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Industry Standard

Music giants fight a corporate war online

internet  music

April 14, 1999
Web posted at: 10:23 a.m. EDT (1423 GMT)

by Lessley Anderson

(IDG) -- Universal Music Group and BMG Entertainment, two of the "big five" record labels, announced a new Web venture last week, and they poured on the hype. A press release went out advertising a press conference for a "major Internet announcement in the media business" – the amusing effect of which was to spur rumors about a linkup of America Online and CBS. Celebrity mogul Edgar Bronfman Jr., CEO of Universal's parent company, as well as BMG Group Chairman Thomas Middelhoff, appeared personally to talk it up. The partnership will launch a site,, aimed at promoting the labels' artists and selling CDs online.

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That was all well and good: The formation of arguably was something of a milestone in the music industry's painful crawl into the Internet age.

But neither Bronfman nor Middelhoff, nor anyone else at the press conference, had much to say about the dramatic behind-the-scenes developments that are currently shaping the future of music.

Prodded into action by the lightning proliferation of the MP3 music format and the piracy that has gone with it, music companies are struggling desperately to develop a feasible method for distributing digital music securely. This effort is supposedly centered on a process known as the Secure Digital Music Initiative, launched last December by the music industry's lobbying group, the Recording Industry Association of America.

But what's really going on is a good old-fashioned corporate power struggle. It involves IBM, Microsoft, AT&T, Sony, Matsushita and Time Warner, as well as BMG, Universal, EMI and a host of smaller companies. And it's ultimately not just about how consumers will buy music, but how they'll buy movies and computer software and just about anything else that can be delivered in digital form.

Few in the business are willing to talk on the record about what's going on. And since the battle is still at an early stage, the dynamics are shifting almost daily. But key alliances are forming. And almost everyone is scrambling to figure out where they'll fit in. Here are some of the most important new developments.

  • On Tuesday in Los Angeles, Microsoft introduced a new way to encode music, called MS Audio 4.0. Some are dubbing the format the "MP3 Killer" because of its smaller file size, superior sound quality and the broad distribution it will achieve when the tools to create the files are bundled with the new Windows Media Player. But the labels distrust Microsoft – they fear the software company's power and resent its support of MP3 in Windows. Microsoft has had a difficult time convincing the record companies to trial the new format at launch, forcing the company to appeal directly to technologically inclined artists such as David Bowie.

  • Universal and BMG are not only building together; sources say they've also emerged as key supporters of a so-called "digital-rights management" system for secure digital distribution developed by InterTrust Technologies. The record companies are working with Reciprocal, a Buffalo, N.Y.- based company that's a key licensee of InterTrust and is partly owned by Softbank, the big Japanese technology publisher and software distributor.

  • The InterTrust-Reciprocal system provides a flexible end-to-end digital-distribution system in which any kind of content can be encased in a locked software "box" and opened by users who agree to certain payments or other specified rules. Earlier this year, Microsoft acquired a 15 percent stake in Reciprocal, and it's expected to use the technology in conjunction with MS Audio 4.0. Sound incestuous? It is.

  • IBM, meanwhile, is pushing a secure digital-distribution system known as the Madison Project. All of the labels have agreed to participate in a trial of the system, which is scheduled to begin in June in San Diego. But sources say that some of the labels – namely Warner Bros. and Sony – are much more enthusiastic about the Madison Project than others, raising the specter of two distinct record-industry camps emerging, one around Madison and the other around InterTrust and Reciprocal. One big glitch with Madison: So far, it only works over broadband networks, which would make it irrelevant as a weapon in the labels' battle against illegal MP3 files on the Net.

  • RealNetworks, not to be upstaged by Microsoft, has jumped in bed with IBM. The company has announced that its RealPlayer software, which currently does not support MP3, will support IBM's Madison solution.

  • Startup Liquid Audio and AT&T subsidiary a2b Music also have secure digital-distribution technologies, but for the moment they're being upstaged by InterTrust and the Madison Project.

  • Consumer-electronics companies – eager to follow the lead of Diamond Multimedia, which did much to drive the MP3 craze with its portable Rio player – have in principle agreed to go along with a specification for portable, Walkman-like digital music players to be developed by the SDMI group. But manufacturers must have their prototypes ready for retailers in June to get space on store shelves for Christmas 1999 – and the SDMI standard won't be ready by then.

  • "The market is not going to wait for standards to be decided," says Hock Leow, VP of the multimedia division at Creative Labs. The consumer-electronics firms are all pushing ahead with their own plans: Diamond's new Rio will use the InterTrust technology, and Matsushita is working on a product with BMG and Universal. Interestingly, the new players will support MP3 in addition to the secure formats. It isn't clear if the RIAA will bless that approach, but the electronics vendors don't seem too worried.

What does all of this mean for the RIAA's much-touted SDMI process? Leonardo Chiariglione, executive director of SDMI – who was appointed to the post largely because of his success in shepherding the contentious MPEG standard – remains optimistic that a consensus on digital music distribution can be reached. This week, the group intends to finalize "Version 0.1" of its specification.

"Why the low number?" asks Chiariglione. "Because at the moment we have nothing."

Almost everyone in the business agrees that it will be some time before any secure digital-distribution system is widely used. Such systems are complex to implement, requiring software on the client side, software on the server side, expensive development tools and intermediaries to collect payments, among other things. And additional hardware components will be required if they're to be truly invulnerable to hackers.

Consumers may also reject bulky, supersecure systems. The beauty of MP3 is that it's extremely simple to use. Some suggest that no matter what the labels come up with, freely traded MP3 files are still going to be everywhere.

But the stakes for the recording industry – and, eventually, for the movie industry and other businesses as well – are huge. Today, BMG and Universal may only be using their new site to promote artists and sell a few CDs. Yet, they and the other labels clearly understand that digital distribution will happen eventually, and that it threatens the companies' control over the business. How this all unfolds will be the biggest behind-the-scenes topic in the music business for some time to come.

Digital Music Dictionary

MP3: Stands for Motion Picture Experts Group-1 audio layer three. Developed in 1991 by the Fraunhofer Institute, a German research firm, it's become the file format of choice for garage bands and CD-ripping pirates.

RIAA: The Recording Industry Association of America. The special-interest group that represents the "majors": Universal, BMG, Warner Bros., EMI and Sony.

SDMI: Secure Digital Music Initiative. Launched in December by the RIAA in order to decide on a method of "secure" digital music distribution to protect the labels' content, and combat the proliferation of MP3.

DRM: Digital Rights Management. A system that specifies and implements the way digital music will be used. DRM would allow a record label to specify whether a track is available free or for a price, for a limited time only or for an unlimited time.

MS Audio 4.0: Microsoft's new file format. It will compete with MP3.

MP3: The new wave

MP3 revolutionizing music business

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Universal Music Group
RIAA Online
IBM Corporation
Liquid Audio
Diamond Multimedia Systems
Creative Labs
Matsushita: Press release 99/04/13-1
RealNetworks, Inc.
CBS Corp.
America Online, Inc.
Time Warner Entertainment Company, L.P.

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