A few years ago, Steve Gottlieb, president and founder of the largest independent record label, TVT Records, was telling his colleagues in the industry to think of the Internet as a business opportunity.
Now he's not so sure. Facing an onslaught of music piracy, "I've seen the equity value of my company disappear," Gottlieb said during a panel discussion on digital music distribution at Cyberposium 2004, held at Harvard Business School. And he doesn't see things getting much better; even with the advent of legitimate music download services such as Apple Computer's iTunes Music Store.
But Gottlieb was in the minority at the January 17 discussion. Most of the panelists, who represented various slices of the digital music industry, expressed optimism that the business is taking off and artists as well as businesses will benefit as the industry matures.
"A year ago, no one believed people would pay for music," said Ted Cohen, senior vice president of digital development and distribution for EMI Music. "On April 28, life changed and opinion changed for a lot of people." April 28 was the debut of iTunes, which to date has sold some 30 million songs.
Since then, a handful of other paid music services have plugged in, including AOL Music (which partners with iTunes), Napster, and Rhapsody. Similar services are promised later this year from Sony, Microsoft, and Virgin Entertainment.
"I think the numbers are about to blow through the roof," Cohen said.
In addition to increasing music sales and stemming piracy somewhat, panelists said that digital distribution has also made it possible for new artists to receive exposure to a large number of people.
Still, the music download business is in its infancy, and significant challenges remain if the industry is to woo both legitimate music lovers and illegal downloaders to the big digital music tent.
| A year ago, no one believed people would pay for music. On April 28, life changed and opinion changed for a lot of people. |
| — Ted Cohen, EMI |
For one, there are a number of major artists including The Beatles and Dave Matthews who do not allow their music to be downloaded online—and that frustrates users new to the music download services, said Laura Goldberg, senior vice president of operations for Napster. If they come looking for that one huge artist and you don't have it, "you lose them forever."
Another challenge, Goldberg added, is that many younger buyers don't yet possess the key to purchasing music online: credit cards.
Evan Harrison, vice president and general manager of AOL Music, said a lack of standards between computers and music players frustrates users, citing his own unhappy experience try to connect his iPod with his Hewlett Packard PC.
Pick a standard, any standard
A bigger problem: At least four incompatible music player formats—Apple, Microsoft's WMA, RealPlayer, and Sony—are slugging it out for market dominance. For users this means someone who has downloaded a title from iTunes can only play that music on an Apple iPod machine. Cohen said EMI is trying to convince Apple that WMA needs to play on iPod and iPod needs to play on WMA devices. "This is critical for consumer acceptance," Cohen said.
Still, Harrison is optimistic that most of the major issues will be resolved this year. There is just too much money riding on the outcome.
But Gottlieb of TVT, which helped launch the careers of Nine Inch Nails, Underworld, and Ja Rule, doubted the rosy scenarios. Though legit music downloads are on the increase, the illegal download world is still far and away the story of the industry. "What will paid services offer to get people from free?" he asked.
And it's not just illegal downloaders contributing to the problem, he said, pointing a finger at Apple Computer CEO Steve Jobs and the iPod.
Few iPod users could afford to purchase the thousands of songs that can fit on the device, he said. "The implication is, you will steal the overwhelming majority of what is on your iPod," Gottlieb said. Jobs "is using music to sell computers in a very calculated way."
In a heated exchange, an audience member who identified himself as a venture capitalist said Gottlieb's paranoia was blinding him to the fact that the industry has changed forever, and if Gottlieb doesn't figure out a way around the problems, someone else will.
A new model
Cohen drew a distinction between the recording and music industries, saying the former is going through a difficult transition while the overall music business is relatively healthy.
One solution for recording companies, he said, might be to adopt a new business model. EMI's contract with singer Robbie Williams might point the way to the future. Instead of just doing a standard recording deal, EMI and Williams share profits from tours, publications, and merchandise sales.
"We went from being Robbie Williams' record company to being his marketing company," Cohen said. 