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With MP3s under attack and major labels designing new standards, three Bay Area firms try to corner the market on online music

Wednesday, Apr 28 1999
At the SXSW Interactive conference in Austin, Texas, last month, co-founder Mark Cuban proclaimed that the free digital music revolution was dead.

It was March 16, the closing day of the conference. Music industry supporter Paula Batson of a2b Music had been shouted down by angry members of the audience for her defense of security measures that would require Internet users to pay for music downloaded off the Internet. Meanwhile, members of the crowd at the last panel of the conference let loose on each other, most ignoring the ongoing panel. All sense of decorum was lost as the hundred or so audience members began screaming back and forth across the room at each other. An Austin DJ stood and declared that all music on the Internet should be free. A tattooed and pierced young woman screamed out that once she downloaded her music, she didn't want any restrictions on what she did with it. The moderator tried in vain to restore order.

Selling digital music on the Internet isn't going to be easy.
Consumers extol the virtues of getting music cheaper -- and quicker -- from the Internet. Artists talk about leveling the playing field and making music more readily available to the fans. The major labels are surely about to die, the argument goes, and anyway, they're no longer necessary in a digital age. In this scenario, prices will plummet as retailers simply become digital storehouses.

The only problem with the theory is that artists and labels share a common goal: making money. So, instead of making music cheaper, the digital age has created a whole new layer of business.

At the core of the issue is the question of who will control digital distribution of music. The record industry wants in: On March 1, 270 companies from around the country met in Los Angeles for the first Secure Digital Music Initiative (SDMI) meeting. Spearheaded by the pirate-hunting arm of the music business, the Recording Industry Association of America, the first goal of the closed-door SDMI meetings is to develop a digital standard for the portable players, ensuring that only secure files would be playable on the new devices.

The portable standard is slated to be completed before Christmas, in time for consumers to buy the next wave of secure, portable music players for the holidays. In the meantime, three Bay Area firms are jockeying for position.

Three years ago, Gerry Kearby was looking to do something different in the music business. He had already created (and later sold) Integrated Media Systems, creating workstations that allowed small bands and labels to create digital music in their basements. Then he approached Robert Flynn and Phil Wiser with an idea. What the three came up with was Liquid Audio, a Redwood City-based firm that secures, stores, and sells digital music files over the Internet.

"We all came from the music industry in some manner and saw that musicians couldn't get their content out to the public, so we decided we were going to try to level the playing field while protecting the artists' rights," says Flynn, Liquid Audio's co-founder and vice president of business operations.

Unlike sites such as, which makes unsecured digital music files available to anyone coming to the site, Liquid Audio is banking on the belief that most music lovers don't want to rip off artists, and that sound quality will become more important to people as technology progresses. "We evaluated every single codex out there, and this company has a lot of people who can hear music really well," says Flynn. "We didn't think that MP3 was really the best sonically to sell and listen to on the Internet."

Instead, Liquid Audio has created the Liquid Track, which uses either Dolby Digital or MPEG AAC to allow bands to encode their songs. The encoded songs can only be played on the Liquid Music Player and are "watermarked," which allows the band to trace the digital files wherever they go.

It's band- and security-friendly, and Kearby and company aren't worried that the hassle of using only the Liquid Player will deter consumers. "Look, if you are a consumer, and you are getting a sonic file [MP3] off the Internet, it's probably not great sonically," Flynn says. "Plus, right now you are probably ripping off the artist. And if you are an artist selling MP3 files, you should know that the first file you sell might be your last."

Liquid Audio stores tracks on its server, which is accessible both through various artists' Web sites and through the 300,000-song Liquid Music Network. And, in an online world in which brand-name recognition seems to be everything, Liquid has struck up partnerships with companies like CDNow, which will also make Liquid Tracks available -- which, Flynn argues, will appeal to music fans. "If I have a choice between hunting down a song by searching through seven links that might lead to a dead end, or going to CDNow to pay a buck for a song, I'll pay the buck," he says.

Unlike its main competitor, New York-based a2b Music, Liquid Audio is willing to work not only with major labels, but also with any band that can pay the $99 the company charges to encode five songs and put them up on its server. And Liquid Audio has also signed deals with Texas Instruments and San Jose-based Diamond Multimedia to ensure that the next generation of portable music players will include Liquid Tracks in their formats.

Oh, and Liquid will also be adding the MP3 format: It's what the consumers want.

Joe Jennings doesn't care about making the best Internet music player, the best-sounding compression file, or the cheapest possible product. As senior vice president of marketing at Sunnyvale's InterTrust, an e-commerce software company, he likes music -- but he also likes making money. "We have built a general-purpose architect so that we can handle music, video, or whatever else a business wants," says Jennings. "We don't believe that consumers want to handle more than one platform to get all of their information, especially when it comes to music." So the company has partnered with Los Gatos-based Sonique to create a music player that's capable of showing the music video while the song is playing. It also provides lyrics and liner notes, and links through which merchandise and tickets may be purchased.

Jennings uses words like "superdistribution" to describe how digital music will help bands reconnect with their fans. That means that the bands -- and InterTrust -- can track downloads and sales of songs, and capture e-mail addresses through which they can notify consumers about new tracks. The bands will also know who's distributing their music, and, in general, how successful it is.

Of course, every time something is sold, InterTrust takes a cut for itself. It's not a new tactic; when sales of Alanis Morissette's recent album began sagging, her label put out a "free" downloadable track online for anybody willing to give out his or her e-mail address -- gleaning the company 285,000 names and addresses it can use in the future.

InterTrust's model challenges the optimists' idea that online music would become cheaper. "The Internet was really supposed to get rid of the middleman," says Internet analyst and author Douglas Rushkoff, "but instead, everyone is trying to become the new middleman." And with a recent partnership with Microsoft, InterTrust seems to be a middleman that isn't going away.

San Francisco's Digital on Demand sees the future of digital music in a different light. DOD allows retailers to offer its customers back-catalog CDs, current singles, T-shirts, or concert tickets. Unlike most other companies that see digital music's future solely in terms of Web sales, DOD will be placing kiosks in retail stores around the country. In theory, this will allow brick-and-mortar retail stores to carry only current CDs, while storing back-catalog material in digital form so that customers can buy the inventory right in the store. DOD will also allow consumers to decide how they want their music: They'll be able to download it into portable devices with secure formats available, e-mail the tracks to their computers, or burn a CD right there in the store.

DOD thinks consumers enjoy going shopping -- and like having a choice of where they can play their music. "My primary goal in life is to make the retailer a relevant source in the coming digital age," says Scott Smith, president and co-founder of DOD. "We are going to bring the back catalog to the store, along with the newly released CDs the labels put out. We are going to give the consumer whatever they want, whenever they want it, and in whatever form they want it in."

It makes sense from a numbers standpoint: Retail music business pulls in about $45 billion a year nationwide, but retailers have a 31 percent walkout rate -- meaning that nearly a third of the customers who go into a store leave without buying anything. The main reason is that the store doesn't have their albums in stock. "I want to own the digital distribution market just like everyone else does, but I want to own the 85 percent of the in-store market before the online market ever gets going," says Smith. "After all, the online market isn't going to get big until the pipes that run into your house get much bigger."

Currently, DOD kiosks are in both American Disney theme parks, as well as about 25 Disney retail outlets. Like the IBM-backed Madison Project, which will only offer full CDs or singles released by the major labels, Digital can only sell entire albums. But unlike the Madison Project, Digital isn't depending on consumers having CD burners at their houses. And Smith has begun buying the rights to sell singles -- mainly oldies -- hoping to convince the major labels that the best way to get consumers to buy music is to give them as many options as possible. With that in mind, Digital also offers CDs enhanced with videos. The enhanced CDs will also include hot links that will allow the consumer to connect to Web sites set up by bands and labels.

For Smith, the most important feature of the kiosk is that once somebody buys the music, the music is his or hers, to use however he or she wants. "Music has always been a download model, unlike pay-per-view movies, which is similar to the streaming technology," he says. "I download the music. I own it. I can do what I want with it. I don't think there is any reason to change that. I want people to be able to play their music however, whenever, and wherever they want.

About The Author

Brad King


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