The Fate of Online Music at Streaming Media

The hipster music industry crowd gathered in the late afternoon Wednesday at Streaming Media West to discuss the unresolved fate of the digital music industry.

On hand for this lively debate was Sean Ryan, president and CEO of and music subscription service Rhapsody; David Frerichs, founder and chief technology officer of IM Networks; Zack Zalon, general manager of Radio Free Virgin; Dennis Mudd, CEO of MusicMatch; and recording industry representative Ted Cohen of EMI Records.

Moderator Phil Leigh of Raymond James & Associates began the discussion by asking the audience if they had ever used Napster to download music. A big show of hands. He then asked how many had used one of the currently available subscription-based substitutes. Another big show of hands. He later asked how many had been happy with the results of using a subscription-based music service. Only two or three people raised their hands.

It is no surprise to anyone, particularly Ted Cohen of EMI, that domestic CD sales are in a slump, much like they were in the early 1980s when the CD industry took hold and jousted vinyl records out of the number one spot. It is also no surprise that music piracy is beating out market share and that the recording industry is stymied by its need to reinvent itself in the digital age and is unable to find its footing in the quicksand of this new economy.

But what are the solutions? Is there a viable, copyright-friendly alternative to Napster? Can Recording Industry Association of America-backed subscription services like MusicNet,, and Pressplay eventually fill the void?

Digital piracy continues to thrive among peer-peer groups like Morpheus and Grokster, and nearly 1.2 billion blank CDs were purchased in the United States last year, far exceeding the annual purchase of prerecorded CDs.

On top of that, according to some of the panelists, the Big Five record labels (Warner Music Group, Universal, Sony, EMI, and BMG) are still excluding some of their best music offerings from leasing agreements with legitimate subscription services, leaving these services with large libraries of music but not always the hottest, most in-demand content that sophisticated music lovers want to pay for.

Zack Zalon of Radio Free Virgin agreed that the record labels are holding back on content providers and that the music they license to outlets such as Radio Free Virgin is not compelling enough for its listeners.

“The Internet makes piracy very easy and it doesn’t feel wrong,” said Mudd of MusicMatch, explaining why getting a grip on the digital music industry has been so confounding and why the temptation to steal is so great. “There is an in-between right now. Some people just can’t bring themselves to pay a monthly fee for access.”’s Sean Ryan pointed out that not long ago everyone thought the Internet would be free, thanks to NetZero. But that didn’t work and they ended up charging for service, which is analogous to the ease and accessibility of digital music piracy for the average online consumer versus the inevitable copyright crackdown on digital piracy.

“The idea that music will be free is a joke,” said Ryan. “A pirate’s dream!”

The problem, according to some of the panelist, is that it’s a lose-lose situation at present. The process is still evolving. Music services don’t have enough clout to attract the mass market of digital music lovers, and yet the all-powerful record labels are losing out as their valuable music assets get pirated away by younger generations of users.

“It’s becoming a generational expectation that music is free,” said Frerichs of IM Networks; “How do we move pirating fans back to the legitimate side of the industry?”

“People will pay for content if we develop compelling models,” said Ryan, although no matter what, there will always be some degree of piracy.

The issue of how to control the use of digital music arose. Are users really getting what they want from subscription-based services despite the understanding that people most often want a tangible music product, something they own or have burned themselves that represents their own music preferences?

“At least Napster created passion for music,” said Zalon, suggesting that music services such as Pressplay and Rhapsody have done little to compare to the wonder and excitement that surrounded the Napster phenomenon.

According to a digital media report done by moderator Phil Leigh titled “The Second Coming of Online Music,” consumers are looking toward the day when they will have fast and reliable access to their choice of music.

“Surveys have demonstrated that the two most important reasons that users employed Napster were (1) they could find just about any composition they wanted and (2) they could access it immediately without having to take a trip to a retailer or waiting for a mail delivery order,” stated the report. “Surprisingly, the free price ranked as only the third most attractive feature.”

One panelist called Napster a terribly squandered opportunity on the part of the record companies.

“Napster was limitless” the panelist said, adding that in many ways, had the Big Five seized on the moment by sidestepping a major lawsuit, they could have directly accessed the mass following that Napster had already cultivated. Instead, they are facing an uphill battle.

“There has to be a base level service with which to convert people from Napster and Morpheus, where we can add tiers of service depending on what they want,” said EMI’s Cohen. “We want to create reasonable boundaries, so in effect you have the equivalent of a curfew. There are barriers, limits to the number of copies that can be made. You cannot sustain the business if there is unlimited access.”

A strong belief among the panelist was that the business model for the record industry must eventually change and that the online consumer has already proven that what it wants is all-access, even if they have to pay for it. Ultimately, this change in business strategy for the recording industry could be compensated for by reduced manufacturing and marketing costs, said one panelist.

“Digital delivery will enable a more efficient business model, but behavior needs to change. We need to speed-bump the technology and slow it down,” said Mudd. “As we get the model and make it easier for people, sales will go up.”

The general consensus was that the next year in the digital music space will bring to light numerous trial and errors, but that eventually, copyright law will prevail and some sort of business model will eventually be accepted by music consumers.

Or at least they hope.

“The future of the business is completely unknown,” said Zalon.

“Whatever models win, we don’t care,” said Frerichs. “We’re here to enable the technology.”

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