The MP3 Battle Heats Up

Not Down with the Download When will the major labels free up their vast back catalogs, and their virtual monopoly on mainstream artists, and make it all readily, legally available for digital download? Don't hold your breath. At present they seem more inclined to litigate than license their music. While the experts predict that the audio file will have supplanted the CD by the end of this decade, Forrester Research, the Cambridge-based think tank, predicts that in 2004 music downloads will still only account for 25 percent of online sales. Emusic's Steve Grady, vice president of marketing for the leading digital music site, agrees. "There is still a desire by the major distributors to get the Internet consumer to play by the same rules as the CD... They are not eager to see the pricing change, or the consumer to have the ability to download one track as opposed to an entire album."

Grady notes that the major labels not only produce the music but distribute it as well. This is a reality that is often overlooked by analysts; the fact that the economic leviathans that own the record companies also contain distribution arms is both a source of strength and the soft underbelly. In an industry that is increasingly based on the uncertainties of producing short-lived pop hits, the majors' continued control of the distribution channels assures them a revenue stream in an increasingly fragmented and confusing market.

Grady even claims that "It's a misnomer to call them major labels?they are major distributors, and the distributors own the labels. So the distributors call the shots. On a higher level, the distributors don't care what they sell. All they care about is selling jewel cases with CDs in them. They have record plants and sales people throughout the world who are responsible for putting that product through the channel.

"WEA and BMG are used to thinking about these things," he concludes. "Their expertise is in moving physical products from place to place. Distributors," on the other hand, "are not consumer-focused companies. They sell through retailers, who are consumer-focused."

Grady's argument against an easy and consumer-friendly adaptation by the industry to a format based on digital distribution is given additional credence by Danny Goldberg, who says, "This is not a moral or a spiritual resistance. At this time I see very little evidence that there is a market for paid digital downloads." Goldberg should know; a former head of such labels as Atlantic, Warner Bros. and Mercury, he went indie last summer when he founded the Internet-intensive Artemis Records.

Goldberg cuts through the rhetoric on both sides and points out that beyond the hype and inflated stock prices the bald truth is that consumers have not yet shown any great inclination to pay for digital downloads. Given that, Goldberg maintains that the behavior of the majors is completely logical.

"I think the pace is entirely predictable. The majors have to respond to the economic requirements of the companies they are part of. They are part of companies that require quarterly profits, and so the people who run those divisions need to deliver. They have to spend money where there is a relationship to a return in three months' time. Digital distribution is a marginal source of revenue."

Goldberg is mindful that the current consolidation of the industry has left it in debt and unstable. "The planning has to be in accord with Wall Street's demands. And besides that, these days nobody plans for more than a year at a public company, because they don't know how long they will be there."

The turning point in the transition to digital music for Goldberg will be when most people have an Internet function in their cars. That will take years. Still, he agrees that by the end of the decade the CD will have gone the way of vinyl. As for the pace and ease of the transition, he says that the company that emerges out of the AOL/Time Warner merger should point to the way of the future: "They have incredible strength on the Internet and in catalog, and should be the ultimate laboratory. If they don't figure it out, I will be surprised."

Goldberg may be in for a shock: the fact is that execs at the birthing megacorporation are a long way from "figuring it out." Their present state of ignorance, in fact, is built into their business plan. Like all its competitors, Warner plans to introduce albums and singles for digital download by the second half of the year. That's the good news. The bad news is that given the industry's paranoia about security issues, the music will be encrypted?and there remains no agreement among the labels for a standard encryption or downloading technology.

Paul Vidich, Warner's executive vice president, claims, "All this will be sorted out, but it won't be sorted out when the market launches. Unlike the formats VHS and BETA, where you had machines that couldn't be changed once they were manufactured, we are now working in the computer environment, where you can download software and create software that inter-operates. So a lot of these potentially incompatible technologies can be made compatible by software programs that allow the computer to bring them together in a way that is intended to be seamless for the consumer."

Execs at the other majors would not speak on the record, but there was general agreement that their corporations were also thinking along these lines.

Leaving market forces to determine the shape of the future makes sense, but it's also clear that Grady's concerns are legitimate. "The question is not whether the majors will market music downloads; the question is whether they will market it in a format that consumers want."

Meanwhile, Vidich proclaims, "I can't imagine anything out there that brings as much value and satisfaction to consumers as the 14 bucks they pay for a CD... I mean, 14 bucks for Alanis Morissette which touches your life is a great value."