Forget the CD: consumers now buy music online

As he paws through compact discs in Borders Bookstore here, dentist Seth Kinder's eyes widen. "$18.99 for one CD with 10 songs?" he says, reading the price tag on Leonard Cohen's "Ten New Songs." "I can join an online service for two months for that and have unlimited access to 180,000 songs."

Mr. Kinder's impulse to go to the Internet and pull down whatever music he wants – one song at a time and with far less impact on his wallet – signals one of the biggest changes to hit the music industry since the LP.

For years, millions of Americans swapped songs on the Web free of charge. But then the courts stepped in and shut down the popular online music service, Napster, that was used to download the songs and became the nemesis of the music industry.

Now, however, a growing number of record companies themselves are offering songs over the Internet for a modest fee. Stung by the continued availability of free music from "pirate" companies operating since Napster, they're offering subscription services that allow consumers to buy songs one at a time online.

The move is ushering in a fundamental change in how music is conceived and sold. It may also lead to the eventual demise of the multi-song album or CD format itself.

"The hard copy, album-form compact disc will die. It is happening," says Don Gorter, chair of the Music Business Department at Berklee College of Music in Boston. "The manner and length in which artists make their musical statements will likely look far different than today."

The latest companies to succumb to the forces of the Web were Universal Music Group and Sony Entertainment, two of the world's largest record companies. Earlier this month, they combined forces to help make it easier and cheaper for consumers to buy songs on the Internet.

They join eight other new licensing and selling services that now include participation from all five of the world's leading record companies. The new subscription services have come in the wake of worldwide piracy that is costing the industry billions a year, threatening the decades-old economic structure of the music business.

"The recording industry as we know it is under attack from all sides and trying to figure out how to reinvent itself," says Drew Borst, an analyst for Bernstein & Company in New York.

With their eyes on such uncertain future, many artists are pulling back and waiting to see how new models of business pan out. Country star Clint Black recently laid out a detailed plan to completely circumvent record companies – with individual units purchased via the Internet from his own website, clintblack.com.

How quickly this new world plays out depends on the changing behavior of two distinct cohorts of consumers, as well as the interplay between them. One of the two groups is younger buyers, aged 16-24, who have little incentive to purchase music because of the proliferation of free (if illegal), file-exchanging services.

"Why in heaven's name would I subscribe to a subscription service for $10 to $25 a month for access to a limited number of songs, when I can have practically any song that exists for free?" asks Carey Brooks, a teenager in Sherman Oaks who has downloaded about 500 songs free from an online swapping service known as Morpheus.

From her computer hard drive, Brooks and others then download the digitized songs into other formats, from portable MP3 players, to tape decks, to CDs. While offering a fee-based alternative to absolutely free music seems ludicrous and futile to some, the new services are attracting significant numbers of subscribers, company officials say.

"A year ago, most people were telling us subscription services were a pipe dream – now nine are up and running with pretty good success," says Michael Graves, a spokesman for Lycos Rhapsody. The service, offered at Listen.com, boasts 185,000 titles via a number of packages for prices ranging from about $10 to $25 per month.

And some analysts say the prospect of sophisticated future services may appeal to older buyers.

"Downloading and organizing free music is fine when you have hours to spend doing it, but what about when you work all day and don't want to mess with all that," says Mr. Graves. "Consumers will think $10 a month to end that hassle is a small price to pay."

How such buying patterns play out may also continue to undermine the single-concept, album CD such as the Beatles' "Sgt. Pepper's Lonely Hearts Club Band," Pink Floyd's "Dark Side of the Moon," and Bruce Springsteen's "The River."

But the music industry is hoping that their online services, too, will be able to cater to those who want to dim the lights, switch on a lava lamp, and take in an uninterrupted Pink Floyd album in its entirety through the Internet. Unlike free services, record companies say their services allow for faster and easier ways to download collections of songs (including albums). They also tout the sound quality of files; the ability to list tracks and organize songs by artist, album, or title; and the inclusion of features such as Internet radio.

But the success of the music subscription services may also depend on record companies cracking down on university computer systems that engage in large amounts of illegal file-sharing. Companies are expected to increase an activity known as "spoofing" in which they flood the Internet with empty or spoiled files as a way to thwart illegal swapping. And they hope good old-fashioned consciousness raising among consumers will help.

"We need to educate a whole generation about the real costs of illegal file-sharing," says Graves. "Most parents wouldn't let their kids go shoplifting. Yet they go out and buy [CD burning] technology that allows their kids to shoplift via the Internet."

Whereas many observers both inside and outside the recording industry have long held a Chicken Little ("sky is falling") view of the current pressures on the music business, more now are taking a sanguine view that the industry had it coming by not catering to what consumers want.

But the all-of-the-above cage rattling is music to the ears of consumers like Kinder, who says he does more than buy music. He also played in a band during college and has visions of cutting, then selling his own CDs in the future.

"I don't see this implosion of record companies as anything near a bad thing," he says. "This is going to allow thousands of people just like myself to write their songs, record them, market, and share them with others like me and have a ball doing it."

Publicly Announced Consumer "On-Demand" Digital Music Subscription Services Licensed By The Major Record Labels As Of July 2002

1. CenterSpan/Scour (available on Scour.com). Licensed by Sony Music Entertainment

2. Full Audio's MusicNow (to be available on 30 ClearChannel station sites in 4 US markets – Chicago, Houston, Los Angeles & Salt Lake City – and other affiliated sites). Licensed by BMG, EMI, Universal Music Group, Warner Music Group

3. Liquid Audio's Burn It First (Burnitfirst.com). Licensed by EMI

4. Lycos Rhapsody (www.listen.com). Licensed by BMG, EMI, Sony Music Entertainment, Universal Music Group, Warner Music Group

5. Musicmusicmusic's RadioMOI (www.musicmusicmusic.com). Licensed by Universal Music Group

6. MusicNet (available on RealOne Music; coming soon to AOL presents MusicNet, Napster, and other affiliated sites and services). Licensed by BMG, EMI, Warner Music Group, Zomba

7. Pressplay (available on Yahoo!, MSN Music, Roxio, MP3.com). Licensed by EMI, Sony Music Entertainment, Universal Music Group, Zomba

8. RioPort's PulseOne (to be available via leading e-tailers). Licensed by BMG

9. Streamwaves (available on higherwaves.com; coming soon to other affiliated sites and services). Licensed by EMI, Universal Music Group

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