Enter Jobs, exit music piracy?

Paid services may soon rival file-swapping networks, according to analysts, giving Apple a leg up in its bid to help fix the beleaguered record industry.

Evan Hansen Staff Writer, CNET News.com
Department Editor Evan Hansen runs the Media section at CNET News.com. Before joining CNET he reported on business, technology and the law at American Lawyer Media.
Evan Hansen
3 min read
If Steve Jobs wants to save the music industry, he'll have to convince millions of kids to give up free file-swapping networks and buy their MP3s instead.

The Apple Computer co-founder and CEO has been exploring an acquisition of Vivendi Universal's music division, according to a source familiar with the situation--surprise talks that underscore the deep problems facing the music industry. Apple's entry into the recording business would no doubt carry huge risks for the computer maker. But it could also help create a catalyst for an industry desperate to innovate its way out of the technology trap set when MP3s met Napster and the high-speed Net some four years ago.

Jobs has pulled rabbits from hats before, but this job may require less magic than it seems. Forcing MP3 traders to pay their way once seemed fanciful, but there are signs that the file-swapping juggernaut may be far from unstoppable.

Although holdouts will likely remain indefinitely, analysts said lawsuits and licensed alternatives to file-swapping networks such as Kazaa stand a good chance of turning the tide for a majority of music fans, providing that the industry can create compelling paid services.

"Music professionals see the Net as a demon right now, but in 10 years they'll look back on it as their salvation," said Phil Leigh, an analyst with Raymond James & Associates.

Apple will have its chance to shake up the industry with or without a Universal Music Group deal. The company is said to be close to unveiling a music subscription service for the Mac that would compete with current offerings targeting PCs licensed by the major record labels such as MusicNet, PressPlay, Rhapsody and FullAudio. None of these services has proven a runaway success, thanks in part to competition from free music from the likes of Kazaa. But analysts point to three trends that promise to put some wind in the sails of licensed services in the coming years:

• Free file-swapping services have not always done a good job establishing customer loyalty, frequently badgering users with invasive advertising and leaving them exposed to security and performance problems.

• Lawsuits will likely keep file-swapping services off balance for years, with the threat of court-ordered shutdowns and substantial individual liability.

• Authorized services are emerging that will begin to compete with file-swapping networks in quality and performance.

Mac Waldbaum, an attorney at the law firm Salans who represents record labels in intellectual property disputes, said he believes that Internet music piracy will decline in the long run as music companies refine their services and pursue copyright infringers in court. He added that proposed new international treaties may soon assist intellectual property owners in pursuing claims overseas.

"The laws have been there and they're starting to work," he said, referring to the software industry's seemingly endless battle against pirates. "We haven't seen it with music yet, but that will happen soon."

Even Kazaa hopes to shift the balance of files traded over its network from unlicensed to licensed content. "We provide a complete end-to-end distribution solution for record labels and artists," a representative said, noting the company this week signed a distribution deal with rapper Ice T through a partnership with Altnet.

Breaking consumer habits built on years of freely available music won't be easy--but it likely won't be impossible.

Michael Gartenberg, a research analyst with Jupiter Research in New York, said consumer surveys conducted by his company repeatedly show that people appear willing to pay for music given the right mix of features, performance and price. Current subscription services typically charge 99 cents for each download, although analyst Leigh said he believes those prices may have to fall by half or more to entice large numbers of customers.

One major hang-up facing the music industry to date, Gartenberg said, has been its insistence on including security features to ward off piracy--an addition that frequently degrades the customer experience.

Gartenberg said Apple has done a good job in the past handling so-called digital rights management in its products, pointing to its iPod music player. The devices make it easy to transfer files off of a PC, but prevent casual users from trading files between multiple users.

"Paid music services can compete effectively with free file-swapping networks, but to do that depends on a number of factors," he said. "If you get into reasonably priced downloads with the ability to burn tracks to a CD, then there can be some success there."