Online Music Wings its Way to the Celestial Jukebox

How do you sell snow on the North Pole? That’s the type of problem confronting music companies that want college students and other Internet users to pay to download music instead of swapping it for free. If music is available for nothing, why pay?

 The music industry believes it loses $3.5 billion a year to pirating through sites like the now-shuttered Napster and its successors, such as Kazaa, Morpheus and Grokster. Music sales have fallen 25% since Napster was launched four years ago, and the industry has had three responses: Erecting technological barriers to downloading; filing lawsuits against downloaders and their enablers; and creating legal, alternative sites that charge downloading fees that flow to record companies and artists.

 But according to Wharton marketing professor Peter S. Fader, who studies online businesses, another promising approach is getting too little attention. “In the long run,” he says, “the celestial jukebox will be the model that everyone prefers.” In a celestial jukebox, instead of downloading songs to a computer hard drive or burning them onto a CD, listeners log onto a site that streams the music directly to their computers for immediate listening. It’s like having your own all-request FM channel.

 A number of services – including Pressplay (http://www.pressplay.com) and Rhapsody (http://www.listen.com) – already offer streaming audio. Rhapsody users, for example, pay a $9.95 monthly fee for unlimited streaming selections from a 350,000-track library, and they can burn songs to CDs for 79 cents apiece. Sound quality is excellent – in contrast to the spotty results users often get from file-sharing services like Kazaa. Music companies let streaming services use their material because they are sure to be paid

 And yet, for all the apparent benefits, streaming services have failed to ignite listeners’ passions. “Why hasn’t Rhapsody taken off like wildfire?” Fader asks. “I just don’t get it.”

 Part of the problem in making online music delivery successful appears to be two deeply embedded, conflicting cultures. The music industry continues to fixate on CD sales as the chief vehicle for delivering its product. Security jitters, for example, have kept record companies from granting streaming services access to their complete catalogues. At the same time, listeners want to own their own music libraries; and, having downloaded billions of songs for free, they are reluctant to pay. “There is a psychological barrier,” Fader says.

 CD manufacturers have tried a number of approaches to curtail pirating, from demanding restrictions on computers’ CD-copying abilities to embedding anti-copying codes in CDs. Most have backfired. Customers resisted buying CDs that could only be played on standard players and not on computers, car systems or portable players, for example.

 Technological attacks center on embedding codes on CDs to prevent copying, sparking an arms race with computer-savvy pirates. Ultimately, says Fader, no copy-blocking technology is likely to survive downloaders’ ingenuity for long.

 When Napster was shut down in July 2001, just two years after it was launched, the music industry came to think legal challenges might stem online piracy, says Lee Black, a senior analyst covering music and media for Jupiter Media, the Internet data firm. Napster was vulnerable because it stored on its own servers records of the tracks its members were willing to share. Successors like Kazaa skirt this problem by merely providing the software that enables users to trade among themselves. The lists of shareable music reside on customers’ hard drives, not the service’s. In April, a federal court found that file-sharing programs Morpheus and Grokster were not violating copyright law, a major blow to the music industry’s strategy of shutting down these programs the way it had Napster.

 “The people that build these applications cannot really be held liable for the content that’s distributed over them,” Black says. “You aren’t going to shut them down, anyway, because anytime you shut one down another pops up.” On the wide-open Internet, foreign services are basically immune from U.S. laws, anyway, Fader adds. Unable to put the services out of business, the industry has resorted to going after the customers. In another court case, the music companies this spring won a ruling from the U.S. Court of Appeals that compels Internet service providers to turn over names of subscribers involved in music file sharing.

Late in June, the Recording Industry Association of America, which represents five major record labels, said it would start gathering evidence against individuals using peer-to-peer networks. Several hundred lawsuits alleging copyright violations would be filed within the next eight to 10 weeks, the group said. While the prospect of legal hassles will discourage some piracy, for this approach to succeed users will have to feel there’s a serious risk of being caught. That’s not likely, given the ways that piracy-abetting sites are finding to protect users’ identities, Fader notes. He believes that the legal attack could further alienate customers who feel music companies have been gouging them with high-priced CDs for two decades. “There’s no worse thing you can do than make your customers feel like criminals,” he points out. Still, with an estimated 80 million people using sharing services worldwide, one’s chances of being targeted are small.

 The music industry has tried a number of approaches to offering downloads itself. Most have been hampered by high costs or heavy restrictions on customers’ use of the songs they acquire – technical barriers like “tethering” to prevent users from transferring music from the computer to a mobile device like an MP3 player, for example. “The music industry has always been an industry of evolving formats,” Black said. “I think what’s been really hard for them is they have not been controlling the evolution of the new format.”

This spring, however, Apple Computer has enjoyed a breakthrough with its iTunes Music Store service, which offers about 200,000 tracks. Customers pay 99 cents to download each song. After that, it’s almost like buying music on a CD, LP or tape. The user can play it on the computer, burn it to a CD that can be played on any device, or transfer it to an MP3 player. The only restriction is an embedded signal designed to prevent the downloaded songs from winding up on Internet file-sharing services. “The significant thing is that Apple is the first one to come out and say, ‘Look, you buy it, you can burn it, you own it,” says Black. “I think that’s really given the market a huge awakening.”

While some other services have tried this a la carte approach, iTunes is the first with significant participation from the major record labels, which are starting to acknowledge they must find ways to distribute music via the Internet and not cling so hard to the CD. At the end of June, Apple reported that customers had downloaded more than five million songs since the service was launched eight weeks earlier.

“The iTunes Music Store is changing the way people buy music,” crowed Apple CEO Steve Jobs. “Selling five million songs in the first eight weeks has far surpassed our expectations, and clearly illustrates that many customers are hungry for a legal way to acquire their music online.” Apple’s music-industry partners, including Warner Music Group, had plenty to be excited about, too. Nearly half the songs downloaded were purchased as entire albums, easing concerns that industry revenues would suffer if customers bought only one or two songs from a 15-track CD.

 According to Apple, more than 80% of the 200,000 songs in iTunes inventory had been purchased at least once, indicating the service appeals to users with a wide range of tastes. “I think the success of Apple’s iTune service isn’t the downloading per se, it’s the interface – it’s fun to use,” Fader says. Currently iTunes is only available to people who use Apple computers with the latest software – about 2% of U.S. computer users. A Windows version, however, is due by the end of the year, so use could mushroom.

 But Fader and Black note that five million downloads is a drop in the bucket compared to that of the illegal market. “To compare the two [legal and illegal] is sort of apples and oranges, when you look at their usage,” Black notes. An estimated five billion tracks are traded on peer-to-peer networks like Kazaa every month. Kazaa’s file-sharing software has been downloaded nearly 300 million times. According to one survey, more than 40 million Americans use file-sharing software at least once a month. Fader points out that iTunes reinforces awareness of the benefits of downloading. “In some sense, it legitimizes the illegal services.”

 At 99 cents, iTunes charges as much per song as customers pay when they buy CDs. True, iTune users don’t have to buy unwanted songs to get the ones they desire, as they do with CDs. And the iTune quality is better than users get on many illegal sites. But is this enough? Heavy downloaders may accumulate thousands of songs. Will they spend thousands of dollars to do so with iTunes and similar services if they can do it for free with little chance of getting caught?

 Fader and Black say it’s far too soon to say that Apple has found the best music model.

 According to them, streaming services get around the problems that confront the legal downloading services like iTunes. Quality of the subscription-based services like Rhapsody is excellent. Users can hear what they want immediately. There are no annoying pop-up ads as on the pirating sites, and users don’t have to worry about viruses or that they are giving hackers access to their computers – a major concern with file-sharing networks.

 Most important, says Fader, selections are extensive, because the music companies don’t have to worry about illegal copies. “With no downloading, you have access to a much larger selection of songs,” he notes. “I think that’s a very important point … Streaming is a much more sensible business model from the industry’s perspective.”

 For $10 a month, an iTunes user would get 10 songs, while a Rhapsody customer could listen to hundreds. The flat fee approach allows users to listen to unfamiliar music without worry about cost, and Rhapsody offers a wide selection of commercial-free, radio station-like channels specializing in various genres. The streaming service involves considerably more interaction between the user and the service than the downloading model does, allowing for many additional features. By studying the user’s choices and those of others with similar tastes, the service can recommend other music selections to the user, much the way Amazon recommends books.

 Pressplay provides “lots of very cool value-added stuff,” including Billboard charts and biographical information on artists,” Fader says. “You can basically find out about other people who have tastes similar to your own. There are all kinds of things like that.” Moreover, the interface – the steps for finding songs and listening to them – “is much nicer than using any of the illegal services,” he adds.

 And yet, streaming services have two shortcomings. First, users do not own the music they hear. If all the music they want is available all of the time, practically for free, this should not matter. But pride of ownership is an old habit that many music lovers may resist breaking. “Behavioral change is required for people to learn you don’t need to own the music,” Fader says. “Clearly,” notes Black, “for these services to compete with free [sites] they are going to have to allow more ownership.”

Even more important, streaming audio can only be heard via an Internet-linked computer. While the computer can be hooked up to the stereo system, streaming is no good for users who want to take their collections in their cars or download them to portable devices. But it won’t be long before the spread of wireless Internet hot spots makes this less of a problem, Fader says. Users will be able to log on while they are on the go, perhaps with small portable devices.

One thing is fairly certain, Black says: the CD will continue to lose ground to online music delivery systems of one type or another. “Downloading will become very pervasive. You will be able to get downloads just about anywhere … I don’t think you’re ever going to return to the glory of the CD.” He expects downloading to attract more individual users than streaming, but adds: “I think your heaviest spenders, your biggest music lovers, will come with the subscription services.”

Indeed, at the end of June, AOL Time Warner announced it is working on plans for a service to rival iTunes. Amazon, Microsoft and Yahoo! are also reported to be preparing services. Some experts believe competition will quickly cut downloading charges in half, to less than 50 cents a track. At some point, legal services may charge little enough that they can truly compete with peer-to-peer networks, especially if sound quality is top-notch, the purchasing process is simple and the add-on features are captivating. “I think you will always have a free [pirating] market,” Black says. “What you have to do is make the legitimate market much easier to use than the free market.”

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