Quotes of the Day
Jamie Partida is facing the music. Like many of her fellow music fans across the country, the University of Michigan senior visits the file-sharing website Kazaa and occasionally downloads a few songs free. The sports-management major, 21, knows it's wrong. "It's unfair to the artist because you're not paying for it," she admits. But the price of CDs is such that she never considered quitting. Until last week, that is, when hundreds of file-sharing consumers found themselves slammed with lawsuits from the recording industry. "Now I'm a bit scared," says Partida. "I know they're targeting the big users, but you never know. I just don't feel that innocent about it anymore." And the pay-per-tune sites don't look so bad. "Ninety-nine cents per song — that's pretty cheap," she says.
If Partida and others like her decide to go legit, that could signal the long-awaited dawn of a potentially huge industry: the sale of digital music online. A gaggle of companies has struggled for years to create such a market, hampered first by uncooperative record labels and then by free file-sharing alternatives. But change is coming fast. The overnight success of Apple's 99¢-per-song iTunes Music Store — it sold its 10 millionth song this month — has awakened consumers to legal downloading options. Iconic acts like the Rolling Stones and the Eagles have begun allowing their songs to be sold online. With the digital-music industry expected to grow in revenues from $77 million this year to $1.5 billion in 2008, according to Jupiter Research, marquee players, including Microsoft, Amazon and Yahoo, are revving up to rush the stage.
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No one needs the new sales outlets more than the recording industry does. Sales for the industry fell 14% from their 1999 peak, to $11.6 billion in 2002, as consumers who were turned off by hefty CD prices and lame products embraced the digital black market instead. Forrester Research estimates that the migration costs the business at least $700 million in lost CD sales annually. Worse, record labels tripped up the progress toward a legal Internet music market by quibbling over rights and hoarding their artists. They spent hundreds of millions on their own online services, alienating consumers by forcing them to seek out artists by label. Luring back those disgruntled music lovers from file sharing is difficult but vital, says Doug Morris, chairman of Universal Music Group, which slashed CD prices this month. "If you had Coke coming out of the kitchen faucet," he says, "what would you pay for a bottle?"
A dollar, wagers Steve Jobs, CEO of Apple — or 99¢, to be exact. When Apple introduced its pay-per-song service last spring, many doubted the computer maker could succeed where so many had failed. But the straightforward concept and uncomplicated design of iTunes immediately hit a chord with consumers, who downloaded 1 million songs in its debut week. The service's popularity underscored Jobs' argument: free file sharing can be a pain in the neck. Once you square yourself with breaking the law, there's also the virus-ridden software, the porn links, the cumbersome downloads. "We're all about competing with piracy," says Jobs. The record industry gets it. "If the business could have done one thing differently over the past few years," laments Andrew Lack, CEO of Sony Music Entertainment, "it would have been to find a smoother, faster path to iTunes and the other services."
Even though iTunes' reach is limited to the 3% of computer users on Macintoshes (a PC version is due by year's end), Apple's success has left the others playing catch-up. Many Internet music services require monthly subscriptions to listen to songs over the computer or extra fees for downloading them (often with complicated and varying stipulations). Some services, like Listen.com's Rhapsody, plan to stick with the subscription format, but Rhapsody also plans to offer an a la carte option for nonsubscribers.
Business is picking up at Listen.com, where the number of songs "streamed," or played as if the customer were listening to the radio, has doubled to more than 500,000 a day since April. But competition from illegal downloading services has put the legit pioneers through a lot of corporate turmoil. Listen.com was bought this summer by RealNetworks; Pressplay, the service begun by record labels Universal and Sony, is now owned by softwaremaker Roxio, which also bought the rights to the defunct Napster brand; MusicNet, begun by the three other big labels, is now offered by America Online (which, like TIME, is owned by AOL Time Warner). Yet the growing business potential brings ever more newcomers. At least 10 new services plan to go live in coming months. Roxio expects to launch a made-over Napster before the end of the year; CEO Chris Gorog says 1 million potential customers have requested e-mail updates. MusicMatch plans to introduce a pay-per-song music store in weeks.
The problem so far with the pay-per-song model from a business perspective is profits — or the lack thereof. With as much as 70% of each sale going to the record label and the rest eaten up by surprisingly high costs for things like infrastructure and credit-card fees, sales volume must but doesn't yet compensate. "It's not a way to make a lot of money," acknowledges Jobs. No, it's a way to help sell iPods. Apple says sales of the music-storing, high-profit-margin palm-size gadgets almost quadrupled between the quarters before and after iTunes' launch. Apple's approach borrows from a proven business tactic. "Westinghouse created radio shows to sell radios," notes Lee Black, an analyst with Jupiter Research. AOL Music takes a cut from songs sold through MusicNet, but its ka-ching comes from the 16 million visitors it delivers each month to advertisers like Coca-Cola.
Believers in legit downloading think they can win over citizens to a new law-abiding habit. "Somebody in your neighborhood will always have pirated cable," says Rob Glaser, CEO of RealNetworks. "But the social norm is, if you want cable, you pay for it." Yet freeloaders won't necessarily go quietly. LaTisha Knowles, 19, a Florida A&M sophomore and former avid file sharer, still refuses to buy CDs. "It's a waste of money," she says. Karen Keenan, 26, a copywriter in Chicago, downloads regularly from iTunes — but also from free file sharer LimeWire. "I have the same moral problem with sharing digital music that I have with public libraries — i.e., none," she says. The future of digital-music sales may rest in the hands of those who, to borrow from the Talking Heads, have developed a healthy fear of music — free music. Says Kyu-Heong Kim, a junior majoring in biology at the University of Texas in Austin: "Who wants to be put in jail or pay some huge fine because you downloaded Justin Timberlake's newest song? It's just too big of a risk."
- Lisa Takeuchi Cullen