More from the Union Tribune and Robert Putnam. Reward or ruin...
Mike Drummond has a flair for the dramatic.
Music industry hits milestone in MP3 war
By Mike Drummond
UNION-TRIBUNE STAFF WRITER
June 29, 1999
Mark your calendars. Yesterday, June 28, marked the historic occasion when the music industry hauled itself out of the 19th century and leapfrogged into the next millennium.
Record labels and major technology companies released technical specifications for the Secure Digital Music Initiative, a blueprint that will allow software and hardware companies to format piracy-proof music files. Those files can then be sent securely over the Internet and recorded on CDs or played back on personal computers and portable devices.
It marks the recording industry's shift from selling music tracks on prepackaged discs -- a medium used in one form or another for more than a century -- to selling music as digital sound files.
The release of the new format specifications could spell reward or ruin for a number of San Diego-based companies, including e.Digital Corp., which is making an SDMI-friendly player with Lucent Technologies; MusicMatch, which makes jukebox software for digital music files; and MP3.com, the high-flying online music distributor set to go public soon.
SDMI is a game of catch-up for the recording industry, which has been rocked by the explosion of MP3, a once-underground format that can convert songs off CDs and shrink them to a size small enough to be sent over the Internet for playback on PCs and portable devices.
The recording industry, under the rubric of its powerful trade group the Recording Industry Association of America, has fought an unsuccessful legal battle to kill the MP3 format and portable devices because the technology does not protect against unauthorized copying and distribution of copyrighted music.
Nonetheless, MP3 went mainstream this year with the proliferation of portable devices pioneered by Diamond Multimedia Systems's Rio player and the popularity of online music distribution sites.
Record labels hope to see SDMI-compliant players on store shelves by Christmas.
Major record labels "don't want to give MP3 a two-year head start," said Robert Putnam, senior vice president at e.Digital.
These new SDMI-compliant devices would be able to play any of the music now being downloaded from the Internet or transferred from CDs.
But after a yet-to-be determined date, new music released by the major record producers will be digitally encoded. To listen to it, consumers will have to upgrade the software in their devices. And from that point on, the machines won't be able to play pirated copies of new music.
"SDMI will enable the future of music and (yesterday's) announcement signals to consumers that this future is coming quickly. This future holds the promise that consumers will have access to vast amounts of exciting new content with a new level of portability," SDMI Director Leonardo Chiariglione said in a news release.
The design specifications are under review and are to be ratified and made public by July 8.
The new machines initially would support all current digital music formats, including the hotly debated MP3 compression format. But the devices will remain forever stuck with the music of the '90s and earlier unless users upgrade their software, disabling this open-ended feature.
News of the upgrade design trickled out from recent SDMI meetings in London and drew harsh criticism, according to the MP3.com Web site. Opponents say it all but forces consumers to minimize their trading of MP3 files.
Analysts at Forrester Research doubt new, SDMI pager-size devices will make it into Christmas stockings this year because it's too late to plug the specifications into devices now under development.
That means MP3 players -- which are multiplying like rodents -- could achieve Furby-frenzy status in the millennium's final Christmas.
Undaunted, SDMI supporters note it's just a matter of time before their format, with its encryption technologies to prevent unauthorized copying and digital watermarks to allow labels to track pirated songs, will prevail.
Diamond Multimedia, I-Jam, RCA and other manufacturers have said they plan to make their players comply with the SDMI format.
"Whether you like it or not, the music you and I want to listen to will come from record labels," e.Digital's Putnam said.
Record labels, with their catalog of popular music, will set a new digital standard, Putnam and others argue.
This would be good news for record labels and companies making SDMI-compliant technology, including e.Digital.
But it would be bad news for companies whose identities and fortunes are closely tied to MP3.
No company is more wedded to the MP3 format than MP3.com, the local online music distributor that has stolen headlines and generated intense investor interest as it stands ready to sell shares on the Nasdaq stock exchange.
MP3.com admitted as much in an amended filing with the Securities and Exchange Commission last week. The 120-page document serves as a reality check for anyone considering plowing their life savings into this white-hot Internet start-up, which is about to go public.
"It is uncertain whether a music-based website that relies on attracting people to learn about, listen to and download music, mostly from lesser-known artists, can generate sufficient revenues to survive," the filing stated.
The company noted that 84 percent of its revenues in the first quarter this year came from advertisements on its Web site. Two of those advertisers accounted for 27 percent of net revenues.
"Our continued reliance on revenue from online advertising may not provide sufficient financial returns for our business to grow or survive," MP3.com's filing said.
MP3.com is in its mandatory quiet period and is not responding to media inquiries.
Eric Schmitt, an analyst with Forrester Research, said online advertising in general "is going into the toilet," and that successful Web businesses will make most of their money through selling merchandise.
In MP3.com's case, that would be custom or ready-made CDs, concert promotion and other merchandise, which so far have generated only a small percentage of revenue.
Then there's the name of the business itself. MP3.com chief executive Michael Robertson paid $1,000 for the domain name from a guy who didn't know what the acronym meant. (For the record, it stands for Motion Picture Experts Group 1, Audio Layer 3.)
That name has served the company well. Studies show that more people are aware of MP3 than they are of any other competing format, including those from Liquid Audio, Microsoft, IBM, AT&T and Sony.
But if the ground shifts and hardware manufacturers and consumers embrace a new format, MP3.com could find itself named after obsolete technology.
"It's like calling your business 'Betamax,' " said one researcher, who requested anonymity.
Potential pitfalls have not stopped investors from pouring money into MP3.com, including Cox Interactive Media, which pumped $45 million into the company's coffers this month.
And the recording industry has its own set of problems to overcome, not the least of which is encouraging market adoption of the secure format it supports.
Moreover, analysts said record labels face a major legal tangle with how to digitally distribute their valuable collection of popular songs.
If labels decide to sell songs piecemeal fashion rather than as prepackaged collections, they likely will have to renegotiate contracts with every artist on a case-by-case basis, analysts said.
Both the renegotiating with artists and reformatting the songs to conform with the new secure digital format would generate costs that undoubtedly would be passed on to consumers, Schmitt said.
"A lot of artists aren't particularly pleased with the contracts they have and might not be friendly during the renegotiating process," he added.
The world will be big enough for MP3 and any new secure format, Schmitt predicted, with lesser-known artists gravitating toward MP3 and established acts embracing SDMI.
"The Web could turn out to be a farm system, the minor leagues for artists," he said.
© Copyright 1999 Union-Tribune Publishing Co.
|
