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Legal downloads buoy music industry

Tuesday, January 13, 2004

By Alex Veiga, The Associated Press

Richard Warner and his family have spent thousands of dollars over the years on music, buying more than 500 CDs and 700 vinyl albums.

Now Warner is surrendering $4,000 to settle a copyright infringement lawsuit -- the price of his 17-year-old daughter's habit of downloading music for free.

The 49-year-old California wine merchant was ensnared in a September wave of recording industry lawsuits aimed at chilling illegal downloading. But while he's angry at the music labels for suing the loyal customer he considers himself to be, Warner has signed up for an industry-backed online music service.

"I encouraged my daughter to enjoy music, and I did not want to make this a negative in our life," Warner said. "We're not going to stop enjoying music."

After four straight years of declining CD sales, the recording industry is hanging hopes for a recovery on music fans like Warner going digital -- and being willing to pay for it.

More than 19.2 million digital tracks were sold online in the past six months, according to Nielsen Soundscan, helping to narrow the music industry's losses last year.

Overall, North American music sales were down 0.8 percent last year compared with 2002, while album sales, which includes cassettes and other formats, were down 3.6 percent, according to Nielsen Soundscan.

Edgar Bronfman Jr., the former Universal Music chief who last month led a group of investors in the purchase of Warner Music from Time Warner Inc., said he believes digital music sales will eventually help the industry recover -- although continued pain will precede the healing.

"I think that the industry is going to see continued difficulty for a couple of years," Bronfman said.

He added that the music industry has only begun to tap the potential for digital distribution and that it's going to take time for the different business models to develop and grow.

"We're already seeing just the very nascent, very beginnings of that here in the United States, and I think that trend will continue," Bronfman said.

Companies from Wal-Mart to a revamped Napster have dived into online music sales. After last year's success of Apple Computer Inc.'s iTunes Music Store and iPod digital player, it's no surprise.

"We've made some incredible headway," said Ted Cohen, senior vice president of digital development and distribution for EMI Music. "Wal-Mart going into this business says a lot."

The handful of industry-licensed digital music services launched in 2001 didn't draw much interest from music fans because they had too many restrictions and not enough flexibility.

Enter Apple chief executive Steve Jobs, who persuaded reluctant record companies to abandon restrictions on selling individual digital tracks a la carte for as little as 99 cents each.

By the end of last year, after cautiously following the progress of iTunes, record companies were busy making much of their catalog available for digital sale.

After seeing many traditional music stores close, music companies now are trying to adapt to an online market where singles are king and the traditional CD format is losing relevance.

"Technology ... has leapt so far ahead of us that we kind of wound up with our heads in the sand and left in the dust, so we're playing catch-up here," said Neil Portnow, Recording Academy president and former West Coast head of Zomba Music Publishing and Jive Records.

For now, only 30 percent of U.S. households use digital music, according to a survey by research firm Parks Associates.

But helping to drive new consumer demand for digital music will be a proliferation of digital music players, cell phones and other wireless devices that can support "digital rights management" technology, which safeguards files from being pirated.

"We think 2004 is going to be the year of subscription content on portable devices," said Scott Kauffman, head of digital music retailer MusicNow Inc. "The notion of figuring out which 12 songs to put on a disc that doesn't fit in your pocket when you already have 12,000 that fit in your pocket ... that's just over."

Already, signs point to a budding price war in digital music. By selling individual songs for 88 cents, Wal-Mart undercut the 99-cent price set by iTunes and followed by Napster, among others.

Industry watchers expect song prices to drop further, though for now, profit margins are squeezed by the average 25-cent credit card transaction fee per song.

Still, lower-priced song downloads may not be able to compete with the no-cost and restriction-free music available over peer-to-peer networks.

A survey released last week by the Pew Internet & American Life Project and comScore Media Metrix found that since May, the percentage of U.S. Internet users who download music was down by half, to 14 percent. And while that figure does not include Internet users younger than 18 -- a ripe demographic for free downloading -- the same report also found marked declines in usage of such well-known file-sharing programs such as Kazaa and Grokster.

But other indicators suggest that the free-for-all is hardly waning. BigChampagne LLC, which also tracks file-sharing, reports that usage of such swapping networks as FastTrack and Gnutella continues to rise.

Meanwhile, the music industry's legal campaign against online piracy has run into some static. Last month, a federal appeals court ruled that it can't force Internet providers to identify music downloaders, making it more difficult to track down and sue individuals it suspects of piracy.

Juan Torres, a 22-year-old security guard in Los Angeles, says he still downloads from the Internet, avoiding sharing his music so he won't become an easy target for a lawsuit.

"If I had a choice in paying for it and downloading for free," he said, "I'd rather download it for free."

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