A smash hit for the song thieves

The music industry is under threat from Internet pirates, says Dawn Hayes

WHEN Blur gave a concert at the Astoria in London recently, 56,000 people worldwide logged on to watch and listen over the Internet.

EMI, the recording company, was using a system called Real Video, the first creaking piece of technology that allows video and audio to be streamed live over the Internet at something like reasonable quality. Excited by the success of the broadcast, the company is now planning a series of live events from the Abbey Road studios.

Unfortunately for EMI, many others are ahead in the race to exploit the Internet. Anyone with a modem, and a sound card in their PC can access and download music from the Internet onto either CDs or their hard disk. It can be cheaper than buying it in shops and in some cases, it's free.

The impact of the Internet on the music industry is threatening to shake it to its foundations, affecting artists, songwriters, record producers and retailers. There is an unprecedented risk that an explosive growth in piracy could threaten its revenues of $45bn a year and undermine profitability.

The industry faces the most serious threat ever to its revenues from inability to exploit copyrights. Although it is working on a legal and technological framework, copyright laws for electronic delivery of music don't exist.

Developments in digital technology are outpacing the ability of all copyright- based industries, including music, films and publishing, to protect their assets from on-line piracy.

The scale of the piracy is already daunting. Cerberus Central, one of a clutch of companies that have sprung up to sell music legally on the Internet, found, on one day alone, 65 to 75 gigabytes of CD-quality audio that lacked a coding mechanism preventing unauthorised access and distribution.

That translates into around 30,000 pirated songs which pay no money to artists, songwriters or record companies.

The limitations of existing technology are holding the breach for the time being. You can download the entire Beethoven collection on an ordinary phone line - but it would take several days because there is insufficient capacity on public telephone lines. That may be about to change.

If a Labour government is elected in Britain, it plans a change of rules that would transform "phone lines [that are currently] the equivalent of a drinking straw to the Channel Tunnel very quickly", says Steve McCauley, an independent consultant.

"The fear obviously is that, at the most extreme, through negligence or lack or foresight, all of our assets become available to absolutely everybody and the consumer is able very easily to send them to his mate," says Jeremy Silver, vice president of interactive media at EMI International. "It's very hard to see a system that would stop people taking a CD, digitising it and sending it around the Net if the bandwidth is there to do it."

There are some positive opportunities for music companies. Electronic delivery is opening up new sales opportunities. For example, EMI and Sir Paul McCartney have set up a Web site to promote his first new album in four years, called Flaming Pie. It's due to be released on 20 May. Meantime, you can go to FlamingPie.com on a host site called Hollywood&Vine.com run by Capital Records and enter your e-mail address for information about the album, from video clips to concert dates and merchandise. Four years ago, that wasn't possible.

EMI is also successfully mixing albums and multimedia technology. An album by the band My Life Story has a hybrid piece of multimedia on the disc that takes the listener to the group's Web site. Hundreds have done so.

These developments are unlikely to lift companies out of the doldrums. The record industry is expected to announce on 29 April that growth in sales of music worldwide slowed again in the second half of 1996. Sales grew at around 4 per cent in the first half of 1996, according to the International Federation of Phonographic Industries (IFPI), the global music industry body.

"The second half is expected to be lower than that," says Tina Poyser, a spokeswoman for the IFPI. That compares with sales growth of close to 12 per cent in 1995 and 10 per cent in 1994.

Piracy figures will also be revealed. Piracy from copying CDs and tapes sliced pounds 2bn off the industry's profits in 1995 and that figure is expected to have swelled in 1996.

As control of intellectual property becomes more elusive in an electronic environment where geographical borders are irrelevant, piracy looks set to explode.

"There are computer server sites in South Korea and elsewhere that are basically music warehouses," says Mr Silver.

The same thing is going on from the heart of Europe in Luxembourg and many other copyright havens around the world, according to Nick Garnett, director general of the International Federation of Phonographic Industries, the global industry body.

The Record Industry Association of America is working hard to close down the South Korean pirate sites because people are downloading entire albums from the Web.

"It's difficult to call them pirate companies in the sense that in those countries, they're not doing anything illegal," says Mr Garnett. No such copyright laws exist in South Korea and other countries.

"They're dumping software that gives people the tools to download music for free," says Ricky Adar, managing director of Cerberus, which sells songs on the Internet for a pounds 10 registration fee and 60p per song.

As yet, there is no tax on electronic data. "There's this whole grey area and nobody knows what to do with it," says Mr Adar.

A 1995 report by the British Phonographic Industry revealed that the record industry was the third biggest earner for the UK after spirit distilling and construction in terms of ratio of exports to imports. That includes invisible earnings from live performances and royalties.

It produced a net surplus of pounds 571m in 1993, similar to the net overseas earnings of the steel industry, the BPI says.

The problem of networked piracy has galvanised the industry into action to develop an adequate legal and technological framework for a world in which, as the old Net adage goes, "information wants to be free".

The IFPI succeeded in driving through a new treaty at the World Intellectual Property Organisation in Geneva last December that outlines a framework for countries to implement into national law copyright protection for digital delivery of music.

That could take place by 1998, says Mr Garnett. However, the treaty is only as strong as its weakest link. If some countries fail to ratify the treaty, online piracy will continue. Bulgaria and China are among the most prominent offenders, says Mr Garnett.

The IFPI has also led a European-Commission funded research project, due to finish in February, that is establishing the rights music producers will need to exist in the Internet market. The project is to look at electronic delivery purely within the business, not to consumers.

However, that's sparked off a fight between the music industry and network operators, including British Telecom and America Online, who want to pump music and other entertainment services over high- capacity networks.

The record industry believes the network operators should be accountable for giving access to material in copyright havens: the networks say they're bringing new customers to the record industry.

"They should be exercising the same kind of checks to ensure copyright is in place when transmitting material as they should be making to ensure the networks are not being used for distributing pornographic or politically sensitive material in certain parts of the world," says Mr Garnett.

Negotiations between the two sides reached fever pitch last December and threaten to go to court if terms cannot be agreed by the summer. While businesses lease high-capacity lines for their own private telecommunications network, public telephone networks don't yet offer sufficient capacity for people to download music easily and quickly.

BT agreed to spend pounds 15bn to lay fibre optic cables from its trunk network for the last few yards into British homes, provided it's allowed to sell entertainment services as well as telephone services.

The Government refused because it promised mainly US-backed cable companies in the UK that it would give them a head start over BT in selling entertainment services until 2002.

The Labour party says it wants an information superhighway as soon as possible to benefit public services, including education and health.

"BT is contemplating a whole range of services and a whole range of areas where they'll get into the business of publishing and distribution," says Mr Garnett.

It is also rumoured that Microsoft is planning to include audio compression software into the next version of its Windows operating system, which would allow a huge installed base of personal computers to receive high- quality audio.

Electronic delivery of music also calls into question the role of traditional retail distribution of music.

"It's a voyage of discovery for everyone," says Stuart McAllister, chairman of HMV, one of the UK's major music retailers. "Retailers can't play King Canute and say go back. Over the next five to ten years, I expect 15 to 20 per cent of our business will go in that direction."

EMI and other major record companies are already running mail-order services over the Net. But they are trailing new upstarts who are selling music using proprietary electronic watermarking systems in competition with retailers.

The biggest names include Cerberus, Liquid Audio run by Progressive Networks, N2K, CD-Now, Music Central and Eurodat. Many of them offer mail-order services over the Internet. Others offer song samples.

The Net is perfect for certain kinds of music, such as dance music, in which trends go out of fashion after a month-and-a-half, says Mr Adar.

"It's a different type of person at the moment who would download a song from the Net than the person who would go to HMV and buy a record," says Mr Adar. "But eventually it'll merge."

"I think the role the record companies play in terms of sales and distribution will lessen," says Jon Kertzer, a music consultant working with Flabbergasted, an on-line music provider based in Spitalfields, London.

Others are less convinced about the newcomers' ability to take market share from the major record companies.

"This is the gold-rush era," says Mr McCauley. "The American definition of a pioneer is someone lying face down in the mud with arrows in his back. There's a lot of that going on - companies are going in and out of business funded by millions of dollars of venture capital."