A company with a unique plan for making money on the Net in the music business could find its lucrative enterprise threatened by one of the thorniest issues around: Net copyright.
Enso creates 30-second digital samples of music for retailers to offer from their sites to drive sales. It also uses that service to gather data for retailers, music firms, and others about which songs are being sampled, how often, and which songs on a given CD are most popular among shoppers.
Sound samples have become a required feature on music retail sites such as Music Boulevard, CDnow, and Amazon.com's music area. Critics of online shopping say it takes away customers' ability to browse--but sampling on a wide scale is a compelling feature online stores have over their brick-and-mortar counterparts.
Enso began as a subsidiary of the infamous Muzak, best-known for providing background music for elevators and dentist offices, and was later spun off.
Though music retailing on the Net is a business that analysts are promising will take off, right now online sales make up only a tiny fraction of the real-world music business.
The Recording Industry Association of America reported that Net sales made up .3 percent of the $12.2 billion overall music market in 1997, or $36.6 million. Jupiter Communications predicts that this year, the number will rise to .7 percent or $179 million, and by 2002, it will jump to 7.5 percent or $2.8 billion. But thin profit margins and tremendous competition among retailers spell tough times ahead for many in the space.
Enso has come up with what appears to be a perfect formula for making money via music retailing on the Net: it provides a back-end service that all the players want and need, does it well, and does it affordably.
"Our business is a service business," said Erika Leber, vice president of sales and marketing for Enso. "Industry-wide, it's a huge benefit."
However, critics say Enso is committing what lately has become the deadliest sin on the Internet: infringing on others' copyrights. Record labels and others say Enso makes money by selling samples of music that are copyright-protected.
"Music companies are not that keen on Enso," said Mark Hardie, senior analyst with Forrester Research. "At the end of the day, Enso is making money on copyrighted material that belongs to someone else. That's the bottom line."
For its part, Enso says it is not selling the samples itself, but rather the service of creating them and putting them on a server for clients to use to drive sales.
"We do not sell the samples," Leber said. "We have to manage them on a server. We have to manage the streaming process. We're not selling someone else's content--we're managing the overall service for the industry."
Indeed, Leber said Enso holds 95 percent of the sampling business. Others include Tunes.com, which was acquired this month by JamTV. Enso's clients include giants such as Amazon.com, Best Buy, CDnow, Borders, N2K, Tower Records, and the Ultimate Band List.
She noted that Enso's pricing structure is based on the number of bytes that are streamed to the client's site, not the number of times a sample is played.
"We charge for the total number of bytes transferred to users of our clients' sites," Leber said. "If a customer listens to 10 seconds of a 30-second sample, we charge for the number of bytes sent during that time.
"We don't charge per listen because that would be charging for the content," she added.
Enso also wants to capitalize on the data it can generate based on its samples--namely, what artists' samples are popular, how many times users are listening to a given sample, which tracks off a given CD are sampled the most, how much of a 30-second sample users are listening to, and the like.
"What they do fundamentally is extremely important," Forrester's Hardie said. "And measuring consumer consumption of music--Enso has backed into that business. But the music companies still hold the cards."
The cards are the copyrights, and "record companies are tenacious about protecting the creative rights of the artists they represent," Hardie said.
There are levels of copyright infringement, and Enso could be accused of either direct or so-called contributory infringement, according to Mark Radcliffe, a partner with Gray, Cary, Ware, & Freidenrich and author of Internet Legal Forms for Business. He noted that the damages for both types are "pretty much the same"--an injunction to stop the infringing behavior and monetary damages.
"I think they have a tough argument that they're not direct infringers," Radcliffe said. "The click trail goes directly to the Enso Web site.
"They're clearly making money from the direct infringement," he added. "But either way, [Enso could] get nailed by the courts for contributory infringement."
A common term thrown around in the Net music space in terms of using samples is "fair use," pertaining to the provision within the U.S. copyright law that gives exemptions for certain uses of copyrighted works "for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research."
Though the clause mentions "the amount and substantiality of the portion used in relation to the copyrighted work as a whole" as a way of determining fair use, it does not specify any duration of time that is acceptable, including the 30 seconds used by Enso. Neither Enso nor its clients are paying royalties to the American Society of Composers, Authors, and Publishers for the 30-second samples, though ASCAP considers the samples public performances that warrant licensing fees, an ASCAP spokesman said.
"There is no provision of the law that puts 30-second samples within fair use," noted Regina Joseph, senior analyst at Jupiter Communications. "This is the lie of the 30-second sample."
But Enso's Leber said: "We don't play the samples. Our clients do."
However, when a user clicks on a sample at a retail site, the RealAudio player that comes up shows that the stream is coming from "www.muzak.com," Enso's former parent. And in streaming technology, small, temporary copies are made onto a user's RAM, which could be construed as making a copy. The making of copies--even small, temporary ones--on the digital medium is an issue that could prove sticky for Enso.
Attorney Radcliffe noted that what the courts look for most in instances where fair use and copyright come into play is "the effect on the marketplace" and the context of the use that seeks exemption.
In other words, "Is this [practice] displacing some market where these guys [the record labels] could make money? Are they [Enso] depriving the record companies of making money on 30-second samples?" he asked. So far, the answer--at least, in the eyes of the law--is unclear.
"On the other hand, the courts have a real lack of sympathy for people who make money on other people's copyrighted works, especially in a purely commercial context," he added.
Jupiter analyst Joseph added: "The record labels know that the 30-second rule is bogus, but up until now it wasn't worth their time" to pursue it in the courts.
The difference now is that a bill to implement two World Intellectual Property Organization treaties to update copyright laws for the Internet passed through a House Commerce subcommittee last week. It is set for a full House floor vote.
The WIPO Copyright Treaties Implementation Act seeks to strengthen copyrights for digital works and makes it a crime to create technology that is meant to break or circumvent copyright protection devices.
And copyright issues in the digital medium are beginning to come to a head. Aside from the WIPO Treaty Implementation Act, earlier this month, the Recording Industry Association of America sent a letter to Net radio stations, claiming that Webcasters owe a licensing fee over and above what they pay to industry groups such as ASCAP, under the Digital Performance Right in Sound Recordings Act.
A provision in that act relates to the digital delivery of sound recordings to a user's hard drive--and because of the temporary copies made in the streaming process, it could apply to Enso, Radcliffe said.
He noted that an exception for delivering only part of a song was proposed in December, which could provide a "safe harbor" for Enso. The provision has not yet been adopted, however.
With all the activity in this area, and the potential effects the WIPO legislation stand to have on a variety of Net businesses if it becomes law, seven companies have formed the Digital Media Association (DiMA), "intended to become a full-service trade association focused on the development and promotion of electronic commerce for audio and video," according to a statement released by the group.
DiMA's members include Enso, music delivery technology firms a2b music and Liquid Audio, Broadcast.com (formerly AudioNet), Net music retailer CDnow, streaming technology company RealNetworks, and TCI Music.
"We all recognize that there's a need to make sure that everyone affected in this space has a voice," Enso's Leber said. She declined to comment about the pending legislation.