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Effects of the Internet and the MP3 on the Music Industry

The Internet revolution is taking place today.  One aspect of the growth of the Internet is the effect it is having on “brick and mortar music stores,” and the conventional ways they solicit consumers.  This is a fascinating aspect of Internet use because it is easy, accessible, convenient, practical, cheaper, and educational.  Internet commerce business is increasing at rapid rates due to the demand of the customer; therefore, companies are being forced to modify and change the way they do business.  The music industry is one industry that is being challenged by this online revolution.  Specifically, there is a controversy between free online music sharing companies like Napster and conventional music stores, music artists, and record labels (Greenfeld 60).  The music industry such as BMG Entertainment, Universal Music Group, Warner Music Group, Sony Music Entertainment, and EMI are being forced to change their conventional way of promotion and distribution of their music because of creative rival online companies such as CDNow.com, Amazon.com, Emusic.com, and MP3.com (Cherry 8).  Internet users are collecting music files called MP3’s that can be downloaded from the Internet.  An MP3 is a compressed music file (song) that can be downloaded, stored, and listened to on a computer.  The MP3 is changing the way consumers listen to and buy their music.  Napster and other online music companies provide a vast selection of MP3’s (Gillmor 34).  Customers are looking for innovative, fast, and convenient means for making their music purchases, and the Internet is facilitating this demand.  Conventional music retail stores are compelled to offer several means for customers to purchase music (Henry 24).  Is the future of the music business in the hands of the Internet?  Online music companies and online MP3 sharing communities are meeting the new demands of customers; the effects of the Internet and the MP3 are forcing the music industry to adapt to these demands because its survival is closely tied to the Internet.

There are differences between Napster, online music companies, and the music industry.  Napster is a computer program that allows users to download MP3’s.  There is no cost to use this computer program.  You simply log onto the Internet, log onto Napster, search for a song, download it onto your hard drive, and then play the song through an MP3 player.  Napster provides the ability to share music by downloading these MP3’s (Gillmor 33-34).  Online music companies such as MP3.com, Amazon.com, Liquid Audio, and CDNow.com make a profit through selling online music through CD’s or MP3’s.  The music industry, made up of established record labels such as BMG Entertainment, Universal Music Group, Warner Music Group, Sony Music Entertainment, and EMI and music retail stores, have not sold their music online in the past.  However, under competitive pressure they have recently begun to incorporate the use of the Internet into their businesses (Cherry 9-10).

Imagine the possibilities as you sit at your computer and download your favorite songs.  You have access to all of your favorite music at the click of a button and it is free.  Napster is a web-based program, which facilitates the sharing of music files.  Napster enables anyone with access to the Internet to download music.  Shawn Fanning, a college dropout who created Napster, devised a way to index MP3 files on his hard drive so that he could share the files with other users (Caulfield 26-27). An MP3 file is an audio file that has been compressed from a music source such as a compact disc.  An MP3 has the digital sound quality of a compact disc and uses a small amount of space compared to an audio track from a compact disc (CD).  For example, a CD is capable of holding twenty musical tracks, which is equivalent to one hundred and fifty MP3 songs.  One problem with a MP3 is that a regular CD player cannot read a MP3 (Cherry 8-9).  How exciting is this new MP3 technology?  The term MP3 is the most common term submitted to Internet search engines.  Forrester Research estimated at the beginning of 1999 that over three million MP3 files were being downloaded every day (Meier 6).

How has the release of Napster affected the music industry and society?  The Record Industry Association of America (RIAA) feels Napster is illegally distributing their copyrighted songs (Robischon 72).  Napster does not agree.  Napster views their site as an opportunity to share the music, not distribute it.  Napster provides a link between two computers; in which, music can be traded.  But because Internet users are able to trade music without making a purchase, the RIAA feels it is losing money.  The RIAA believes Napster users are stealing royalties from the music artists (Greenfeld 65-67).

The long-term effects of Napster have not been determined.  Though some feel it is an ingenious program, investors in the music industry and music artists feel Napster is having a negative effect on their profits.  Music artists are concerned that Napster will lower their sales volume (Clancy 45).  For example, Aimee Mann, a music artist, has released the Magnolia soundtrack.  Although the album has not been released in stores, one may download the entire album from the Internet using Napster.  Once the album is released, sales may be lower if potential buyers were able to previously obtain her music for free.  There are some artists who favor Napster because they feel Napster is a free marketing tool (Robischon 72-74).  Artists often referred to as  “one hit wonders” may lose money.  When the hit song sells the album, and potential customers can download that one song without purchasing the entire album, sales will be lowered (Collins).

A trend in the future could be selling music by the track instead of by the album.  A positive outcome for consumers would be saving money while building a substantial collection of favorites (Murphy 38).  For example, a person would be able to search for songs online and listen to them two or three times to be sure they enjoy them.  They could find several songs they like and email a company with a play list.  The company could then make the CD for them from the list of songs the consumer has provided and mail it to their house (Snider 3D). 

For artists and the record industry, this trend may force them to reevaluate the way they do business.  They would not make money if customers did not buy artists’ CD’s at their store locations (Collins).  Music companies could join with Napster and sell their music strictly by the track.  The music industry may be forced to sell single tracks of music for more money to cover its costs.  Also, artists would be forced to record more preferred music so that listeners would choose to download all their songs and not just their hit song (Greenfeld 66-69).

In its favor, Napster can be viewed as providing free marketing, which can help music artists.  While artists that produce the chart-topping singles derive income from CD sales, most artists make a large percentage of their income by concert touring and by selling merchandise.  The artists’ CD’s are used as a tool to promote their music so that listeners will want to attend their concert.  CD’s are a great marketing tool, but they are expensive.  Napster can provide the same product without a high price tag (Healey 25).  Napster’s CEO, Eileen Richardson, exclaims, “Any artist that has released an MP3 for free on the Internet has seen their sales skyrocket” (Robischon 73). In fact, Ms. Richardson is using that argument to rebut the RIAA’s piracy claim.  She believes that Napster can be an ally of the music industry (Meier 7).

But the RIAA is fighting Napster because of copyright laws.  Who has the right to the music?  The music industry has the right by law, and they feel Napster should not be allowed to trade the music.  On the other hand, the RIAA’s view is that the music industry, which includes the artists, should be entitled to the profit (Robischon 72).  Napster is currently not making money, but its popularity suggests that consumers are searching for simpler and more economical means of buying music (Healey 26).  Patrick Rains, who represents musician David Sanborn, says, “Napster is saying music should be free; meanwhile they’re going to make a hundred million.”  If he is right, the artists and the music industry will continue to lose money until a court decision is reached (Robischon 72).

Today, the conflict with Napster is being debated in the courts.  While Ms. Richardson and Napster’s lawyers accuse the record labels of trying to cripple Napster, a potential competitor, the music industry is trying to put an end to Napster.  The Internet is becoming a wealth of information technology, and Napster is riding the tide of this growth.  This issue is forcing the music industry to seek a compromise with the Internet companies (Healey 24-25).  Since the music industry has waited until now to act on this online dilemma, other companies like Napster have been established, and they pose an additional threat to the music industry.  Opening these new companies forces the music industry either to continue the battle or to compromise.  Napster was the first major online music swapper (Murphy 38).  New companies such as Scour Inc., CuteMX, Gnutella, Palo Alto-based SpinFrenzy.com Inc., iMesh.com Inc. and Yo!NK are developing their companies to avoid the problems that Napster is facing.  If the music industry decided to ignite a full-blown war against online music and marketing, the industry would be fighting an entire fleet of online companies (Healey 24).

These companies which are similar to Napster are using strong, strategic business maneuvers to dodge the music industry copyright laws.  They are not issuing or sharing their music for free.  Some of these networks allow consumers to download a song and listen to it several times.  If the customer wishes to continue to listen to the song he must purchase it.  These companies are broadening their business.  Engineers with Gnutella, CuteMX, and SpinFrenzy allow their programs to swap any type of data file in addition to music through MP3s.  They hope that this will increase their ability to withstand a lawsuit from the music industry.  The ability of these companies to joint together may increase the chance that they will be able to fend against lawsuits from the music industry (Healey 24-26).

The music industry needs to find an alternative way in which to work with these online companies.  The five major music companies (Universal Music Group, The EMI Group, Sony Music Entertainment Inc., BMG Entertainment, and Warner Music Group) would be agreeable to online marketing of their music if there were a secure way to distribute the music for a fee (Cherry 9).  Karl Slatoff, Vice President of BMG, says that secure files are at the heart of what he calls the Holy Grail: having sales spread electronically from friend to friend over the Internet (Healey 24-25).

The development of a secure music file could prompt music companies to form an alliance with Napster (Collins).  New technology allows the consumer to download a song with a built-in lock.  He can listen to the song two or three times, after which he would have to pay for it.  He is also able to e-mail the song to three friends and then the built-in lock re-engages.  The recipients would be able to listen to the song two or three times.  This technology allows the files to be exchanged without the threat of piracy, illegally duplicating the file and distributing it free of restraint (Cherry 8-9).

Currently, the court case between Napster and the RIAA has prevented the two from joining forces.  Music labels have not talked about joining forces with Napster, but this new technology could provide a solution (Greenfeld 70).  Napster feels that they are a legitimate sampling service that allows consumers to preview a CD before buying it; they do not see themselves as pirates who are hurting the music industry.  It would be easy to incorporate the secure file format into a file swapping company.  Would Napster be as popular as it is now if the customer had to pay for the song or could only listen to a song two or three times before it is erased (Healey 25-26)?

Shawn Fanning has indeed created a revolution in the music business on the Internet.  In only one year, Napster has tallied over a million users.  Marketers have forecast that Napster could grow into a multi-million dollar industry, but economists suspect these statistics would change if Napster were to merge with the music labels and to allow file swapping at a price.  Jason Pascal, executive director of the music division at EverAd Inc., a digital-rights-management company, states, “I’m not convinced that there is an incentive for the user to buy music in a secure format” (Greenfeld 69).  But at the same time, Webnoize Inc. surveyed Napster users on college campuses and found that sixty percent of them would pay fifteen dollars a month to belong to the Napster community (Meier 23).  Larry Miller, President of Reciprocal Music, states, “Most consumers in the studies I’ve read are happy to pay for services that will let them access a lot of music at a fair price in a convenient way” (Healey 26).

One major benefit of using Napster is that listening to music has never been so easy (Collins).  Napster allows a user to search from a menu of millions of songs and to begin downloading with the click of a button.  Downloading is convenient.  A simple 56K modem can download an average-length song in about seven minutes.  With a cable modem, songs can be downloaded in less than a minute (Meier 18).  If you consider Napster as an “online music library,” music library, Napster contains more songs than any single record store in the world, storing top-chart singles, entire albums, B-sides, and extremely rare music (Healey 24).  If somebody listens to the song, Napster has it (Robischon 72).

Subscribing to Napster for fifteen dollars a month might not be the most lucrative decision for Napster, and experts fear its users may seek alternative choices.  Jason Pascal feels music companies should collect fees from advertisers, not consumers.  Simple software could provide ads to be displayed while listening to a song (Healey 25).

Music has been greatly affected by the skyrocketing use of the Internet.  A survey through the National Association of Recording Merchandisers (NARM) shows a significant increase in music sales through the Internet.  In 1997, 0.7 percent of CD sales were over the Internet.  In 1998, 1.1 percent of CD sales were over the Internet.  NARM has predicted that CD sales over the Internet will account for approximately 10 percent of sales by the year 2005.  Consequently, while Internet sales are on the rise, sales through record stores are decreasing.  From the same study, 69.8 percent of CD sales in 1990 were sold through record stores, while only 50.8 percent or CD sales were sold in record stores in 1998.  This survey shows that the future of music sales is definitely becoming more electronic (Meier 22-23).

Increases in Internet sales have come from the new online companies such as CDNow and Amazon.com.  These companies are using new, innovative ways to market and promote CD’s.  They allow Internet surfers to listen to the music online before making a decision to buy.  They provide reviews about the artists and Internet links to find out more about the music they are sampling (Murphy 38).  This provides a safe, confident way for consumers to buy music without the hassle of going to the store.  With appropriate shipping charges included, CD prices at CDNow and Amazon.com are comparable to the prices at retail stores.  This poses a threat to the leading record companies, specifically BMG entertainment, Universal Music Group, Warner Music Group, Sony Music Entertainment, and EMI (Meier 10-12).

These new Internet music companies are surpassing their leading competitors because they are using innovative designs to organize their business.  For example, the structure of CDNow is simple, providing more service and information to its consumers than the leading record retail stores can.  CDNow provides information about the artists and their music, while selling music at a competitive price.  CDNow has no inventory and relies on Valley Media, a music distributor, to ship products to consumers and handle returns.  A third party credit card company manages their billing.  The company focuses its efforts on its web site and uses aggressive marketing skills.  With strong Internet use, more information can be provided, making the company more attractive than conventional retail stores to customers (Meier 13-15).

MP3.com is another Internet company that provides innovative business techniques to attract consumers.  It provides a way for consumers to meet the musicians.  Artists set up web pages where consumers can download samples of the their music.  With a credit card, consumers can buy an artist’s CD and have it shipped to them.  MP3.com provides the artist with valuable information such as number of downloads, ranking in genre, and number of visits to their web page.  Ninety percent of MP3.com’s profit is derived from advertising (Meier 16-18).

Emusic.com is another online-based company similar to Napster.  Emusic.com allows users to download music for a price.  Individual tracks sell for $0.99 and entire albums sell for $8.99.  Similar to MP3.com and BMG, Emusic.com is utilizing the Internet Underground Music Archive, which connects users to over 5,000 music artists’ home pages (Meier 21).

Another threat created from the new technology on the market is the distribution of CD writers.  This technology is limited, but CD writers are standard on new computers and soon every computer will have a CD writer.  The technology allows individuals to download music through Napster and create a CD at no charge.  An individual can buy a blank CD for a dollar and copy his favorite songs onto it.  An entire album can be downloaded through Napster and put on a CD, making a copy that has the same quality as the original CD.  The music industry can only fight this problem by fighting the free distribution of non-secure MP3 files (Snider 3D).

There are also new portable music devices that use Internet music.  Diamond Media offers a Walkman portable player for about two hundred dollars, which uses music in the MP3 format.  Consumers download their favorite songs from Napster and load the songs onto the portable player.  This device allows up to sixty minutes of recorded music.  However, the CD is still superior because it allows for seventy-four minutes of recorded  music (Caulfield 27).  Sony’s new Memory Stick is a new portable device that operates just like the Diamond Media Walkman, but the new stick is the size of a piece of chewing gum.  Sony and Empeg make an MP3 player that fits into cars.  This new device can hold up to seventy hours of MP3 music!  The technology being developed is revolutionary and it relies on the MP3.  Napster facilitates this technology through the distribution of MP3’s (Meier 14).

Liquid Audio has provided a way to make downloading music easy and piracy difficult.  Users can sign up for free by providing their name and credit card choice and credit card number with expiration date.  Users can then download songs for a price in MP3 format and Liquid Audio will then charge your credit card account.  Piracy is controlled through a “digital watermark” that allows authorities to trace any illegal copy back to the original purchaser.  This technology could provide a compromise for Internet music distributors and music retailers (Meier 20).

Industries are presently working on technology standards that would restrict downloading piracy.  Record companies, trade associations, and technology companies launched the Secure Digital Music Initiative (SDMI) in December of 1998 to ease digital distribution.  If accomplished, this will provide a big step in protecting copyrights (Cherry 10).

While the record companies fight Napster because of piracy, the innovative Internet companies such as MP3.com, Emusic.com, Amazon.com, and Liquid Audio are going to surpass them.  The record companies should be focusing on enforcing their copyrights, limiting Napster’s capabilities and, most importantly, adopting new business strategies in order to stay competitive.  BMG entertainment is doing this by organizing the company to serve its digital customers.  BMG launched its first online efforts in 1995 and has been experimenting with the Internet since that time (Greenfeld 65-66).

BMG took an interesting approach to online promotion.  BMG set up a series of web sites, each focusing on a different music genre.  The sites were initially established to promote and advertise the music by placing web addresses on albums and other music paraphernalia, attracting thousands of visitors.  For example, BMG conducted a survey in which they gathered 100,000 potential Britney Spears fans.  Of these fans, 80 percent said they would buy Miss. Spear’s album, demonstrating that information through the web provides amazing music promotion.  BMG’s online community has been an outstanding success (Meier 19).

Why is Napster the most popular file-swapping company?  Because Napster does what the other companies do not do.  Napster connects users and music together in a network.  When someone connects to the Internet, he is put on an Internet Protocol (IP) address, which allows the user to receive information from the Internet.  Napster allows people to use the computer as a server and give others information as if their computer was on a permanent IP address like most web sites.  If every computer were connected like this, the amount of information on the Internet would double.  Another bonus to a Napster network is how easy it is to use.  Serious robust connection servers are top of the line but are extremely expensive to build and maintain.  Napster can do most of the things high-powered servers can do, but through low-powered computers that are not always online.  High-powered servers could become obsolete.  If  Napster is banned from file swapping, then the technology Napster has created should be used to facilitate and continue the revolution of the new information based era.  (Caulfield 26-27)

Music retailers feel they are seriously threatened by the selling of music and downloading of music on the Internet.  However, most retailers are utilizing the Internet.  By 1998, seventy percent of the members of the National Association of Recording Merchandisers and the trade association of US music retailers had established web presence, and as expected, use continues to increase.  One third of these companies are using downloading promotion of their music. Tower Records has been online since 1996, but has changed their online store to be comparable with CDNow and Amazon.com (Meier 24).

The music industry is changing with the growth of the Internet.  The release of the MP3 format has posed a threat.  The future of music could rely on the MP3.  Napster and online music companies have forced the music industry to become involved in the Internet.  Consumers are enjoying the new, vast amount of music information they can find on the Internet.  Napster provides new online technology that could revolutionize Internet design.  Will the music industry bring down Napster?  Will Napster technology merge with existing music companies?  Will the courts settle the copyright issues?  Are CD’s already becoming obsolete due to the new digital era?  With the future lying in the Internet, anything is possible.  But without a doubt, the music consumers love will always be available with the click of a button.

Bibliography

Caulfield, Brian.  “Facing MP3’s Music. (Company Business and Marketing).” Internet World April 2000: 26-7.

Cherry, Bob.  “Will Libraries Want Their MP3?”  Library Journal 125.7 (2000) 8-10.

Clancy, Heather.  “The Noise Over Napster is Music to My Ears.”  Computer Reseller News  June 2000: 45.

Collins, Jennifer.  Personal Interview.  27 July 2000.

Gillmor, Dan.  “Putting Napster Technology to Other Uses.”  Computer Reseller News August 2000: 33-5.

Greenfeld, Karl T.  “Meet the Napster.”  Time  October 2000: 60-73.

Healey, Jon.  “Napster Could Be Both Friend and Foe to Recording Industry.”  Internet World  July 2000: 24-6.

Kanaley, Reid.  “Napster's Huge, Almost Instant Success Will Have Lasting Effects
Well Beyond Recording Industry.” Knight-Ridder/Tribune News Service July 2000: pK7026

Meier, Gerrit.  “BMG Entertainment.”  Harvard Business School  N9-701-003 (2000) 1-24.

Murphy, Kathleen.  “Kicking In the Door on Internet Music Pirates.”  Internet World  August 1999: 38.

Robischon, Noah.  “Free for All: Napster Lets You Get All the MP3 Tunes You Want Without Spending a Dime.  So Who Pays the Artists?”  Entertainment Weekly  March 2000: 72-4.

Snider, Mike.  “Napster’s Siren Song Entices Loyalty.” USA Today  26 July 2000:  3D.

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