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Last Updated: Thursday, 25 March, 2004, 00:20 GMT
Can the music business compete with free?
By Tim Weber
BBC News Online business editor

Outkast's Andre 'Dre' Benjamin, left, and Antwan 'Big Boi' Patton
Hey Ya - did you pay for your download?
The UK record industry is threatening to get tough on people illegally downloading music. Where will this leave consumers, artists and the industry?

Mother is happy. Fourteen-year-old George is safely at home and not with his dubious friends.

Pecking away at his computer, listening to Outkast's Hey Ya, he won't get into trouble with police, will he?

He might - soon.

George downloaded the Outkast album from the internet without paying, and in the eyes of music industry bosses that's just as bad as if he had shoplifted the CD in the Virgin Megastore down the road.

In the US, the record industry has filed lawsuits against nearly 1,600 people for online copyright infringement.

"This is not about going after our customers. Illegal downloading is stealing, they are not customers but thieves," says David Munns, boss of EMI Music in North America.

The UK's music industry association, the BPI, might soon follow suit.

Final warning

Record industry warning message on Kazaa
Coming soon to a Kazaa filesharer near you

An "awareness campaign" will drive home the message that most filesharing is illegal, and warn darkly of lurking dangers: computer viruses roaming filesharing networks, and software like Kazaa allowing strangers to sniff out personal files like your tax return.

Hardcore offenders that offer large numbers of songs for illegal download will have warning messages pop up on their screens, a "final warning" that they "risk legal penalties".

Lawsuits are not imminent in the UK, industry officials insist. The threat is there, though.

The perfect storm

The original Napster frenzy may be long over, but new software like Kazaa, WinMX, Grokster and Gnutella has taken its place.

April 2002: 600m
April 2003: 1.1bn
Jan 2004: 900m
April 2002: 3 million
April 2003: 5 million
Jan 2004: 6.2 million
source: IFPI

The International Federation of the Phonographic Industry, IFPI, estimates that in January this year about 900m illegal music files were available on the internet, offered by 6.2m users of so-called peer-to peer software.

Together with the spread of CD burners in home computers and a tsunami of CDs pirated commercially in Russia and the Far East, the music industry says it is in the centre of a "perfect storm" that's been raging for four years.

Global annual record sales have plummeted in value from $40bn to $30bn.

"If you get what you want when you want it for free, there's no incentive to buy," says IFPI boss Jason Berman.

Top executives, meanwhile, paint a doomsday scenario of a collapsed industry, where nobody nurtures new bands or markets stars.

Filesharing and artists

Many will find it hard to shed tears for record bosses.

Peter Gabriel at an OD2 news conference
Small bands depend on record sales for 60% of their income
Peter Gabriel

But this is not just about them, says Peter Gabriel of Genesis fame and a rock legend in his own right.

He has a unique insight into the industry: a successful musician, owner of a studio and the Real World label, and one of the founders of OD2, currently Europe's biggest music download retailer, serving portals like Wanadoo and Tiscali.

"Yes, the big stars might be able to give away their music for free, because they have lots of revenue streams: concerts, television deals, merchandising," says Mr Gabriel.

"It's the smaller bands and artists that will suffer, because they depend on record sales for 60% of their income."

Of course, piracy has been around for ages. But today's pirated copies are of perfect quality, and many songs appear online even before they are officially released.

Every time that happens it leaves "a huge global damage crater," says Peter Jamieson, the BPI's executive chairman.

The online mess

But why did the industry fail?

Kylie Minogue and dancer
The industry says online pirates cost artists and producers billions of dollars
Music firms made the "cardinal mistake of totally ignoring consumers," says Alain Levy, the boss of EMI Music.

Download sites came and went, failing over poor usability, faltering technology and expensive pricing.

And the movie industry is next in line for a beating.

"When the new Star Wars movie was released, it was online within 24 hours. Two days later it had been downloaded 45,000 times," says Richard Gelfond, co-chairman of Imax, the large-screen and 3D cinema firm.

Downloading that film took four hours. With broadband pipes rapidly getting fatter, DVDs could go the way of CDs.

Dangling carrots

To stop the rot, the media giants can't just rely on law suits.

"We have to have carrots along with the sticks," says a top executive at one of the big five record companies.

But talking to music bosses, it quickly becomes obvious that nobody is sure what would make the best carrot.

Beyonce singing at the Super Bowl
Beyonce's Super Bowl appearance - now available on iTunes
Pete Gabriel says that "to compete with free we have to provide something better".

Get a song for free, for example, but pay for cuts of the song in progress or extended live recordings. Or let the artist become your digital companion, scheduling your Media player with the music he or she listens to.

Some of this has already begun to happen.

Days after the Super Bowl, Beyonce's rendition of US national anthem Star Spangled Banner popped up on iTunes.

And don't just buy your favourite tune but get the very version you heard at last week's open-air festival. US cult band Phish already has more than 40 gigs on offer.

In the movie world Richard Gelfond hopes "the Imax experience" will do the trick, as it can't be brought into the living room.

The nasty DRM secret

For music executives, though, this does not solve the problem of rampant copying. How can consumers be stopped from becoming distributors through file-sharing?

The magic formula is DRM, short for Digital Rights Management, usually a software solution that controls what a buyer can do with the music.

Britney Spears
The industry is looking for ways to turn the internet into a gold mine
The results, though, can be infuriating. Radiohead's most recent CD can't be transferred to MP3 players and played on a PC it effectively freezes the rest of the machine.

In an age where MP3 players are replacing the walkman, it leaves consumers cheated.

Record executives take heart from the arrival of technology firms on the scene. Online music stores like Apple's iTunes and Roxio's Napster 2.0 at last promise the ease of use, pricing and DRM technology that can persuade consumers to stay on the legal side of downloading.

There are still hitches. iTunes, for example, ties you to Apple's expensive iPod player if you want to be mobile.

Pricing could still become an issue. In the US a song usually costs 99 cents; UK consumers, charged nearly double at 99 pence, might bemoan another "rip-off".

And after a long drought European consumers will soon face online music overload, with dozens of web sites ranging from iTunes and MSN's music club to Wippit's legal peer-to-peer technology vying for attention.

But 2004 could be the year when online music is finally taking off - in its legal form, that is.

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