Burn, Baby, Burn
Sales of music on CD are plummeting. Homemade discs are more popular than ever. What can the big record labels do?

Monday, May. 20, 2002
The last time the music business fell into a slump, Madonna was a Cyndi Lauper wannabe, the theme from Miami Vice was a No. 1 hit and the rising star known as Prince still had a name that didn't look like a typo. The year was 1985, and although shipments of recorded music were down 4%, the worst the industry had to worry about — hair spray and tight pants aside — was that some listeners liked to mix their own cassette tapes with favorite tunes from the latest Phil Collins or Duran Duran albums. Record companies dealt with this casual piracy by printing a skull and crossbones on the backs of tapes along with the claim that home taping is killing music. If that was the case, then it was the compact disc, which really took off in the mid-'80s, that brought the music industry back to life. Sure, you could hook your cassette recorder up to a CD player, but you couldn't copy that wonderful hiss-and-squeak-free digital fidelity — not yet. So everyone had to buy the Beatles and Beach Boys all over again. Result: a 15-year-long sales boom.

Now that party is over, and the guests are stampeding for the exits. For the first time in the format's history, CD sales are dropping globally, according to a tally released late last month. At the same time, companies such as Apple and Gateway are pushing the power of computers that help users create personalized mixed CDs. Consumers love these innovations, which give them what they want — easy access to favorite tunes anywhere they choose. They are clearly willing to pay for this convenience, as shown by the $1.6 billion they spent last year on CD burners, blank CDs and digital-audio players, as reported by the tech-research firm NPDTechworld. And fewer and fewer music lovers are willing to buy the music industry's shopworn business model: $17.99 for a recorded CD that contains only a couple of tracks they like.

Rather than seeking new ways of pleasing customers, however, the Big Five music companies (AOL Time Warner, Bertelsmann, EMI, Sony and Vivendi Universal) are focusing on making it harder for consumers to get what they want. Although the connection between home copying and lost sales is as tenuous as it was in the '80s, the industry is pushing controversial anticopying technology into the marketplace — while entrepreneurs are assembling new business models for selling music in the digital age.

You can hardly blame Big Music execs for getting jumpy. Worldwide sales of recorded music fell 6.5% last year, according to the London-based International Federation of the Phonographic Industries. That meant a drop in revenue of $1.7 billion, the worst in the annals of the industry. Sales in industrial countries like Japan, Germany and Canada took an average 9% hit, while those in developing nations such as Brazil and Poland — drained by an epidemic of professionally pirated CDs — fell as much as 28%. In the U.S. not one album sold more than 5 million copies last year; in 2000, seven albums did. Blame the global recession or a lackluster lineup of singers, if you like. But the industry doesn't. It blames you.

"In 2001 more people listened to more music than ever before," says Jay Berman, chairman of the I.F.P.I. "We just weren't getting paid for it." In other words, the party reconvened at a free establishment down the street. That place is not Napster or any one of the dozens of free online music-file-swapping services like Morpheus that sprang up after the Big Music labels had Napster shut down by the courts. That place is your home.

Consumers, it seems, can't get enough of ripping (that is, copying a CD to their computer's hard drive) and burning (creating a new CD from scratch). In the U.S., last year saw a whopping 90% rise in the number of owners of computers with a drive that burns CDs (called a CD-RW drive, short for recordable/writable). A third of all PCs have one; 54% of new computers come with one installed. Half of CD-burner owners, reports Forrester Research, create at least one disc a month. Blank CD-Rs (discs on which you can record only once) bought in bulk cost as little as 25[cents] each. Making your own CDs — from your collection, from friends' discs or from downloaded tunes — is easier, cheaper, faster and more satisfying than any '80s mix tape ever was. Millions of music lovers who don't (yet) own a CD burner are enjoying often eccentric collections of tunes created by friends and colleagues.

This trend has Big Music running scared, at a speed that makes its fight against Napster look like a stroll through the easy-listening section of Sam Goody. Hilary Rosen, the tough-talking president of the Recording Industry Association of America (R.I.A.A.) who led the legal charge against Napster, feels almost nostalgic about 2000, when file sharing was the sole problem. After all, only 11% of Napster users ever transferred their stash of tunes onto a CD; the rest kept them on a computer. Since piracy has gone portable — and local — it is perceived as more of a threat. "It used to matter whether there was some bad guy in a Chinese manufacturing plant sending out thousands of counterfeit copies," says Rosen. "Now people at home can have the same impact."

Critics of copy protection say its side effects are potentially disastrous: the discs may not work at all in car stereos, portable CD players, some older CD components or Macintosh computers and may cause some computers to crash.

In Silicon Valley, copy protection is seen as folly. Not only do geeks treat code cracking as a contact sport, but the software industry has been trying — and failing — to combat piracy for years. "Copy protection is theoretically impossible," says Marc Andreessen, lead inventor of the Netscape browser and currently chairman of the Web-services firm Loudcloud. "All you need is a piece of software that ignores the restrictions. These things are trivial to break."

It's All Free!
Music! Movies! TV shows! Millions of people download them every day. Is digital piracy killing the entertainment industry?

It's easy to see why the pirates do what they do. Right now you can find thousands of free movies online if you know where to look — a glance at one popular website yields links to copies of Holes, Malibu's Most Wanted and even the Rowan Atkinson comedy Johnny English, which won't hit U.S. theaters until July. Just about every song ever released — as well as quite a few that haven't been — is available online for nothing more than the effort it takes to point and click. Record-industry types have a cute nickname for this phenomenon: "the celestial jukebox."

Most online piracy happens through what is called file-sharing software, such as Kazaa, Gnutella and Direct Connect, that links millions of computers to one another over the Internet. File-sharing software takes advantage of the fact that music and movies are stored as digital data — they're not vinyl and celluloid anymore, but collections of disembodied, computerized bits and bytes that can be stored or played on a computer and transmitted over the Internet as easily as e-mail. Using file-sharing software, people can literally browse through one another's digital music and movie collections, picking and choosing and swapping whatever they want. If you've never tried it, it's hard to describe how seductive it is. Start up a program like Kazaa, type in the name of your favorite rock band, and a list of song titles will instantly appear on your screen. See something you like, click on it, and it's yours. An average song might take two minutes to download to your computer if you have a broadband connection. Log on any night of the week and you'll find millions of users sharing hundreds of millions of songs, movies and more.

Ask your average high school kids if they use Kazaa, and the answer is a resounding "duh."

This isn't how it was supposed to be. A little more than three years ago the Recording Industry Association of America (R.I.A.A.), which represents most U.S. record labels, filed suit against Napster, the granddaddy of file-sharing services, for "contributory and vicarious copyright infringement." The R.I.A.A. won; Napster lost. A judge ordered its servers shut down. End of story?

Hardly. The file-sharing services didn't go away. They evolved, getting smarter and more decentralized and harder to shut down. Napster's network relied on a central server, an Achilles' heel that made it easier to unplug and shut down. But Kazaa, now the most popular file-sharing software, is built around a floating, distributed network of individual PCs that has no center. There's no single plug to pull. Kazaa has savvily chosen a decentralized business strategy too: it's a mirage of complicated partnerships with the official owner, Sharman Networks, tucked away on the South Pacific island of Vanuatu. So far, its diffuse structure has kept its management off U.S. soil and out of U.S. courtrooms.

In a sense, the future is already here. You can see it in action in Asia. Piracy is a growing phenomenon in the U.S., but in some developing countries, it is a fact of life. There's a marketplace in Karachi, Pakistan, where you can buy a DVD of How to Lose a Guy in 10 Days for 100 rupees (about $1.75) even while it's playing in first-run theaters in the U.S. Karachi boasts five optical-disc factories, just one of which churns out 40 million pirated discs a year. If you think American teenagers are guiltless, file-swapping punks, try talking to a Karachi shopkeeper. "We make copy of everything!" says Mohammed Haris. "Even George Bush cannot dare to come over here. We will keep the original and send his copy back home."