FOSTER CITY, Calif. Struggling with a decline in its core business, the music industry is sending out mixed messages about future plans for digital content.
On the one hand, studios led by Sony BMG (New York) are moving aggressively to lock down their CD content with new copy-protection schemes in the face of widespread piracy that shows no sign of abating. On the other hand, they are embracing new services, especially in mobile, enabling a market where cell phones may soon surpass MP3 players as the dominant digital-music receiver.
"Respecting copyright and embracing technology is where we need to go," said Thomas Hesse, president of Sony BMG's digital group, at a keynote address to the Music 2.0 conference here last week. "Striking the right balance between making digital music available and getting adequately compensated for it is key."
In the end, bread-and-butter CD sales are expected to remain roughly flat while digital-music sales, an estimated $350 million annual drop in today's sales bucket, could triple in the next five years, according to market research estimates.
Digital sales are "chump change compared to $11 billion in annual CD sales, but that's where all the growth is," said David Card, senior analyst with Jupiter Media (New York). Annual CD sales have fallen by $2.5 billion since their peak seven years ago, he added.
"We don't see the music business coming back to where it was in 1998. We have a long way to go to replace physical sales with digital sales," Card said.
Stop the rippers
Keynoter Hesse promised that all Sony CDs sold in the United States would sport copy protection by the end of March; Europe and Asia will follow sometime later. The company has already conducted in-depth focus groups on at least two major CD releases that let users burn three backup copies and transfer songs to five other devices.
"The conclusion was [that] consumers accepted copyright protection," said Mathew Gilliat-Smith, managing director of First 4 Internet Ltd. (Oxon, England), whose copy-protection software is currently used on more than 30 Sony CDs.
The EMI Group is expected to announce similar plans soon, using Macrovision software. The other two major music studios Universal Music and Warner Brothers are evaluating technologies and waiting to see how Sony's moves play out.
"I'd be surprised if they don't follow suit," said Gilliat-Smith, whose company makes something less than 10 cents per disk for its copy-protection software.
Sony executives met privately with Apple Computer Inc. here last week in an effort to make it easier for users to transfer music from copy-protected Sony CDs to iPod players. It's unclear whether Apple would be willing to make the necessary tweaks to its iTunes software to streamline the file transfer process, given Apple's desire to distance itself from the music industry's efforts at copy protection.
Indeed, analyst Card said one early study showed that sales of copy-protected CDs might slump as much as 75 percent vs. today's unprotected disks. But "that has not been borne out" by the initial Sony market tests, he said.
Nevertheless, Card said he does not believe copy-protected CDs will have any significant impact on growing piracy and sluggish CD sales. Although the percentage of adults who admit to illegally copying digital-music files has fallen from 15 to 8 percent in the last two years, the number of younger people who say they make illegal copies has held steady, at about 31 percent, Card said.
One widely cited report said the number of simultaneous peer-to-peer downloads at any moment over the Internet hit 8.5 million in July, an all-time record. Sony's Hesse pointed to one report saying that in 2004, ripping illegal copies was up 38 percent and burning them to a CD was up 13 percent over 2003 levels.
Young people see illegal copying as a legitimate reaction to the major studios, which they perceive as overpaid purveyors of poor-quality music, according to an informal panel of six anonymous men and women ranging from 19 to 28 at last week's conference. All six panelists said they get illegal songs from peer-to-peer services. Only two said they sometimes pay for digital music.
"You would be the odd one out if you didn't" share illegal music, said one panelist, who added that a friend who works for the FBI shares illegal copies with her. "The music industry is garbage right now," she said.
If members of Generations X and Y may be unafraid of sharing illegal songs, technology companies are operating in a climate of fear over legal liability, said Fred von Lohmann, a senior attorney with the Electronic Frontier Foundation (San Francisco). The recent Supreme Court case of Grokster vs. MGM Studios only increased the anxiety because it did not define the scope of existing legal liabilities for so-called vicarious and contributory copyright infringement. Instead, it added a third possible liability: inducement.
"If you are in the tech space concerned about the scope of liability, the upshot is you have continued legal uncertainty," von Lohmann said. "We need more clarity for consumer uses" of digital media.
In this environment, progress in digital media will be slow, von Lohmann said. Most established companies will move cautiously, striking partnerships with traditional studios and seeking their permission and licenses before embarking on new products and services that generally stay within existing guidelines. Echoing that view, executives from many companies noted with frustration the rise in complex legal contracts for every new use of digital-music files.