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A Wireless iPod Can Torpedo the Pirates

By Charles Haddad Riddle me this: What would you get if you crossed a BlackBerry with an iPod? The answer: The future of the music business. Let me explain. Imagine, if you will, an iPod as a wireless digital ladle. It would dip into a nearly bottomless stream of continual music, scooping up any song you wanted, when you wanted, where you wanted. There would be no need for CDs, hard drives, or any other storage device. And trying to capture such music would be about as easy as trapping mist in a jar. Every song would contain a digital expiration date, so, over time, they would evaporate.

If there were no need to store music, indeed no way it could be stored, then piracy would go the way of Blackbeard, a spooky tale of yesteryear to amuse your grandchildren.

Fanciful? Not at all. After all, this isn't my brainchild, it's a concept called Everywhere Internet Audio (EIA) that has been kicking around university think tanks and newsgroups.

UNCONNECTED DOTS. Now the time has come for Apple (AAPL) and its new bud, the music industry, to embrace EIA. The concept represents a huge new opportunity for both. As technology writer Don Tapscott put it recently in The New York Times, EIA is a way for music executives to "do unto the file-swappers what the file-swappers has done to them." That is, the music industry should use wireless technology and the Internet as a springboard to jump ahead of file-swapping pirates.

Apple can be the music industry's trampoline. The iPod is already widely popular with young people -- Mac and PC users alike -- and they represent the core of the music industry's market. Indeed, Apple already sees the possibility here. It's moving as fast it can to harness wireless technology to improve its computers. It recently announced wireless keyboards and mouses, but both are dry runs for something even bigger. It's an ill-kept secret that Apple is trying to figure out how to add wireless Internet connectivity to the iPod.

The idea of streaming commercial-free music isn't new. In fact, it has a record of success. For about five years now, cable-TV operators have been pumping commercial-free audio channels to their digital customers. Now some entrepreneurs are trying to do the same thing for car radios.

Nor are portable devices with wireless Internet connectivity new. In addition to the BlackBerry, there's a growing number of cell phones and personal digital assistants with this capability. Palm's (PALM) Tungsten model not only has wireless Internet access but also plays high-fidelity music in MP3 format.

NEW BUSINESS MODEL. These efforts are a good start, but they're really unconnected dots, forming no real network. Apple and the music industry together would have to assemble these disparate parts into a new medium to distribute music. It would require the labels to offer their full music libraries online, and make them available 24-hours a day.

This is not only a huge technical challenge, it's a legal and contractual one, too. The players will have to figure out a new way to gather and distribute revenue generated from music -- really develop a whole new business model. That may be a big task for an industry in which executives are often at war with artists.

Yet the music industry has strong incentive to try something new. David Bowie has long asserted that the Internet and piracy will make copyrights as we now know them worthless in about 10 years, and he's right. Recorded music will become a promotional vehicle for performance, which is how most musicians will make their money. If the labels are to continue, they will have to become subscription services. That's not as radical as it sounds. NetFlix, which rents out DVDs online for a monthly charge, has blazed a path. In fact, it has been so successful that now Blockbuster Video (BBI) is trying to mimic NetFlix' moves.

These are hard truths that few musicians and music execs want to face. Some, though, are embracing the future. Independent label Vagrant Records, for one, lets customers swap songs over the Net without charge. They would welcome the opportunity to beam their latest songs to an iPod.

PERFECT PARTNER. In time, the rest of the industry also will see the light. It won't take long for music executives to learn that bludgeoning customers in a legal assault isn't a smart way to do business. As file-sharing upstart Earth Station Five says on its Web site: "Resistance is futile."

Just ask Microsoft (MSFT). It has been suing pirates for decades now. But instead of surrendering, pirates have just become ever more sophisticated in eluding punishment. Indeed, some would argue, that Microsoft's aggressive strategy has turned a nuisance into a real competitive threat. The open-source code movement and Linux can trace their roots to the idea that breathed fire into early software piracy: that no one company should control the standard for either operating systems or major programs as word processing.

If the music industry is smart, it will learn from Redmond's mistakes. Instead of trying to skewer pirates it will try to outfox them. And in such a strategy you couldn't ask for a better partner than Apple, with its sophisticated understanding of the Internet, wireless technology, and ease of use. Haddad, Atlanta-based correspondent for BusinessWeek, is a long-time Apple Computer buff. Follow his weekly Byte of the Apple column, only on BusinessWeek Online

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