The future of music trafficking

By Nate Seltenrich

The record industry may finally be joining the rest of us in the digital age. After four straight years of declining sales, it seems that major labels are ready and willing to support the growth of legitimate online music services.

In North America last year, overall music sales were down 0.8 percent compared to 2002, while CD sales were down 2 percent and album sales, which includes other media such as cassettes and records, were down 3.6 percent, as reported by Nielsen Soundscan. Across the board, drops in 2002 were even more substantial - CD sales fell an alarming 8.8 percent.

The Recording Industry Association of America's decision to focus its energies on developing technologies may also have been expedited by a federal court's ruling last month that the RIAA can't force internet service providers to identify music downloaders, making it far more difficult to file lawsuits against individuals it suspects of piracy.

While consumers are willing to pay for it, major labels will continue to prepare their catalogs for digital sale. More than 19.2 million digital tracks were sold online in the last six months, says Nielsen Soundscan. This may have helped to ease the sting of the music industry's losses over the past few years and encourage the transition to online and digital music.

Apple has recently lead all others in terms of changing ways to purchase, manage and consume music. Its new line of products geared toward smart and creative music fans has encouraged much innovation and competition in the field. Its iPod player has sparked a whole new subset of the consumer electronics industry that is geared toward creating accessories for the sharp little music player, such as a carrying case, a voice recorder with a built-in speaker, and a system that connects the iPod to a car radio.

With Apple's iTunes Music Store at the front of the pack, digital track sales surpassed physical singles sales by over 7 million units in 2003. This is largely due to the fact that it is generally more costly to buy physical singles ($3-$4) and these may contain songs that the listener does not necessarily want to purchase.

Stanford University student and music lover Phil Lehman made the switch from KaZaA to iTunes last November and hasn't looked back. So far he's spent about $30 on iTunes, mostly on purchases of single songs.

"I just got fed up downloading a song and not having it be good quality. iTunes offers a better music player and better sound quality than I had before," he said. He's been impressed with the range of music iTunes offers, but remains reluctant to buy a song he hasn't heard before.

"I probably know only one person who still uses KaZaA," Lehman said.

Other online music sales services that have developed in Apple's wake over the last year include Napster 2.0, Rhapsody, and MusicNow, as well as offerings by companies such as Wal-Mart, Dell, and Amazon.com.

Although 2003 was a huge year in terms of the transition to legitimate online music services, it may also be remembered for the lawsuit war waged by the RIAA as a final attempt to scare online music traders away from copyright infringement.

In September, it announced it would be suing 261 of the most egregious offenders. Although the RIAA has threatened to sue thousands of individuals, the number has only reached about 400. That's been enough to scare away many potential peer-to-peer file traders.

"Once they started suing people, I stopped," said Jessica Rauff, a junior at Santa Clara. Although she had used KaZaA to introduce herself to new music prior to CD and concert ticket purchases, she felt this advantage wasn't worth the possibility of being sued.

However, the online pay services don't appeal to her either: "I don't like buying songs. I like buying albums as a whole," said Rauff.

To the best of Information Services' Chief Information Officer Ron Danielson's knowledge, no Santa Clara students have been sued by the RIAA. However, the school has received notifications from the RIAA and some software vendors regarding illegal use of copyrighted material by students at Santa Clara.

During the 2002-2003 school year, only four such notifications were received; since classes started this past September and the RIAA stepped up its efforts, the school has already received 11 new notifications.

After these notifications are received and verified, "we block the IP address that's cited and remand the student to the student discipline process," said Danielson. The student loses access to the network until they complete the discipline process and delete the copyrighted material.

Alongside the increased disciplinary activity that these notifications have resulted in, Danielson reported, "inbound peer-to-peer file sharing traffic seems to be down as compared to other years." In other words, student downloading has dropped.

Digital sales have been around since at least 1997, when Capitol Records became the first of the major labels to do so with a Duran Duran single. However, until now, unauthorized and illegal file sharing has undermined the possibility of a mass marketplace for digital music.

A handful of industry-licensed digital music services were launched in 2001, but they didn't draw much interest from music fans because they had too many restrictions, not enough flexibility, and too few musical offerings.

Then along came Steve Jobs, the Apple chief executive who convinced record companies to sell digital tracks one-at-a-time for as little as 99 cents each. Less than a year later, there may already be a developing price war in digital music. Wal-Mart undercut iTunes, Napster 2.0, and others by selling individual songs for 88 cents.

As consumers make the switch from illegal to legal, they will facilitate a change in the industry that will solidify the reign of the single and continue to reduce the importance of the traditional album format. Further, once enough people jump to programs like iTunes and Napster 2.0, the content diversity of programs like KaZaA and IMesh, which are decentralized and user-based, will eventually fall below that of the pay services.

The flip side of growth in the digital and online sectors is that diminishing record sales have put many physical record stores out of business. Los Angeles-based Wherehouse Entertainment filed for Chapter 11 bankruptcy last January, and has closed approximately 300 stores around the country since then.

They are left with 111 locations and have amped up their online presence as part of a new business model. Also in January 2003, Best Buy closed 107 Musicland-division stores nationwide. At that point Best Buy had already closed 160 stores within the past year.

A survey of local indie record stores including Solid Grooves, Rasputin Music, and Streetlight Records, revealed that all have seen music sales decline considerably over the past few years. They cite different reasons, ranging from the poor economy to the internet's dominance to the advantages held by national chain stores.

Fueling the demand for digital music is a growing arsenal of consumer electronics like digital music players, cell phones, and other wireless devices that support "digital rights management" technology, which safeguards files from being pirated.

Hewlett-Packard announced on Thursday, January 8., that it would be selling a version of Apple's iPod player called iPaq and including Apple's music software in its machines. The alliance adds the market's leading digital music player to HP's line of consumer products, which could significantly enhance their combined share in the business.

As the year 2004 unrolls, the entire music industry is in the process of changing its approach to sales and consumption, and this will be the year when the business truly begins to transform from physical to digital. Upcoming changes to stay on top of include pricing and features offered by online music sales services and advancements in consumer electronics.

Contact Nate Seltenrich at (408) 554-4546 or nseltenrich@scu.edu.