Juking Around With MP3

The music business is about to change profoundly -- if only the major players would admit it.
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Editor's Note: The MP3 phenomenon promises to change the music business forever and to create a new round of e-commerce fortunes. Jim Seymour, TheStreet.com's technology expert and a longtime professional musician, explores the curious world of downloaded music. Today, he takes a look at the technology, the worries and the players in this burgeoning industry. Tomorrow, Jim will point out hot prospects for investors among the companies leading this revolution and explore how you can sample MP3 yourself.

The revolution in the digital-music world gets stranger and scarier, at least for some recorded-music vendors, almost every day. It began two years ago with MP3, a shot across the bow of an industry that's as much out of touch with technology today as any other I know.

The digital era is going to change the music business profoundly, and yet many of the principal players, blinded by fear and frozen by uncertainty like deer caught in headlights, still just don't get it. They're living in the 1970s, and their retreat from reality is making their problems much worse.

In case you've been on Mars for the past couple of years, here's the necessary background. The audio portion of the digitally-encoded-movies MPEG-1 spec is called MP3, for "Motion Picture Experts Group, Layer 3." As an audio-only file format, it was further developed by Germany's

Fraunhofer Institute

and France's

Thomson Multimedia

. MP3 compresses audio files by a factor of about 10 times, down to about one megabyte per minute of music with near-CD quality. It's easy to transfer existing digital audio recordings, such as CDs, to MP3 files saved to your PC's hard disk, from which they can be played via the often very-high-fidelity sound systems installed in many PCs today or piped out to separate, "real" stereo systems. You also can post those files on a Web site so that anyone who knows where to look can download them.

MP3 buffs have been transferring to Web servers thousands and thousands of current and popular older CDs, so that with a little searching, you can find almost any recording you want as a downloadable file on the Web. How big a deal is this? Search on

AltaVista.com

for MP3, and you'll find 2,470,910 items. (Actually, that was Monday; the number's inevitably higher today.)

Artists such as

Tom Petty

, the

Beastie Boys

and

David Bowie

have released songs in MP3 format on the Web. The rap group

Public Enemy

says it's going to release its entire next CD on the Web in MP3. You can already buy MP3 songs by

Louis Armstrong

,

Patsy Cline

and other name-brand artists of earlier days.

This isn't a tiny, fringe thing. This isn't a long shot. This isn't Kansas anymore, Toto.

Needless to say, this scares the daylights out of the record companies and the performance-rights licensing entities, such as

BMI

and

Ascap

. You and I will stop going to

Amazon.com

(AMZN) - Get Report

or

Tower Records

to buy new CDs, they're convinced; we'll just hunt down MP3 versions of the new albums on the Web, download 'em, then sit back to enjoy the tunes.

Want to take a few tunes with you when you go cycling or commute to work? Pick up a $150

Diamond Multimedia

(DIMD)

Rio

, a cigarette-pack-sized portable MP3 player much like a

Sony Walkman

or

Discman

, download your faves into it, and you've got

MP3 Hits The Road, Jack

. In your pocket. For free.

Maybe even worse, goes the recording industry's thinking, since most pop music CDs are filled these days with a lot of ... well, filler ... you won't be buying the nine songs you don't care about on a CD, only the two or three you do want.

Revenue, either way, to the record store, record company, performer, songwriter? Zilch. So they're scared. Big-time.

Know what?

They're absolutely right.

Many of today's recorded-music buyers

will

slow their purchases of CDs, instead in effect pirating MP3 files of the music they want via the Web. But by no means all of them will. The CD has years ahead of it as an important music-distribution medium. And not all of us want to be pirates; we're happy to buy music, not steal it, if given a chance.

But downloaded music is already a sizable endeavor, and it's about to get much, much bigger.

Groping Toward Legitimacy

It's easy to understand the knee-jerk responses of the music business. The

Recording Industry Association of America

tried unsuccessfully to enjoin Diamond from selling the Rio. The performance-licensing groups have been churning out press releases, and the major labels have been working furiously behind the scenes to come up with "secure digital-music" systems -- in other words, download protocols that will let them sell you digital music files over the Web only after you've paid for them, without worrying that you'll then be able to copy and redistribute them.

In other words, they want to kill MP3. Big surprise.

I've watched this with some glee because it's a lot like closing the barn door after the horse is out. Or better, calling the fire department a month after the barn burned down.

MP3 is so firmly established today that it's very unlikely even the most powerful alternative technology -- pushed by the strongest possible industry alliance, united behind the most robust non-MP3/no-copying scheme -- can kill it any time in the foreseeable future.

That hasn't stopped companies all over the lot from trying to develop a secure-download system. If anyone succeeds in producing a truly pick-proof digital lock, they stand to make a mint. But remember all the frenzy over antisoftware-copying schemes a decade ago? Efforts to copy-protect software were eventually abandoned because they proved so relentlessly burdensome for legitimate users -- the paying customers who were coughing up $495 a copy for

Lotus 1-2-3

-- and also because about a month after every new copy-protection scheme was announced, a hacker somewhere defeated it. Today, in the Web era, those anticopy-protection hacks can be distributed worldwide in just seconds, so the window of protection for

any

method today is likely to be very short.

Still, lots of companies are trying.

Microsoft

(MSFT) - Get Report

is building secure-music-download code, called Windows Media 4, and claims to compress music into half the space required for an MP3 file into its products -- though it has yet to sign a single major record company to use its system.

RealNetworks

(RNWK) - Get Report

supports both MP3 and its own RealMedia file formats in its sensational new

RealJukebox

application. The

Secure Digital Music Initiative

, an alliance of more than 110 record and music producers, hopes to develop and use its own scheme -- or bless an independent one.

Sony

(SNE) - Get Report

says it has a killer secure-download system almost ready. Even

AT&T

(T) - Get Report

, which I am long --

AT&T, for God's sake?!? That famous backer of rock-and-rollers?

-- has a subsidiary,

a2b Music

, which is trying to peddle its own encoding-decoding system.

And as

Herb Greenberg

pointed out last Wednesday, among the many long shots in this game is his old favorite

CustomTracks

(CUST)

. Last week, CustomTracks named Douglas Kramp executive vice president of strategic business development, and he then proceeded to say that CustomTracks' "new Digital Signature technology, in my opinion, is the most exciting development on the Internet since the browser." Uh-huh.

You get the idea: This is turning into a feeding frenzy, full of unlikely boasts and self-serving PR.

Desperately Seeking a Standard

As much as I think MP3 can't and won't be dislodged anytime soon, it's also clear that this situation won't continue forever. But a solution is complicated and has at least two parts:

First, CD publishers have to find a way to change the CD production system itself, so new CDs can't easily be digitally copied. This is a massive task with potential for all sorts of incompatibilities with existing CD players. But unless something is done, no matter what the record companies do about secure downloads, anyone will still be able to buy a CD and almost effortlessly record its tracks onto MP3 files. And remember, this is only an answer for future recordings -- it doesn't help with the hundreds of thousands of CD titles already in existence.

Likelihood of a quick, enduring fix: Essentially zero

.

Second, the recorded-music industry needs to coalesce behind a single, nearly bulletproof standard to allow copy-protected online sales. Tough for the reasons outlined above. Worse, the real vice of MP3 for the music business is that it's so addictive. Once you've tasted the ease of downloading and saving MP3 copies of songs you like on your hard disk, you find it hard to take seriously the need to buy those $15 Frisbees, the need to buy a bunch of third-rate filler material to get the hit tunes you want and the whole hassle of shuttling CDs in and out of whatever you play them in.

Likelihood of a quick, enduring fix: Quick, yes; enduring, maybe. Not soon

.

As you can see, I'm a pessimist that the record companies' problems will be solved in any substantial way very soon. But call me an optimist from the consumer's point of view -- at least, from the short-term perspective. Longer term, of course, if recording artists, music publishers, songwriters and record companies can't make money, we'll see far fewer new albums and much less new-artist development.

Music isn't going away -- and you can make a good case that the continuing success of MP3 could actually lead to a new flowering of recorded music by putting control of recordings in the hands of the artists themselves -- but this extended period of transition is going to be rough.

Tomorrow: Spotting investments in the emerging downloadable music market, and exploring for yourself what the MP3 revolution is all about.

Jim Seymour is president of Seymour Group, an information-strategies consulting firm working with corporate clients in the U.S., Europe and Asia, and a longtime columnist for PC Magazine. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. At time of publication, Seymour was long AT&T, although positions can change at any time. Seymour does not write about companies that are consulting clients of Seymour Group, or have been in recent years. While Seymour cannot provide investment advice or recommendations, he invites your feedback at

jseymour@thestreet.com.