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Can rip-proof CDs save the music biz?

Coming soon: The untouchable compact disc

By Bridget Finn
Business 2.0

Coming soon: The untouchable compact disc

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Even if the copy-protection system works flawlessly, will the new CDs improve sales? Don't bet on it.
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(Business 2.0) -- Can anything save the music business?

Since 1999, CD unit sales have plunged 26 percent -- a decline of $2 billion -- thanks in part to file-sharing services and other forms of digital piracy. The record labels' frustration is so acute that the Recording Industry Association of America has begun suing hundreds of consumers who have exchanged music on peer-to-peer networks like Kazaa, Morpheus, and Gnutella.

But what technology giveth, can it taketh away?

The industry hopes so: This month the first copy-protected CDs are expected to start showing up on music-store shelves in the United States. And that's great news for the one or more lucky companies whose music-locking tech will be adopted. Even by modest estimates, licensing fees will amount to more than $100 million annually.

The big winner could be Macrovision, a major provider of copy protection to Hollywood. With revenues of $102 million in 2002, the company, based in Santa Clara, California, commands a near monopoly on video and DVD copy protection, providing the system used in more than 2.1 billion DVDs and 85 million DVD players.

Dueling firms

Macrovision also built the antipiracy technology used to protect 150 million music CDs sold in Europe and Japan.

"Our DVD business is in the $40 million- to $50 million-a-year range, but the CD market is twice as big," says Macrovision CEO Bill Krepick.

The technology for the U.S. market is expected to be a better version of the trouble-prone systems introduced in Europe and Japan, which generated complaints when they failed to play on many car stereos and PCs.

Macrovision's technology, called CDS-300, hides the original audio tracks but makes pre-compressed music files available for limited downloads to PCs. The company's main competitor is Phoenix-based SunnComm, a 25-person upstart that already has a contract to supply copy-protection technology to BMG, the fifth-largest record label. SunnComm's MediaMax CD-3 also restricts the original audio files, but does so on the user's PC, rather than the disc, by installing a kind of software lock.

Krepick argues that Macrovision's experience and size give it an advantage.

"We're not a garage operation," he says.

But Bill Whitmore, SunnComm's chief operating officer, points out that CDS-300 has been plagued by delays.

"Nobody's seen Macrovision's new technology work," he says.

Looking for sales

No need to fight, boys: Analysts like Sterling Auty of J.P. Morgan say the labels may well hedge their bets, relying on several vendors to provide copy-protection technology.

But even if everyone's system works flawlessly, will the new CDs improve sales? Don't bet on it.

In Germany and Japan, where the labels began selling copy-protected CDs in 2000, sales have continued to decline.

For more technology news visit Business 2.0.

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