluntary specification for encoding software that would prevent their music being stolen. They do not want to set a standard - even if they could - but rather certify products that lock out pirates.

The genie, however, is already out of the bottle. Just this week Microsoft released a trial version of its music software that the industry doesn't like because it also includes programming that allows pirating. Also this week, IBM and RealNetworks announced a joint venture to combine Big Blue's encoding technology with existing audio software. The industry loves this one, so the scene is being set for a ding-dong battle perhaps like the one Microsoft waged against Netscape's Internet software.

Not content simply to let the technology geeks find a solution, however, Bertlesmann and Universal are consolidating their Web sites to make a killer site where music can be downloaded. If they can snatch Net surfers from rival offerings, then they might be able to stem the tide.

The industry still holds an ace up its sleeve. While millions of people are downloading music, comparatively few own CD writers. This means that electronic companies might be tempted to design new equipment that would play recordings that use only the industry's encryption-certified products. Sony is one company that would covet such an outcome, because it is in both recording and electronics.

Even so, consumers might still thumb their noses. The answer most likely does not lie simply with encoding software or whizz-bang new electronics, but also with pricing and marketing. By cutting out expensive manufacturing and distribution channels, recording companies should be able to offer substantially cheaper music over the Internet. If so, people might even pay for it.

* Alan Deans is New York correspondent for the Australian Financial Review.