The Future of the Digital Content Revolution

Following our look at MP3.com (MPPP Quote) Monday, and Napster and Gnutella Tuesday, where are we headed in this copyright dilemma?

If the content-protection landscape looks messy -- well, it is messy. It's clear that major changes are underway, if less obvious how these issues will be resolved. Let me venture some thoughts on some of the most likely outcomes.

First and most important, this is not a problem -- a problem for content owners, that is (eager Napster and Gnutella users would say, "What problem?") -- that is going to be resolved by fiat. People who have grown accustomed to looking first on the Web for their music -- and usually finding it there -- rather than flipping through the bins at Tower Records are not going to stop because society says tsk-tsk.

That also holds true for institutions where the use of these programs and their clones has become commonplace. Whether in a university or the workplace, a top-down memo declaiming that "there will be no accessing Napster" is unlikely to stop illegal copying and sharing of files. The allure of free music is too strong, and more, the culture is by now too deeply embedded.

Even for digital content beyond music -- say, m-o-v-i-e -s -- where the culture of downloading rather than buying hasn't yet taken hold, mandates, legal and otherwise, not to do so aren't going to have much effect. Music-industry czars and movie-industry moguls might as well command "thou shalt not sneeze!" for all the good it will do. Even relatively vigorous enforcement of copyright-protection laws, including the new Digital Millennium Copyright Act, passed last November, is unlikely to stem the tide of free and easy sharing of digital content.

And remember the political and economic costs of vigorous enforcement of these laws. Do these industries really want to fund thousands of simultaneous civil suits? How would that make their customers feel about them? Would their artists stay with them, or bail, worried that their fans would bail on them? And do voters really want to fine Junior $250,000 for those 100 acid-rock cuts stored on his PC's hard disk ... even if that's the penalty prescribed by law?

Second, and almost equally important, is that this problem is not going to be solved in the technology labs, but in the marketplace. Both music and movie groups will fund, use and lose with anticopying encryption measures.

The problem for them is simple, and unavoidable: whatever your programmer can encode, my programmer can decode. And the numbers are intimidating: for every 10 programmers the Big Five record companies put to work on crafting copy-protection schemes, there are 10,000 bright, committed programmers out there ready to work on busting that copy-protection scheme the minute it appears.

Those building anticopying technology schemes work for money. The vastly larger number of programmers just waiting for a shot at new copy-protection methods work for glory: the worldwide attention and respect of their peers. Few notches in a top programmer's gun count so much as becoming known in the business as the person smart enough to come up with an elegant hack around a tough new copy-protection method.

So ... if the answer lies in the marketplace, how are things going to change?

1. The day of the $15 to $18 CD is over. When CDs appeared two decades ago, record companies jacked up the price from $3.95 to $4.95 for a typical album on LP ("vinyl," these days) or tape threefold. But the costs of manufacturing a CD -- less than 90 cents in reasonable quantities, including the disc, "jewel box" case and associated printed material -- were not significantly higher.

The rest went right into to the labels' Greed Fund. (And partly, in a very few cases, into the pockets of top-tier musicians and songwriters.) Look at this oversimplified chart of what happens when Tower or Virgin sells you that $15 disc:

Where Your $15 Goes The Music CD Food Chain

Source: TheStreet.com research

The retail slice is a percentage of the gross sale, so the real room for adjustment is in the labels' cut. By how much?

I've seen two studies, neither publicly available, which suggest that about $7 is the price at which CD sales could continue to boom, even with significant illegal downloading activity. Whatever price works -- and I'm convinced there is some price at which many people will continue to buy CDs -- it sure as heck isn't $15 to $18.

In any case, as you'll see next, I don't think the future of the conventional album is very bright.

Click here to read about more changes coming in the recorded-music business, in the second part of this column.