Digital music hits sour note

If you build it, will they come?

That's the burning question for technology companies banking on the adoption of music delivered via downloads, as opposed to the purchase of CDs online.

The answer may have become more complicated today when Jupiter Communications released some bad news to those firms--most of which are on hand for the research organization's Plug.In '98 conference in New York to show off their latest wares.

Jupiter is predicting that sales for music distributed digitally will amount to only $30 million by 2002, or 2.2 percent of total online music sales, which the research firm predicts will be $1.4 billion in the United States.

Jupiter isn't the only one with tempered expectations of technology from firms such as AT&T's a2b Music, Intel, and Liquid Audio.

"There's no mass market there," said Mark Hardie, senior analyst with Forrester Research, adding that his firm does not make specific financial projections for businesses that are "at least five years out."

Aside from just having to embrace the concept of digital delivery of music, Hardie noted, the record labels also would have to "come together and agree on a standard way to do it. Plus, the labels have to get permission from every one of their artists."

Hardie said that "no artists made money when [record labels] were selling singles," adding that "artists view an album as a single piece of work--not 12 singles. The whole is worth more than the sum of its parts."

So the labels will probably encounter resistance from some artists, as digital delivery would largely involve individual tracks. Even if the studios were able to get permission from all their artists, they still would have to choose a standard from among many technologies being offered--relinquishing significant control over distribution in the process.

"This is the first time the music industry is releasing its product into a channel in which they have little or arguably no control," Hardie said.

In spite of such skepticism, technology firms say they are confident that the labels will come around. "We feel that Jupiter's numbers are conservative," said Ruth Colombo, director of product marketing for Liquid Audio.

"The music industry is beginning to stick its toe in the water with promotional trials," she added. "You can see the major record labels experimenting. They know [the adoption of digital downloading] is coming--it's just a matter of how rapidly they want to embrace it."

Jupiter's projections are based on current market factors, Colombo pointed out, and "there has not been a lot of content in digital format to be downloaded. As we see more content--especially exclusive content--available for digital downloading, those numbers will increase."

Jupiter advised record labels to embrace digital distribution of their products, not only as a means for cutting costs, but also to combat online piracy, which is mostly perpetrated on sites that use so-called MP3 (MPEG-1, audio layer 3) technology.

In its report, Jupiter illustrates four stages in deploying a strategy to expand digital downloading, as follows: First, labels should offer special promotions in which users can download a single track before buying an album. Next, they can offer out-of-print albums digitally, followed by catalog backlists. Finally, the labels could release new albums for digital distribution.

Although labels are concerned about users downloading music and then distributing it themselves, Jupiter predicts that security will evolve to the point where that is less of an issue.

"Major labels need to relinquish their rigid anti-digital distribution stance and realize that it is an industry inevitability," Mark Mooradian, group director of Consumer Content Strategies at Jupiter, said in a statement. "The longer major labels hold out, the more ground they will lose to pirated copies of their own music and to independent labels, which are generally eager to roll out digital distribution models."

But Hardie said security remains a true concern. "There are no ways to really protect copyrights right now," he said. "Nothing is impregnable."

The breakdown in control over distribution could prove to be great. "Look what happened with MP3," Hardie said. Music companies met last week to renew their plea to the European Union to draft tough legislation to crack down on piracy. Earlier this year, a study found that nearly 80,000 illegal music files were already available on the Internet.

Still, while music sales overall have been flat, Colombo said that "the segment that continues to grow is the independent segment." The bigger labels could follow suit once they see success among their smaller counterparts, she said.