What Will Be the Net Effect?

The prophets and profits of the music industry say a new world is fast approaching, one where you can hear any song you want, any time you want . . . with the mere click of a button.

This would be a world where you carry your favorite songs around with you on something that looks like a credit card, plays like a compact disc and fits in portable players.

A world where minutes after a concert’s final note, fans with those memory cards flock to lobby kiosks to buy an instant copy of the show to take home--where an e-mail from the band is already waiting to thank them for attending.

Sound like Jules Verne territory?

Some of it could be reality in two years, and all of it within eight to 10, industry leaders agree.

What about your compact-disc collection? The CD will fade in the next five years and could be obsolete as early as 2009, according to some projections, replaced by “flash memory” devices and the Internet’s digital download capabilities.

If that swirl of possibilities leaves you feeling giddy, intimidated and nervous all at once, perhaps you can begin to imagine the breathless state of the music industry in the summer of 1999.

“In terms of music, it’s a seismic blast,” says R.E.M.’s singer Michael Stipe. “It could really destroy the system that’s set up now. I think that’s really healthy.”

For better or worse, the drumbeat of the music world will soon be accompanied by the hum and whirl of computers, and terms such as “digital download” and “music streaming” seem set to become as familiar to our ears as “hi-fi” and “audiocassettes.”

But unlike past innovations, the music industry has not been setting the pace this time.

While record companies have been researching these frontiers for a decade, it is a computer file compression code called MP3 and its wildfire spread across the Internet in the past two years that have turned the future into a near place. A legion of casual “pirates,” many of them students using the high-speed Internet access available on campuses, has been swapping and giving away illegally copied music. The industry is now scrambling to come up with its own, secured format and hoping to stall the growth of piracy until it can offer consumers a viable, legal--and profitable--alternative.

To that end, leaders in the recording industry and electronics manufacturers agreed last week on early standards for a new breed of portable digital music players. Those devices will hit the market by December and should instantly heighten both consumer interest and piracy--continuing the music industry’s love-hate relationship with the new technologies.

The tumult has a dizzying number of subplots: Does this mark the twilight of the major record labels, or the eve of their greatest payday? Can digital piracy really be stopped? What happens to record stores? Should artists see the Internet as a wide, liberating landscape or just a new way to get lost in the crowd.

And are they really getting rid of CDs?

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“I’d say we have a good 10 years left in the CD format,” says Strauss Zelnick, delivering the survival forecast for the compact disc without remorse. “I could be wrong, but I don’t think so.”

Zelnick is president and CEO of BMG Music, which has sold quite a few CDs in recent years with youth pop acts such as the Backstreet Boys, Britney Spears and ‘N Sync. Saying farewell to the format may cause replacement angst for fans, but that, he says, is the price of progress.

“I had a lot of vinyl records too,” he said, “but now they’re all probably sitting on a Salvation Army truck somewhere.”

While some other industry leaders interviewed said the CD would hold on for two decades or more, all believed that the Internet and new flash-memory devices would begin pushing aside the shiny disc in the next decade.

But how exactly will music be bought and sold in the years to come?

Many envision music buyers compiling digital jukeboxes at home on powerful household machines that will be part computer, part television and a conduit to the Internet. Fans will pluck songs, albums or videos straight from the Internet (legally and for a price, industry leaders hope) and add them to their vast collection.

Zelnick predicts that within five years music buyers will be loading music files from their home computers to memory cards they can then play in their cars or in hand-held players.

So what about record stores?

The music retail realm has already been hard-hit by thin profit margins, leading to numerous consolidations and retreats. And then there are studies showing that youthful fans are spending more and more hours online. Even with all that, no one seems to be predicting music store extinction.

“Not everybody lives in nice houses,” says Jimmy Iovine, co-founder of the Interscope Records label. “People want to get out of their house. Who wants to live in front of a computer?”

The most frequently invoked metaphor in the music business these days is the advent of videocassette recorders in the 1980s and their impact on the film industry. Theater owners worried that the VCR would kill off their business, but in fact the outcome was the opposite. The American romance with movies intensified and expanded on both the silver and small screens.

Jim Griffin, whose Cherry Lane Digital consulting firm has clients such as Microsoft and Universal Music Group, says that music stores of the future will sell “beautiful talismans” and collectibles, and offer new events and experiences. They will still sell music in “hard product” and also as downloads at kiosks, most industry observers predict.

But Griffin suggests there will be one more music option in the brave, new world ahead: an all-you-can-eat subscription.

Instead of buying music on hard product or as a digital file, fans will be able to “rent” music with a flat monthly fee that allows them unlimited access to a vast cyber-archive of songs. The music is “streamed” to listeners much like radio, but with the listener writing the playlist.

The breadth of the selection would be stunning, Griffin says, unfettered by record store shelf space limitations or manufacturing costs. Every Rolling Stones concert ever taped, every Billie Holiday outtake, every one-hit wonder--all would be instantly available. Artists would be paid based on the number of times their songs were selected.

A number of industry leaders privately scoff at Griffin’s theory, with many saying the subscription fee would have to be prohibitively expensive. “It doesn’t seem practical,” one said. “How do you get the music together and, more importantly, the money?” But the consultant points out that there are some unresolved issues with the more popular plan to create jukeboxes out of every home computer. For example: How will fans react the first time a glitch instantly wipes out their entire music collection?

And if it’s not clear exactly how the music will be sold, who can be truly certain about who will be selling it?

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“It’s like this,” says Chuck D., the pioneering rapper and online entrepreneur. “There’s a fat guy on a street corner selling M&Ms; to all the people waiting in line, he’s making all the money, and they’re not happy about it. Then the bottom of the bag rips, and the candy goes all over the sidewalk. What are the people going to do? They start grabbing it up, and he’s standing there saying, ‘No, wait, that’s my candy!’ ”

The Public Enemy founder lets out a hearty laugh as he finishes the sweet scene. “That fat kid . . . he’s the record industry.”

The tumbling candy is a metaphor for the music, money and power that many see slipping away from the five major music conglomerates (Bertelsmann Music, EMI Music, Sony Music, Seagram-owned Universal Music and Time Warner) as the Internet threatens to redefine the entire industry apparatus.

For Chuck D., a longtime foil to the music business powers that be, it’s as simple as this: Why do you need the major labels if you can sell music without compact-disc factories, delivery trucks, radio stations and stores?

Says the rapper, “The music industry as it is today is a banking system; it’s not about art. They’d sell a hubcap with cheese on it if they could. Who needs them?”

That sentiment is deeply appealing to many artists and to a growing crowd of online music enterprises that sense a new world order--or at least a world of new opportunities--opening up. Some, like Chuck D., see the existing recording industry conglomerates teetering in the new system, but others believe the music market will explode in size and leave plenty of room for existing powers and the upstarts.

“The majors are a railroad company, and Ford just went into business,” says Marc Geiger, whose ArtistDirect handles Internet “stores” for more than 100 artists, including the Rolling Stones, Beck and Korn. “What they do now will decide their future. There’s artists, and there’s fans; everything else is just ‘middle.’ If the majors don’t recognize that, they’re going to circle their wagons--and the Indians are going to run right past them.”

The lessons learned by other industries facing sea changes have been well noted by today’s music powers, says Hilary Rosen, president and CEO of the Recording Industry Assn. of America.

“The phone companies may have let cellular develop without them, and the television networks may have let cable grow up without their participation, but the majors are not going to cede the Internet,” Rosen said. “They are going to be participating in a big way.”

Some of the ground rules may change, however. Al Teller, whose Atomic Pop company two months ago put the new Public Enemy album, “There’s a Poison Goin On,” out over the Internet, says artists who gravitate to the new companies will get far more handsome deals than they can find at the traditional companies.

“The majors are like an oil tanker--they have to start turning their steering wheel now to change direction,” says the former MCA Music Group chairman. “And we’re a little speedboat.”

Can there be a day when the oil tankers sink?

“I think that’s overreaching,” says Thomas D. Mottola, chairman and CEO of Sony Entertainment. “The key issue, the most important thing here, is that distribution of music is just one service we provide to artists. There’s marketing, promoting, touring, the work with radio, artist development. . . . It does not matter what the technology is; in the end it’s about the music.”

It is also, of course, about money.

A heady rush of money and speculation into Internet companies has led to a near-daily announcement this year of some new music Web site, be it a merchant, search service or quasi-label.

The upstart Internet companies are not the only new players who will be sharing the table with the major labels. Telecommunication companies such as AT&T; and online powers such as America Online and Yahoo may decide to become music companies themselves, signing artists to provide coveted “content” so they can bundle their music with hardware sales and strengthen brand names. It would be easy for those communication companies to license out the manufacturing of CDs or partner with existing labels.

It sounds shocking, but many industry insiders say it would not be a surprise to see a communications or computer giant sign a major artist sometime in the next year or two.

Pearl Jam, the Foo Fighters and the Smashing Pumpkins are among artists whose existing contracts are near completion. Will one of them become an AOL band in exchange for paydays and handsome stock options that no major label could reasonably match?

And why stop there? Those companies that own the cables and make the hardware may decide to buy up entire existing labels to give them rights to music libraries. “Look at the price of PolyGram,” says Jim Guerinot, manager for the Offspring and No Doubt. “That’s a bad weekend for Bill Gates.”

Don’t be surprised, either, when corporate logos start popping up in videos and attached to the computer graphics that will be the electronic album covers of the future.

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“Give it to me bay-bee!” That’s the first line of the hit Offspring song “Pretty Fly (for a White Guy),” and the fans must have shared the sentiment. By one estimate, there have been 18 million illegal downloads of songs by the popular punk outfit--18 million--and no title has been ripped off more often than the catchy “Pretty Fly.”

So why is Guerinot smiling? According to conventional logic, the manager of the Offspring should be scrambling to shut down the pirates and retrieve the plunder. Instead he’s doing arithmetic.

“There were 18 million downloads, and we’ve sold 8 million copies of the new album,” he says, referring to the worldwide sales of the band’s “Americana.” “If that ratio holds up, I want 36 million downloads so we sell 16 million albums.”

About 8,000 Offspring fans have responded to an e-mail survey, and the results show that even though 76% have downloaded the band’s music via the Internet, a full 90% of the total respondents purchased “Americana.”

That suggests the music industry has been somewhat shortsighted on the piracy issue, Guerinot says.

“Everybody has started off by saying, ‘Is this hurting us? Is this cannibalizing sales?’ I think part of the dialogue should be, ‘Is this helping?’ So far, the psychology has been literally upside down.”

Indeed, it has been hard for many people to talk calmly about MP3, piracy and related issues. MP3, a free and “open” code (the latter means it works with a wide range of systems), sprang from a German research facility (it was created there to compress audio files of CD quality to one-tenth their size for easy transport). But it’s now a hot-button buzzword after becoming as ubiquitous as pizza boxes in college dorms.

The MP3 format is not itself illegal, nor is it unique. There are other file formats and “players” that can be used to listen to music files, including three others being weighed by the recording industry (including Liquid Audio, Windows Media Player and a2b Music, all of which offer varying degrees of sound and security quality).

The bottom line: Every hit song of the past year is available for free right now on the Internet if you are willing to break the law.

There are also thousands of free and legal songs--but most of them are by obscure artists. Several major acts have had spats with their labels when they have tried to post free songs--most notably, Tom Petty, whose “Free Girl Now” was yanked off MP3.com at Warner Bros.’ insistence after two days and 175,000 downloads.

But that is not to say all artists are rushing to embrace free music offerings and that the labels are the sole voice of restraint. Some artists and managers privately say they are leery of devaluing music by making fans accustomed to not paying for it.

“You get sugar packets for free at restaurants, so you don’t think much of their value, do you? I don’t want that to happen to music,” says the manager of a major pop act who asked that his name not be used. “But you don’t want to be seen as fighting this great movement.”

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Many who do worry about pirating say it will be a fact of life in the new market but believe it will be a manageable problem.

“There’s much gnashing of teeth and tearing of hair, but I believe it will take care of itself, and the piracy stuff will begin to go away,” says Jason Olim, president of CDNow, an online music merchant.

Olim compares the current trepidation to the record industry fear during the advent of FM radio and blank tapes. “They were afraid no one would buy an album again--and the market boomed.”

But the push to create a secured download will not create a panacea. Even if music sold via download cannot be copied, online pirates have access to the same songs from another, pristine digital source: compact discs.

Thousands and thousands of songs are currently posted on the Internet, and most of them were likely culled from CDs, not the Internet.

“There can be no control until the death of the CD,” says consultant Griffin, who was the technology chief for Geffen Records. “The problem is, how do we kill the CD?”

That issue is somewhat moot, according to Mark E. Hardie of Forrester Research Inc. and author of a recent market analysis that’s been widely cited by industry leaders. Hardie says no matter how easy it is to steal music, most consumers would rather pay--and they will as soon as the music industry gives them the means and music to do so.

More than a third of online consumers say they would download music, according to Hardie’s research. Hardie predicts that consumer interest will lead to a $1.1-billion business in paid downloads in just five years and then far beyond. That new way of selling music will eventually energize the entire industry, Hardie says. “The music industry is a $100-billion industry trapped in a $40-billion body,” he says. “That’s going to change.”

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For artists who find commercial success elusive, there is far less fear of the Internet undercutting their sales. To these musicians, the reach of the Internet is full of promise, not danger.

“I don’t think you lose anything by giving something away; it’s a good shot for people to hear an artist they may not know yet,” says singer-songwriter Randy Newman. “I’m not Garth Brooks. I don’t sell a million albums in the first week out. Anything to get people to notice me is of use to me. . . . It’s a battle for attention these days.”

The artistic life of major music acts could be dramatically different in a matter of years. For one thing, many may no longer have their work automatically sold on an album, today’s linchpin format. Artists could opt for a steady stream of new work--say a song a month--instead of putting out a 12- or 15-song album every few years.

The albums that exist may be priced differently as well, predicts Hardie. Albums by marquee acts may cost much more than unknown artists--perhaps a range as dramatic as $3 to $50--as “branding” becomes a more central part of the business.

The Internet will include vast reservoirs of songs as a multitude of artists launch their careers for very little cost. All those voices--it’s a daunting thought for fans and artists alike, says Bono, the singer of U2.

“If it’s just words and not to an end--and not coherent--maybe it’s a conversation we can do without,” the Irish singer says. “The bottom line of technology is, ‘What are you communicating?’ And that’s still more important to me than how you’re communicating.”

Still, for most music makers and fans alike, there is a glittering allure to this near-future. To many of the true believers pushing for the realization of these visions, it’s already getting hard to look back.

“All this stuff that’s going to happen, this I get,” consultant Griffin says. “Really, the stuff I wonder about is how the heck we did it all in the past.”