August 19, 2000

BARRON'S: Plugged In: Napster Has The Record Industry In A Purple Haze

As the record industry continues its relentless campaign to crush Napster in court, the question is not so much what will happen to the controversial start-up, but what will become of the business upon which it has wreaked so much havoc.

The future of Napster, the Internet file-sharing phenomenon, is murky at best, but the music industry is in a chaotic state of deconstruction. Record companies, working hand-in-glove with corporate-owned radio stations, have ruled over rock bands and other musical artists with an iron fist. But the industry's Hollywoodcentric business model, which is woefully antiquated, inefficient and, at times, downright sleazy, is imploding before its very eyes.

"The major record industry labels have been ripping off artists for years. And they think they have to have control over everything that involves music," explained rapper Ice-T at a recent workshop in Los Angeles sponsored by Red Herring magazine. "Napster is going to morph into something crazy. The Internet is up. It is linked. Yet I see people trying to hang on to something that is old," said the artist, who has successfully crossed over into acting and production.

No one is quite sure what the music industry will look like in two years, much less in five years. One thing is certain, however: Change in the music business has lagged that in other sectors of the entertainment industry. Where technological innovation and competition from cable television and videotape recorders may have forced TV networks to shed some of their arrogance during the past 10 years, the record companies have done everything within their power to hoard control, perpetuate mediocrity, stifle creativity and retain the status quo.

"The pace of change at the major [record] labels hasn't been what people would like to see," concedes Peter Standish, a Warner Brothers vice president of marketing. But the industry isn't in the dark, he argues. "When Madonna comes to us to talk about her new record, the first thing she wants to talk about is her Internet strategy. That wasn't the case on her last record," Standish says.

That the Material Girl appears to "get" the 'Net comes as no surprise. But the fact that she, not her record label, is driving the conversation shows how sclerotic the record industry really is. "You change or you die," says Tim Quirk, managing editor of Listen.com, an online music seller based in San Francisco.

This much is clear: The Napster experience is not about intellectual property theft, though questions surrounding who owns the music and who gets paid must ultimately be resolved. Napster is about the untapped potential of the Internet. It has proved that people are willing to share computer files from their databases and that music fans are willing to receive their music in a digital form via the World Wide Web.

Indeed, it now seems inevitable that the compact disc will go the way of the vinyl record. But the industry will stumble through various pathetic business models before it finds its way, says Quirk, the online music editor, Stanford graduate and former punk bandleader.

What's going to happen, Quirk asserts, is that record labels will become optional to artists, mostly for their marketing muscle as opposed to distribution capabilities. Under the current system, record labels support only the mainstream commercial cash cows, making it more difficult to bring a broader variety of music to market.

"Right now, it's sort of all or nothing for musicians," Quirk says. "Everything depends on how many units you ship, which isn't necessarily good for artisttypes."

After the dust settles, artists could be the biggest winners in an Internet-driven recording industry, which is ironic given that many recording artists view Napster as the enemy. Indeed, it is the record labels, not the artists, that are most likely to see their cut diminish.

The reality is that, under the American system, only songwriters -- not the performers -- get paid when their music is played on the radio. What's more, most record deals involve cash advances that are used to make the recordings, and many artists outspend their advances.

"There are so many hidden costs, it gets really disgusting," Quirk says.

True, Napster enables computer users to copy and distribute music without having to compensate the owners of the intellectual property, namely the record companies and the songwriters. But music lovers have used tape recorders to make illegal copies for decades. Now, though, Napster allows for such thievery on a much grander scale. The Internet company's peer-to-peer file-sharing system avoids central computer servers and allows everyday pirates to copy digitally and distribute their illegally gotten gains across the globe via the Internet in minutes.

"Sure, you could tape a CD and send it to my homeboy," Ice-T notes. "But the mail is slow and the Internet is fast. You've got your cops and you've got your robbers. And it's going to get real hectic trying to police cyberspace."

Obviously, the rapper-turned-entrepreneur gets it. Pandora is out of the box, and the way music is made, played and distributed will never be the same.

Ice-T also agrees with Quirk that artists have a chance to thrive under a new world order and should be able to recapture some control over the music business. Music will be digitally distributed over the Internet. The big questions are: Who will pay for the music? And how will it be played? The conventional wisdom is that people are likely to pay monthly subscription fees for a service that downloads or streams music into yet-to-be-perfected digital players.

The problem is that desktop computers still dominate the hardware front when it comes to playing digital music. "The days of the digital download will not be upon us until the hardware catches up to the software. It's still a joke," says Ice-T, who received shares in <> in return for certain rights to his music.

Right now, the portable digital players are still primitive. But eventually, consumer electronic manufacturers are going to figure out how to make the right products at affordable prices. In addition, the broadband pipes necessary for topshelf distribution of digital audio and video are still not readily available, making streaming audio too expensive at this point.

In the meantime, Ice-T is taking matters into his own hands. In an interview with Barron's, he revealed plans for an independent music label he is launching on the Internet this fall. In keeping with his gang roots and urban fan base, the label has been dubbed Coroner.com.

"It's like we are starting any other independent label. Only it's on the 'Net," he explains.

The rapper hopes to sign a dozen or so young artists to modest contracts that will allow them to distribute free samples of their work. They will also post raw, low-budget videos on the site to gain exposure and drive online traffic. If some of his artists hit it big and attract attention from majors, then Ice-T's label would get a cut as the producer of future records, which is how it works with indie record labels now.

He's actually using a "bricks-and-clicks" business model, melding the marketing power of free digital distribution with the making of modest, low-budget CDs that he plans to sell directly through his Website. T-shirt sales and concert appearances will contribute to revenues, just as is the case for most artists signed to independent record labels under the old business model. "You make most of your money offline," he says.

Considering that the music industry will be in flux for the foreseeable future, the enterprising entrepreneur figures this is a low-risk way for him to position himself for the post-Napster era.

"I'm trying to create leverage," Ice-T figures. "This site might be a flop. Or maybe it won't. But at least I'll be in the game."