The Current State of E-commerce in Music

Law is the chaperone of trade, and its guarantor. It stimulates rather than inhibits growth in the marketplace. Historically, massive investment in a new market happens as soon as there is a minimum contractual base for commerce. The argument is pertinent today when we think of E-commerce, a modern form of trade that actually takes place over the Internet when a buyer visits a seller's web site and makes a transaction there. In particular, for the Internet to become an open route for the distribution of music, record companies and societies of artists and composers need to have complete confidence in the medium. Court rulings, therefore, matter tremendously—not just to the future of music but to e-commerce in general.

The principle is that all the creators in the production chain that wish to be compensated should be. It has become critical, therefore, both to distinguish between legal and illegal offerings in the Internet and to address concerns of "fair use" of digitized product. For example, anyone can compress their music into MP3 files, but when Napster(Opens in a new window) is used to exchange songs in a public medium without the artist's permission, legal precedent is broken. Naturally, where there is a commercial benefit, there can be no fair use of music, as MP3.com(Opens in a new window) found out with its novel MyMP3.com site.

Technical Challenges
Such is the law, which, by affirming property rights, likely brings more sellers to market. After all, we try to convince the Chinese that copyright protection will give local business, including their own music business, a boost. The same applies to e-commerce in the Internet. To be sure, there are technical challenges too. A system that delivers product for free on the Internet, such as Napster, is far simpler to develop than an alternative secure and legal technology, which has to procure revenue for many concerned parties. The music business, for instance, has a complex clearinghouse mechanism, and this has to be replicated. To "steal the clothes" from the pirates is therefore unworkable, says Jay Berman, chair and CEO of the International Federation of the Phonographic Industry.

It should be realized that the standardization of delivery and collection mechanisms online is also a thorny issue which takes time to be resolved, and requires continued negotiation between content owners, rights management companies, and clearinghouses. In particular, the security system which encodes files with usage rules establishing how many times a user can play or copy a digitized piece, has to be well integrated with the new post-MP3 compression-decompression algorithms (codecs) that transfer files over the Internet. Some problems are evident already. Microsoft, a key e-commerce player, appears unwilling to make its digital rights management system work with a file compression method other than its own Windows Media codec—which prompted BMG Entertainment to have two file formats and security systems in place for its August 17 launch of downloadable music, one for North America and another for Germany.

There is nothing unusual about all of this, of course. The colonization of the Internet requires extensive police and administrative functions. For the market to be as broad-based as it can be and enjoy lasting success, it has to ensure good representation as well. A consumer might become impatient with a record company that procrastinates on e-commerce, but, as suggested above, that timing may not be entirely under the record company's control. Additionally, there may be a considered policy that deserves, I think, to be better understood.

The Revenue Pie
The music business is global. Talent may be bred locally, but the machinery that transfers the product of that talent to consumers is organized internationally. Sales by the top companies are based at least on equal measure in the U.S. and the rest of the world, and music is only a part of their revenue pie (as little as 11 percent for Sony, 21 percent for BMG, 25 percent for Time-Warner, and about 45 percent for Vivendi-Seagram). Inevitably, music Internet plans are going to take longer to execute as other media or company interests have to be considered and integrated.

Given the scale involved, mergers may be the best solution to cope with the shifting sands of technological change. Seagram-Universal, which lacked Internet definition, sells to Vivendi, whose Vizzavi portal is to be run by the English telecom Vodafone. The site will be well-suited for cellular phone usage. Time-Warner sells to AOL and instantly becomes a key Internet player. BMG buys Barnes & Noble and signs deals with Terra Lycos. And then there is the host of smaller partnerships, joint ventures, and agreements geared to secure a presence on the new horizon of music and other downloads. It is perhaps understandable then that, during the Internet's incubator age, the major music labels have not been overly rushed by consumer demand for quick downloads. The market will still be there, barring any surprises in court rulings, after they finish taking care of business.

Yet at the time of this writing, some progress is being made on the download front. All majors except Warner have now announced plans for limited releases of CD single tracks. Sony started quietly in April with 20 or so offerings at its web site, including songs by Marc Anthony, Ennio Morricone, and Joey McIntyre. EMI followed early in July, giving online retailers 100 downloadable albums and single cuts from them by artists such as Pink Floyd, Bonnie Raitt, and Spice Girls. Universal was next with about 60 tracks distributed through affiliate web sites. Like the rest, it restricted output to previously released material, in this case by the likes of Live, George Benson, and Luciano Pavarotti. Finally, BMG started targeting German music fans with 300 downloadable songs by acts such as HMI, the Guano Apes, and DK Tomekk.

The Majors Play It Safe
This odd array of downloadable product suggests conservatism. Indeed, for now the aim is mostly to get consumer feedback and avoid overly alienating the traditional retail base. Prices are high, typically starting at $1.99 a song and higher—but not necessarily a deal breaker for buyers. And there is yet no common corporate standard of delivery and fulfillment, let alone a clear conception of how downloadable music should be packaged. The first issue could hinder consumer acceptance. The second could create confusion. Will labels, for instance, now follow the lead of Universal and give a multimedia experience with each song file?

In the meantime, other companies are taking advantage of the MP3 phenomenon and filling the download void. New all-you-can-eat subscription services have recently been added to the menus of EMusic.com and SpinRecords.com. Both offer single songs, mostly by independent artists, for 99 cents but now let consumers download unlimited amounts of music for $9.99 and $4.95, respectively. Yet the profit potential of these services, which legitimately compensate artists and publishers, is still unproven. Their business, together with major label download services, is probably less than 1 percent of total music sales.

Subscription Systems
Streaming music, by comparison, is clearly gaining in popularity. The majors appear to be embracing subscriber-based streaming models. Sony, Warner, and EMI are backing Music Choice.com(Opens in a new window), which recently launched a subscription system that gives users access to 30 channels of music, audio and video on demand, promotional music downloads, webcasting of exclusive concerts, and artist chats for only $4.99 a year. The competition is Musicbank.com(Opens in a new window), which has agreed to stream BMG music and hopes to sign with the rest of the labels in the coming months. The service will be free, but a higher bandwidth version will cost about $20 a month. MP3.com and MyPlay.com(Opens in a new window) are also players in the field. While the latter has no plans for subscription services, MP3.com has signed agreements with BMG and Warner Music and already offers both a classical and a children's subscription service at $9.95 a month. To boost physical sales of CDs, MP3.com is also promoting uploads by new artists, which can be streamed or downloaded, and MP3.com takes a reasonable cut. The company has assigned the princely sum of one million dollars per month for distribution, which it bases on the number of registered song hits at its site. For many artists, this "payback-per-playback" scheme can afford additional revenue to their CD sales. Some Berklee faculty, for instance, have taken advantage. Guitarist Bruce Bartlett is one of MP3.com's top earners.

A Look Toward the Future
Overall, the future of E-commerce in the music industry is subject to many of the same considerations that apply elsewhere. Consumer streaming and downloading is limited now by a typical 58 Kbps connection. Coming wireless access to the Internet at 115 Kbps, and cable modems, which run at 500 Kbps, should give subscription and download services a push. More online shopping will allow for real-time price comparisons and market transparencies, which will bring prices down (at least one-fourth of CD Now's business is from countries outside the U.S., where CDs are more expensive). There should be more choice too, all of which will be good for consumers. Sellers will benefit as well as the music pie grows. Independent labels will likely do more business, but their share in the total might suffer as a result of the current wave of consolidations and Internet positioning.

Projections for B2B e-commerce (i.e., business-to-business transactions on the Internet) have to be more guarded than for the car and chemical industries, for instance, where an impact has been felt already. For now, it is hard to see a label contracting with a supplier, i.e., an artist, online. But a strong B2B online environment for licensing music and clearing publishing rights may be close. Companies like License Music.com(Opens in a new window), owned by Berklee alumnus Gerd Leonhard, and the regional initiatives of many national authors' collection societies are showing the way.