A Musical Free-for-All on the Net

Until the moment Katie, 14, turns on her computer, the high school freshman is the recording industry’s dream. She is from an upper middle-class family in Pacific Palisades has a healthy allowance, a curiosity about the latest tunes and a brother who works for Epic Records.

But when Katie slips in front of her PC and logs on to the Internet, she becomes the $40-billion recording industry’s greatest fear.

“I get all my songs in [America Online] chat rooms,” said Katie. “I don’t buy albums anymore. I get my singles for free.”

What alarms music executives is the simplicity of it all. Go to any search engine on the World Wide Web and punch in “MP3,” the name of a compression technology that allows computer users to quickly download free, CD-quality songs.

Occasionally, the search uncovers songs legitimately up for sale by record companies, who will take a credit card number and allow the user to download a song.

But most often, people discover one of the thousands of Web sites offering pirated songs by well-known artists.

How big is this? After the word “sex,” the phrase “MP3” is the most popular term searched on the World Wide Web, according to research by SearchTerms.com.

Despite ties to the software hacker scene, music pirates on the Net are not just disenfranchised teenage boys. They are medical students at UCLA, high school athletes, 14-year-old girls who live in quiet suburban neighborhoods.

And they are scaring the recording industry so badly, it is doing what was once unimaginable: waging war against young music pirates.

For the last two years, the Recording Industry Assn. of America has been working to shut down MP3 Web sites that house pirated songs and sending legal warnings and “informative” letters to site operators and university administrators.

It also launched a national campaign designed to scare college students away from MP3 piracy and convince universities to take a stronger stance against pupils who use their campus accounts to swap these files.

So far, at least three college students have been expelled and others suspended over this, Recording Industry Assn. officials say.

“When it comes to music pirates on the Internet, we will find them and shut them down,” said Cary Sherman, senior executive vice president and general counsel for the association. “Somehow, some way, kids need to be taught that what they’re doing is illegal and, in our opinion, immoral.”

Music for the Masses

For fans like 16-year-old “Filter,” collecting MP3 music is an obsession. He is a member of Phreemp3, one of several self-described MP3 gangs that troll the Net in search of the latest, greatest tune. These gangs adhere to a simple goal: To gather and distribute more music than the next guy.

Money is never exchanged, because the youngsters don’t swap tunes for a living. To them, it’s a braggart’s game, not theft. The more that manufacturers attempt to lock music with serial numbers and anti-copy measures, the more fun it is to break. In these cases, they find ways to grab songs that normally are locked until purchased.

“My parents know I do this, but they think I get [the files] legally,” Filter said. “They’d probably freak if they knew how many thousands of files I have.”

For these groups, the emphasis is on quantity, not quality, and their members fall into two categories: The “uploaders” spend hours collecting pirated files off the Net, or take audio CDs and transfer the songs to the MP3 format. The “servers,” like Filter, are in charge of giving these songs to as many people as possible.

On a recent afternoon, Filter signed on to America Online and slipped into a private chat room called Audio. A software program on his computer clicked on and automatically alerted everyone in the room to his Phreemp3 status. Other chat members, using special channels that act as “homes” for MP3 trading, then plundered through his extensive list of pirated music and grabbed whatever they wanted.

The most popular channels house automated programs that deliver MP3 singles after receiving specific text commands. Filter just sits back and watches.

He will repeat this process throughout the week. By Sunday night, he said, he will have distributed 35,000 songs to other AOL members.

“You can’t legislate morality, and you can’t debate the ethics of intellectual property with a child,” said Dan Lavin, research director for IV Associates, a Burlingame-based consulting firm. “Hollywood learned that with the VCR. Fundamentally, people don’t think it’s wrong to re-record music. And it doesn’t help that record companies are big, faceless corporations, and rock stars have a pampered image.”

The roots of the problem tap into the music industry’s own dreams of selling and distributing music on the Internet.

Companies such as Liquid Audio and AT&T;’s a2b Music handed record companies the tools to do it. The key was to digitally compress a song enough to download relatively quickly off the Net, but make sure it still sounded like a CD. Yet these were proprietary tools, which meant that people couldn’t listen to an a2b song on a Liquid Audio player, or vice versa.

Enter MP3, an open standard allowing any computer-savvy fan to unlock its code. Soon, hundreds of people posted MP3 software on the Net, free for all to see and use. Any song stored as an MP3 file--legitimate or not--could be played on any computer with an MP3 program.

Today’s most popular MP3 program--WinAmp by NullSoft Inc.--was developed by a 19-year-old from Arizona. So far, the company claims 10 million people have downloaded WinAmp.

Record executives dismissed MP3 as a gear-head fetish--until last fall. That’s when Diamond Multimedia Systems Inc. unveiled Rio, a $199 Walkman-like device that let people pull these stolen digital tunes off their hard drives.

Suddenly, the dynamic changed from the digital elite rocking out in office cubicles, to everyday fans listening to MP3 tunes at the gym or in their cars. To prevent Diamond from launching the Rio for the holidays, the Recording Industry Assn. filed suit against the manufacturer in Los Angeles federal court, seeking a temporary restraining order.

The suit asked Diamond to comply with music copyright laws, which let consumers use devices like digital audiotape machines to make a copy of a song for personal use. In exchange, manufacturers pay a royalty to copyright groups and include a system lock in the device that prevents people from making perfect serial copies for mass distribution.

The Recording Industry Assn. claimed that the Rio was an illegal product, because Diamond had not paid any royalties under the Audio Home Recording Act. Diamond disagreed, saying the law didn’t apply to computers and peripherals, and that the Rio was a passive playback device that couldn’t be used to make multiple copies.

The court ruled that the Rio is an audio recording device, but it refused to issue a preliminary injunction because redesigning the Rio wouldn’t curtail the explosion of illicit MP3 files. The association is appealing the decision, while Diamond filed an antitrust countersuit. Both are pending.

The recording industry is trying to replace MP3 with alternatives it controls. Today, IBM and the five major record conglomerates will unveil a secure music delivery system that lets consumers shop for and download entire albums online.

But for a secure, standardized system to work, “we need a lot of songs by artists that people actually care about, and to make it easier to buy than to steal,” admitted Larry Miller, chief operating officer of a2b Music. “That’s a place we need to be. Right now, we’re very far from it.”

Meanwhile, several arenas are beginning to converge to push MP3 further beyond the control of the recording industry. The cable television industry is connecting more and more households to faster Internet connections. Several hardware manufacturers expect to debut Rio-like MP3 players later this year.

And last Monday, Web giant Lycos Inc. launched an expansive MP3 search engine, which provides a one-stop shop for finding online tunes, both legitimate and pirate.

Courting the Youth Market

The industry also must confront a serious side-effect: a generation of music fans weaned on MP3 who won’t buy into the album format. This attitude undermines the economic foundation of the record industry, whose profits are garnered by albums that wholesale for about $10.

Despite their penchant for piracy, young fans still represent an important class of shoppers for the music business. According to the Recording Industry Assn., the 15-to-24-year-old demographic was responsible for 32.2% of music sales in the United States in 1997.

But they are not buying as enthusiastically as they did in the past. After enjoying double-digit growth during the late ‘80s with the birth of compact discs, U.S. sales began to slow.

Total record-unit sales rose only 5.7% from 1996 to 1997, from 616.6 million to 651.8 million albums, according to SoundScan, a New York research firm that electronically monitors music sales for the industry. In 1998, it grew 9%, to 711.0 million.

As the industry focuses on album sales, music conglomerates are scaling back their singles business. Yet the Internet and its young users thrive on singles because the files are smaller and easier to transmit.

But music companies can’t survive by selling singles. Indeed, some of the biggest pop songs produced in recent years never even made it to that fading format. The reason is simple: The profit margin on singles has become so small that they are seen as more trouble than they’re worth.

“How the technology is shifting consumer habits is what’s really scaring the recording industry,” said Bob Kohn, chairman of Good Noise Corp., an online music company based in Palo Alto. “That’s why it’s in their interest to fight MP3.”

Paying the Price

The recording industry insists it only cares about protecting artists’ rights.

With the speed and ease of transmitting music over the Internet, the potential harm to copyright owners is “exponentially greater” than traditional forms of piracy such as copying audiotapes, warn industry officials. Music executives say they are following cues from the software industry and cannot afford to let consumers believe that music is a free resource to those with the right equipment.

Both the software and music industries backed the No Electronic Theft (NET) Act, passed by Congress in late 1997. Under NET, penalties for piracy can run as high as $250,000 in fines and three years in prison per infringement.

While the NET Act and subsequent laws give copyright holders legal bite, there are limits. Internet service providers and nonprofit groups generally aren’t liable for what their users do.

To teach college students and staff about copyright issues, the RIAA launched an educational program last year. Dubbed the “Soundbyting” project, it includes booklets, posters and electronic Web links to information on copyright law and the music industry. Hundreds of schools now participate, said Denise Incorvaia, associate anti-piracy counsel for the Recording Industry Assn.

When the association finds pirate sites, officials notify the Internet service provider--often a university--which then typically asks the site’s owner to remove the offending material.

“We are getting serious about music piracy on the collegiate level,” said Incorvaia. “The schools know that there’s no excuse for students storing or distributing MP3 files.”

School officials, seeing a rise in MP3 cases, seem eager to comply. Over the past year, Texas A & M has placed students on deferred probation over the issue, while the University of Texas at Austin has suspended one person for distributing pirate music files.

At least three college students have been expelled in the past year because of pirate MP3s, said Incorvaia, declining to say where the expulsions took place.

Thomas Putnam, director of computing and information services for Texas A&M;, recalls one case last school year in which a student refused to pull down his MP3 files. “By the time things were getting pretty serious and we were tossing around the word ‘expulsion,’ this particular person graduated,” Putnam said. “We just took the files off line ourselves.”

Educators say they are more concerned with conserving their technology resources and less interested in policing their students for copyright infringement. Web sites that offer pirated music tend to attract a lot of traffic, which can slow down the university’s entire network.

Policing the MP3 files, however, can be nearly impossible. At the University of Michigan, students who live on campus have high-speed connections to the Internet in their dorm rooms. Often, students store MP3s on their own hardware--not the school’s.

“What are we supposed to do, go room to room and search through every single PC? No way,” said Dora Furlong, a user advocate who handles cases of student computer crime at the university. “Besides, it’s an invasion of their privacy.”

The record industry says it doesn’t care. Taking advantage of extended protections offered by federal Internet laws, particularly the recently passed Digital Millennium Copyright Act, the association says it will roll out stronger measures, including legal action. “These are the businessmen and women of our future, and they should know better,” said Frank Creighton, senior vice president and director of investigations for the Recording Industry Assn.

This month, the group plans to alert colleges and commercial Internet service providers that, if the association serves them with a subpoena, they will have to hand over the name of students operating pirate Web sites.

“We’d like to work together with Internet providers and universities to educate them about these laws,” Creighton said. “We expect to file a wave of subpoenas [later] this year. . . . We will know who these students are.”

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SOUND SYSTEM: IBM is unveiling a system to deliver songs over the Net with music company support. C1