For Entertainment Firms, the Choice May Be to Adapt to the Internet or Die

Leaders of the two most famous and prominent industries in Los Angeles--music recording and film--don’t quite know what to make of the Internet.

On the one hand, they’re watching a whole new generation of Internet entrepreneurs strike it rich with new online ventures. The billion-dollar stock portfolios of twenty- and thirtysomethings running Internet-related companies are bound to get your attention.

On the other hand, the Internet threatens to shake the foundations of both the music and film industries. It’s not uncommon these days to hear young e-commerce pioneers predict the imminent death of big music companies and film studios.

Mark Cuban, co-founder and president of Broadcast.com, a Dallas company that specializes in streaming video broadcasts on the Internet, told an audience just this in his keynote speech at the Multimedia.com convention in San Jose two weeks ago. Cuban said the six companies that control film distribution and the five companies that dominate music recording will either die or be totally unrecognizable within five years.

That prospect has led to some signs of panic among movie and music moguls, especially those in the music business. The focus of their concern is currently on protection of intellectual property rights, or controlling the way artists and their production, distribution and marketing companies are compensated. But that fight may be masking deeper alarm over whether the Internet will restructure the entertainment industry and throw slow-moving companies into history’s dumpster.

The leading edge of a fight that may determine the character of the $40-billion-a-year music recording industry is a bitter controversy over a technology that most people over 40 have never heard of: MP3. This is the term for a compression algorithm used to squeeze digital audio by a ratio of 12 to 1. It is now widely used to compress music so the audio file can be sent via the Internet or stored on a hard disk. Music compressed in MP3 can be expanded and played by an MP3 player with near-CD quality sound, yet the files are small enough to be attached to an e-mail message.

MP3 has been the rage among young people over the last year. They search the Internet for MP3-encoded music and create archives of songs that can be played on a PC like a jukebox. “MP3” is now the second-most widely used search term on the Internet after “sex,” and the search engine Lycos features links to more than half a million MP3 songs. There are new and hot MP3 music sites on the Web such as https://www.MP3.com and Goodnoise (https://www.goodnoise.com/). New MP3 devices are popping up nearly every day, such as the Diamond Multimedia Rio player, which looks like a Sony Walkman; new home audio players that plug into stereos; and even MP3 players for the car. An MP3 car player from Empeg (https://www.empeg.com) promises to hold 35 hours of CD-quality music.

The use of MP3 has drawn the wrath of the Recording Industry Assn. of America, a trade group that fiercely defends the interests of the music industry. The RIAA has waged a war against music pirates using MP3 over the last year, by notifying college administrators, for example, about illegal sites of pirated MP3 music on college Internet servers.

Last week, the group threatened to sue Lycos for its links to illegal songs. Also last week, it released the results of a survey that indicated an annual downturn in the percentage of music purchased by people between the ages of 15 and 24, a prime music-buying group. The RIAA report said, “Potentially the rise of the Internet as a free entertainment center, and the accompanying availability of free MP3 music files, could be contributing factors” to this trend.

The RIAA has launched an industry-sponsored project to develop an alternative compression standard for selling music on the Internet, the secure digital music initiative, a technology that will include copyright protection schemes such as encryption and watermarking, a technique used to embed copyright information in the digital bits of the music itself. But the SDMI standard may be overwhelmed by the tidal wave of MP3 music and the MP3 players that vendors are releasing all the time.

Microsoft is also getting into this game. It recently announced its own alternative, MSAudio 4.0, which will be previewed at a Microsoft event in Los Angeles scheduled for April 13.

There is controversy among young people about the impact of MP3 on their music purchases. Online bulletin board discussions about MP3 feature posts by some young people who admit to having hundreds or even thousands of pirated MP3 songs, and some of these people say they don’t think of this as illegal. Others say that sampling an MP3 song sometimes makes them buy the CD. And quite a lot of posts simply say that record companies aren’t putting out music that’s worth buying.

The MP3 craze has led some bands to view the technology as a way to become known without the hassles of a recording contract, and some established musicians have experimented with MP3 releases outside the boundaries of the conventional music publishing business.

Rock musician and MP3 fan David Bowie wrote an article in January for the London Guardian in which he said: “Not surprisingly, there is a lot of resistance to overcome. Record companies may resist the Web until the last minute before being forced into action. My record company isn’t exactly jumping on board, but . . . you don’t have to stay with a record company forever.” Bowie added: “If I were starting out on my career now, I might even be more interested in the Web than in music. It’s absolutely the new way of communicating.”

Mark Cuban has said in his recent speeches that he believes the industry’s SDMI initiative will fail and that there will be no way for recording companies to prevent copying. Most copy protection schemes, such as for software programs, have died. The real question, says Cuban, will be how the conservative entertainment industry will adapt to the Internet, and that may entail new business models that it is ill-equipped to exploit.

What’s most interesting about this new terrain, however, is that the music and film industries, like so many others in the United States, have been consolidating and becoming more concentrated at precisely the time when new technologies are making it easier and cheaper for both artists and consumers to circumvent the large companies.

These are countervailing trends, increasingly at odds with one another. Just as Microsoft apparently locked up the operating system market, up popped Linux and Open Source software. And just as recording and film companies dwindled to a handful of behemoths, we’ve seen an explosion of independent producers, alternative delivery mechanisms and new technologies that threaten those companies’ control of their markets.

That’s the real “culture war” of the 21st century, one just beginning to emerge.

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Gary Chapman is director of the 21st Century Project at the University of Texas at Austin. His e-mail address is gary.chapman@mail.utexas.edu.