The Internet is
Changing
the
Music
Industry
Calvin K.M. Lam and Bernard C.Y. Tan
An emerging distribution paradigm is redefining the
roles of traditional music retailers, tightening competition within
the industry and allowing more efficient ways
for consumers to get their music.
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"The threat to the music industry is not MP3s, but
the arrival of a consumer distribution channel that is
not controlled by the music industry." Jeremy Silver,
vice president of New Media, EMI [10].
TERRY MIURA
O
ver the past decade, digital technologies have permeated the music industry. Music has been encoded in digital
form and stored on CDs, laser discs,
and digital versatile discs. Such digital
technologies have become popular due to their quality and portability. In the past, bandwidth restrictions have impeded distribution of music in digital
form over the Internet. However, these restrictions
are disappearing due to advances in networking
(broadband) technologies. Consumers are now able
to procure and play high-quality music in digital
form directly through the Net, accelerating the
development of the Net as an infotainment hub,
whereby it will become the main conduit for both
information and entertainment.
According to the Recording Industry Association
of America (RIAA), Net-based sales of CDs and digital downloads in the U.S. have reached $500 million in 2000 [8]. Napster, the company embroiled in
a legal tussle with RIAA, has more than 80 million
registered users. At its peak, there were 250,000 daily
downloads of its software. An average registered user
has access to 220 songs at any given time. As bandwidth increases and better compression techniques
become available, the Internet will be a major distribution channel of music in digital form. Collectively,
the music industry is concerned about such effects of
disintermediation [1]. This development has important ramifications for the music industry, which will
have to reexamine its value propositions in the light
of new business possibilities. At the heart of all the
changes introduced by the Net is the advent and
proliferation of MP3, the audio portion of a video
compression standard defined by the Motion Picture
Experts Group [6]. Traditional standards allow
music to be sampled at 44,100 times per second (in
stereo-2 channels) with each sample having 16 bits.
In comparison, MP3 uses music compression algorithms like advanced audio coding to replicate original music at a bit rate of 128Kps. This represents a
compression ratio of 11:1. Although MP3 has a
much lower bit rate than traditional standards,
music quality does not suffer because human ears
cannot discern the difference for bit rates beyond
128Kps. But with this compression ratio, a CD that
has 12 songs encoded in traditional standards can
contain more than 130 songs encoded in MP3. The
advantages of MP3 are particularly significant in
light of advances in broadband technologies and
reduction in storage costs. Increasing availability of
broadband access and reducing costs of hard disks
allow downloading and storing of songs in MP3 economically attractive. Because it is operable across
many technology platforms and has no security or
copyright features, MP3 is immensely popular [4].
MP3s began with a huge underground movement
of college students on the Internet who converted
songs from their CDs into MP3 files, and circulated
the files over the Net, allowing people worldwide to
download these files and play original music on PCs
using free software. This MP3 movement sparked
worry in the music industry, where key players (the
retailers, record labels, and artists) were concerned
about losing money [4]. Although some have
attempted to alleviate this concern by showing an
increase in CD sales from 1999 to 2000 [5], RIAA
has attempted to shutdown as many illegal MP3 distribution Web sites as possible with legal action.
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RIAA is fiercely protective of its members’ music
copyrights and has actively engaged in legal action to
prevent any misuse of its members’ music. To date,
RIAA has brought lawsuits upon Napster, MP3.com,
Aimster, and others in its bid to control piracy.
RIAA argued that Napster facilitated music piracy
on a large scale with its 80 million registered users trading millions of songs daily. Copyright disclaimers on
Napster’s Web site were not adequate; copyright laws
state that a person is liable for copyright infringement
when he or she materially contributes (either directly or
indirectly) to that activity with the knowledge of its
implications. RIAA suggested that the burden is on
Napster to operate in a secure and legal environment.
Furthermore, RIAA reiterated that it was not against
the MP3 technology per se, but rather the illegal use of
the MP3 technology.
In March 2001, RIAA won its lawsuit against
Naspter. An injunction was
granted against Napster,
requiring it to install filtering
technologies in its file trading
directories to prevent illegal
exchange of MP3 files. While
it was legal for people to convert songs from their CDs into
MP3 files for personal use, it
was illegal to distribute these
MP3 files without consent
from the copyright owner.
Since then, Napster has
entered into alliances with
Gracenote and Reltable to
improve its filtering technologies. This approach appears to
be working. In April 2001, the swapping of MP3 files
through Napster had fallen drastically by about 36%.
Similarly, the average number of songs available to
each registered user dropped from its peak of 220 to a
paltry 37 by the end of April 2001.
To complement its legal action, RIAA employed a
team of Internet specialists to study what technical
action could be taken. But RIAA was aware that all
such efforts might not be sufficient to combat piracy.
RIAA is currently looking for more secure and controllable alternatives to MP3. This has brought forth
such standards as a2b, Liquid Audio, Beatnik, and
Microsoft Media Technology [4].
Perhaps what is more worrisome to the music
industry is not the advent of MP3 or copyright issues
but the emergence of a new Internet distribution
channel, dictated by consumers [10]. Through this
channel, consumers can purchase individual songs
instead of entire albums, from whomever they please.
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With powerful search engines (Napster, Gnutella, and
BearShare, to name a few), consumers can find songs
quickly without the aid of retailers. Consumers also
have to ability to purchase songs directly from artists.
This new distribution channel, if widely accepted and
practiced, threatens to do away with intermediaries in
the traditional distribution channel, which involves
the following steps:
1. The artist signs a contract with the record label to
leverage on the core competency of the latter,
such as marketing and distribution.
2. The artist records the album and the record label
produces the album in some media such as CDs.
3. The retailers buy the CDs and other media from
the record label.
4. The consumers buy the CDs and other media
from the retailers.
With this business model,
artists receive a small percentage of
the sales proceedings while the
What is more
record label gets the bulk of them.
worrisome to the
Given the Net’s low entry barrimusic industry is ers, new entrants in the music
not the advent of industry are outpacing traditional
MP3 or copyright record labels, which have limited
issues but the
experience with new technologies.
emergence of a
The music industry is at a point of
new Internet
inflection, where business dynamdistribution
ics change rapidly due to the viachannel, dictated bility of distributing music in
by consumers.
digital form over the Net. As more
and more consumers go online to
shop for music, key players in the
music industry must reexamine their value proposition
to remain relevant. Several traditional music retailers
have since launched limited services for consumers to
download music in digital form. The next section offers
some action items for the music industry to reposition
itself in order to face the challenges ahead.
The Future Music Industry
Brick-and-mortar (traditional) retailers are recognizing the value of Internet sales. For example, over the
last five years, Tower Records has worked with digital companies like Liquid Audio to provide digital
downloads. Tower Records has also used different
audio codecs (one of which is the a2b standard) and
different digital rights management systems. Some
retailers have been mindful of illegal copying and
have implemented secure, watermarked digital music
files. But at present, Internet sales involve only
selected singles rather than complete collections and
remain quite limited. For example, Tower Records
has only about 100,000 songs available for download
compared to tens of millions of songs available on
CDs. In a statement, Tower Records indicated it
wanted to make more songs available for digital
downloading but was somewhat stymied by its suppliers (the record labels) who might want to apply
their own digital download model. Other brick-andmortar retailers have created Web sites to sell CDs or
allow consumers to custom-make CDs with (currently limited) selected songs. These retailers can capitalize on their brand names to create a reputation for
delivering quality downloads. Consumers are likely
to trust these retailers more than unknown Internet
companies. To move toward interoperability, brickand-mortar retailers can take a further step to distribute music online in widely accepted industry
standards rather than proprietary standards.
Brick-and-mortar retailers can compete on the
basis of consumer services. For example, they can provide facilities in their stores for recording songs (in
MP3 or other standards) onto CDs or other media
that consumers can bring home. Sony, EMI, and
BMG have formed a partnership with companies
offering music via kiosks in record stores. This way,
consumers can compile their favorite songs onto CDs.
Even if consumers have the equipment at home to do
likewise, store facilities should be attractive in terms of
price, convenience, selection of songs, quality of
recording, and speed of recording. These facilities can
cater to numerous consumers who have no Net access
or who do not have the time and energy to compile
and record the songs themselves. Brick-and-mortar
retailers can charge a premium for rendering these
new value-added services.
These retailers can maintain their consumers by
exploiting the sociopsychological aspect of physical
stores that cannot be replicated on the Net. Physical
retail stores are social gathering places where music
lovers congregate to interact in relaxed settings. Cafes
with music can be set up in stores, which also sell
music-related commodities such as clothing, posters,
books, and magazines. Such an ambience provides
consumers with the social intimacy absent in the
impersonal, anonymous world of the Internet. Consumers can interact with familiar staff and likeminded music fans face-to-face. With engaging and
meaningful experiences, consumers may be encouraged to return to these stores. Tower Records has
begun such practices. Nevertheless, this is a challenging enterprise, requiring a keen sense of pop culture,
prudent consumer management, and financial support to succeed.
Action items for brick-and-mortar retailers include:
• Encoding a wide variety of songs in widely
accepted industry standards and selling these songs
via the Net;
• Offering facilities in stores for compiling songs
onto albums and charging a premium for these services; and
• Turning physical retail stores into social gathering
places with appropriate ambience for music lovers.
W
ith this new music distribution
paradigm, online retailers such as
RollingStone.com, Amazon.com,
CDNow.com, and MP3.com
may assume some traditional
roles of brick- and-mortar retailers. Such online retailers have established a strong presence in the music
industry through aggressive promotion and a track
record in fulfilling Internet orders. Besides selling
CDs via the Net, online retailers can take the lead in
offering consumers their choice of music in digital
form. After settling its legal issues, MP3.com has
relaunched its “Instant Listening Service.” This service allows users to have online versions of CDs they
purchased. From an account on MP3.com, they can
access their music files anytime, anywhere.
Since online retailers have the expertise and facilities to distribute music files over the Net at minimal
costs, they can adopt a competitive pricing strategy.
To facilitate delivery of music files, online retailers can
place servers at strategic places around the world to
serve their consumer bases. For example, servers holding Asian songs can be placed in Asian cities where
demands for such songs are high. Online retailers can
also allow consumers to sample songs by making these
songs playable from Web sites in live streaming format
such as Real Audio (with limited playable period). In
order to succeed, online retailers must make sure their
Web sites (their only sales channel) are accessible at
any given time. They need to invest adequately in
computer and network equipment to handle Net traffic at peak periods. Alternatively, online retailers can
team up with companies offering content delivery services globally, with a high-performance network
instead of the usual best-effort network.
Online retailers tend to have extensive consumer
databases. To better serve consumers, these retailers
can use data-mining techniques to chart consumer
purchase patterns and understand buyer preferences.
Consumer behavior (browsing and purchasing patterns) at the Web sites can be captured in cookies and
stored in databases. Consumer profiles can be created.
This knowledge can be translated into increased sales
through focused marketing efforts. For example, fans
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65
of a particular genre of music can be introduced to
other artists of similar genre automatically (perhaps
via email). Amazon.com has taken the lead by using
this practice. Many consumers were initially attracted
to Amazon.com not because of the good deals or the
wide selection of music but because of its personal
attention to users. Amazon.com’s Web site remembers
the identities and interests of its consumers. In sum,
online retailers can do well by employing a dual strategy of consumer intimacy (knowing consumer preferences) and convenient delivery (facilitating orders).
Action items for online retailers include:
• Offering selection of and distributing songs in digital form, and adopting a competitive pricing strategy; and
• Leveraging extensive consumer databases to examine consumer purchase patterns and engaging in
focused marketing efforts.
Traditionally, record labels play key roles in the
music creation and distribution process. They scan
the environment, discovering promising artists with
latent talents and enter into contracts with these
artists. They manage the music production process by
marrying artists with the right mix of coworkers (producers, songwriters, and musicians), handling legal
aspects of music creation, packaging artists for marketing purposes, and distributing music (songs on
CD or other media) through brick-and-mortar retailers. The increased visibility of the Net in the music
industry may rattle the pole position of record labels.
F
or a long time, record labels have given
brick-and-mortar retailers full responsibility of distributing music to consumers. But
with rising prominence of online retailers,
record labels must work with these emerging retailers or become online retailers themselves.
Three of the five major record labels (EMI, Sony, and
Universal) have begun offering downloads of music.
Other major record labels and several independent
labels (for example, Zomba and TVT) have
announced similar plans. Major record labels have
also teamed up with online companies (MusicNet
and Duet) to deliver music online. MusicNet is similar to Napster except for one main difference: the
songs expire after a time period if the subscription is
not renewed. Duet uses streaming but there are
doubts about the popularity of this approach. However, both approaches do not allow consumers to listen to music anytime, anywhere, and anyhow (on
whatever device, online or offline). Warner, BMG,
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August 2001/Vol. 44, No. 8 COMMUNICATIONS OF THE ACM
EMI, and other labels have entered agreements with
MP3.com, MusicBank, and other companies to offer
consumers the ability to store their music wherever
they are and whenever they want through the currently legitimized Instant Listening Service. Since
both types of retailers have their own unique competencies, record labels can attain maximal benefits by
distributing music simultaneously through both types
of retailers. With the online model, the increased
costs in marketing are likely to be offset by savings in
manufacturing and distribution costs. Moreover, by
moving downstream toward consumers, these record
labels can learn more about consumer preferences.
Of course, the relationship between record labels
and artists will change. Traditionally, artists are
dependent on record labels for music creation and
especially for music distribution. Now the Net makes
it possible for artists to handle parts of the music creation and distribution process. To earn a bigger share
of the sales proceedings, established artists can marry
up with coworkers and distribute their songs over the
Net, independently of record labels. To make up for
the possible departure of established artists, record
labels must compete with each other in their search
for new talent, to whom the services of record labels
will be most valuable. With intense competition, it is
prudent for record labels to concentrate on their core
competency of music creation. This way, record labels
can remain truly relevant and valuable to both established and new artists.
Realizing their lack of technological expertise,
record labels are striving to form alliances with Internet and media companies to encode music in secure
standards so as to battle piracy [3]. For example, the
RIAA has undertaken the Secure Digital Music Initiative (SDMI) [9], together with record labels, with
the objective of developing secure standards for music
files so they can be distributed over the Net without
being subjected to piracy abuse.
Action items for record labels include:
• Distributing songs to consumers through traditional and emerging retail avenues;
• Becoming online retailers and distributing songs
with a concept of anytime, anywhere, and anyhow;
• Focusing on core competency of music creation
and proactively searching for talented new artists;
and
• Strengthening strategic alliances with Internet and
media companies to develop secure standards for
encoding music files without sacrificing portability.
Established artists such as Sting, Wycelf Jean, and
Laura Fyji may break free from the restraining con-
fines of record labels and deliver their own music to
consumers via the Net. With their many years of
experience in the music industry, these artists no
longer need to rely on record labels. Some artists are
already raising their own visibility via the Net. For
example, David Bowie has a Web Site to reach out to
fans and sell songs to consumers (www.davidbowie.
com). Some artists are distributing their song samples
through their own Web sites at minimal costs. Other
artists have left their record labels to self-promote and
distribute their music via the Net. Besides artistic freedom, these artists stand to gain a large share of the
sales proceedings.
For new artists, however, the emerging scenario is
an interesting conundrum. The ease of accessing the
Net and the quality of MP3
files allow new artists to provide consumers with unprecedented amounts of song
samples. Soon, consumers will
be faced with a glut of choices
for songs and artists. When
this happens, new artists will
face tough competition in
their efforts to get adequate
attention on the Net. These
new artists can turn to record
labels, which can assist them in
getting attention through
intense marketing efforts.
Record labels can also facilitate
the music creation and distribution process for these new artists.
While the Net can bring about disintermediation,
it may also result in reintermediation, where new
companies move in to fill the void left by record labels
in the new music distribution paradigm. Such companies include traditional marketing companies
(Ogilvy & Mather is just one) and Internet marketing
companies (DoubleClick.com is one example). Other
companies (for example, Artistdirect.com) attempt to
play the roles of record labels but in a new Internet
context. Artistdirect.com manages Web sites for over
50 artists and groups, including big names like the
Rolling Stones and Aerosmith. With the new music
distribution paradigm, artists can look to such new
companies when seeking professional management.
Action items for artists include:
• Promoting and distributing via the Net for better
financial benefits (for established artists);
• Turning to record labels to receive support for publicity creation, music creation, and music distribution (for new artists); and
• Looking to new value-adding partners when doing
music distribution through the Net (for all artists).
Consumers will be the biggest winners with the
new music distribution paradigm. Key players in the
music industry will compete with each other to
deliver high-quality music in convenient or other preferred ways to consumers. The fierce competition and
the Net’s minimal delivery costs will drive down song
prices. Some key players may even offer songs for free
to attract more consumers to their Web sites and
instead generate revenue from advertisements. For
example, EverAd (an New York-based advertising
company) is testing a system of embedding advertisements into the free music that it offers to visitors of its
Web site. When a song is played,
a series of advertisements will
appear and remain until the song
MP3 files allow
is finished playing. New business
new artists
models that are centered on conto provide
sumers and driven by their needs
consumers with
will emerge.
unprecedented
Action item for consumers
amounts of song include:
samples. Soon,
consumers will be • Exploring alternative music disfaced with a glut
tribution channels available to
of choices for
them and purchasing songs
songs and artists.
through their preferred
channel; and
• Getting music anywhere,
anytime, and anyhow.
The Piracy Issue
Piracy remains a nettlesome issue despite efforts by
RIAA to clamp down on illegal music distribution
Web sites. The advent of portable MP3 players and
similar technologies exacerbates the situation by
encouraging piracy and copyright infringements [7].
But on the other hand, the prevalence of technologies
supporting specific industry standards also facilitates
development of the new music distribution paradigm.
With the need for widely accepted industry standards,
the piracy issue can be alleviated through secure standards, legislation, and education.
RIAA started SDMI as a forum to bring together
parties that can contribute toward development of
secure standards for distribution of music in digital
form. To be effective, guidelines put forth by this
body of participants must be adhered to universally
with the cooperation of key players in the music
industry. One way to alleviate the piracy issue is to
promote the use of watermarking when encoding digital music [3]. Watermarking is a process of embedCOMMUNICATIONS OF THE ACM August 2001/Vol. 44, No. 8
67
ding concealed identification and tracking information directly into encoded digital music. This solution
can be complemented by implementing playback
devices that recognize and play only legal MP3 files.
As an example, the Serial Copy Management System
has been used to encode original music with security
information and playback devices built around this
system that can differentiate legal from illegal music.
Although such security features are not impregnable,
these may suffice to discourage consumers from illegally obtaining music. If the music industry makes
the effort to encode songs only in widely accepted
secure standards, fewer opportunities for piracy will
be available. Only with such concerted efforts can the
thorny issue of piracy be controlled.
With regards to legislation, the Digital Millennium
Copyright Act (DMCA) [7] was passed into law in
1998 to address legality issues in the music industry.
The issues covered in DMCA include defining penalties for piracy of original music, setting the context of
copyright infringements, and establishing rules for
Web-casting technologies. Having such legal infrastructure is vital for effective control of piracy activities, enabled in part by advanced technologies.
DMCA is applicable to music licensing organizations,
Web-casters, Web-casting recipients, artists, record
labels, and retailers. Such a law should be extended to
other parties, such as manufacturers of portable playback devices, to encourage them to manufacture
devices compliant only to secure standards. Besides
the U.S., other countries can contribute to the music
industry by enacting similar laws.
Education can complement secure standards and
legislation. Some students are currently using college
servers to establish their own music Web sites and
make unauthorized copies of original music. The
Internet and MP3 facilitate the proliferation of these
activities, despite policies in many colleges that forbid
such activities. Because the Net is a relatively new technological frontier, there is widespread misconception
about what is legal in the context of music distribution
via the Net. Many college students believe their illegal
music Web sites can benefit artists by functioning as a
promotional vehicle. Others are simply unaware that
it is neither ethical nor legal to create such Web sites.
Education is clearly necessary to help college students
and others understand how their actions are potentially detrimental to the music industry.
Complete elimination of piracy is a utopian idea;
there will always be a demand for pirated music, and
rewards for piracy are simply too tempting. But with
appropriate measures (secure standards, legislation,
and education), the piracy issue can be alleviated. For
example, appropriate measures have helped to reduce
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software piracy in Asia, where it was most rampant. A
study showed the software piracy rate in Asia
decreased from 64% in 1995 to 49% in 1998. Worldwide, the software piracy rate has fallen to 38% in
1998, the first time it has gone below 40% [2].
Conclusion
Lawsuits filed against Internet companies serves to
underscore the impact the Net has on the music
industry. However, lawsuits are not the best approach
for record labels to deal with emerging technologies.
Lawsuits are ephemeral and serve only as a delay tactic for record labels to catch up with emerging technologies. While the issue of contention in lawsuits is
often the protection of copyright materials, the real
concern for record labels may be the ceding of
monopoly power in the distribution of music.
The Internet is bringing new key players and business models into the music industry. Technological
advancements and emergence of industry standards is
accelerating such changes. Some key players in the
music industry have readily embraced the Net, hoping to reap first-mover benefits. Others have been
cautious about jumping on the Internet bandwagon.
Consumers will be the biggest winners amidst
intense competition. All other key players in the
music industry must concentrate on their core competencies and reexamine their value propositions so as
to remain truly valuable and relevant to consumers.
What remains to be seen is whether brick-and-mortar
retailers or online retailers (if any) will prevail. c
References
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Commun. ACM 41, 8 (Aug. 1998), 35–42.
2. Global Software Piracy Report. A study conducted by international planning and research corporation; www.siia.net/news/releases/piracy/
98globalpiracy.htm.
3. Lacy, J., Snyder, J.H., and Maher, D.P. Music on the internet and the
intellectual protection problem. In Proceedings of the IEEE International
Symposium on Industrial Electronics, 1997, 77–83.
4. McCandless, M. The MP3 Revolution. IEEE Intelligent Systems 14, 3
(Mar. 1999), 8–9.
5. Napster Helps RIAA Again; www.slashdot.org.
6. Noll, P. MPEG digital audio coding. IEEE Signal Processing Magazine
14, 5 (May 1997), 59–81.
7. Paez, M.F. and Anderman, J.M. Digital music and the digital millennium copyright act: Copyright piracy, liability, and licensing. Working
Report, Lowenstein Sandler PC, 1999.
8. Recording Industry Association of America; www.riaa.org.
9. Secure Digital Music Initiative Specifications Version 1; www.sdmi.org.
10. Silver, J., Interview at the digital distribution and the music industry
meeting, 1999; www.firstconf.com/digitalmusic.
Calvin K.M. Lam (clam@comp.nus.edu.sg) is a graduate student
in the Department of Information Systems at the National University
of Singapore.
Bernard C.Y. Tan (btan@comp.nus.edu.sg) is an associate
professor in the Department of Information System.
© 2001 ACM 0002-0782/01/0800 $5.00