Heard Any Good Computer Files Lately?

If the record business is to thrive, it must embrace the digital-music format

Brian Crissie has eight compact disks, each loaded with about 80 songs by the Dave Matthews Band, a popular rock group that Crissie worships. But Crissie, a sophomore at the University of Illinois at Chicago, didn't buy any of these CDs. The songs were downloaded from the Internet and then copied onto recordable disks by a college buddy. "He had hundreds and hundreds of songs," Crissie says, "and I was like, `Wow, I'd like to be able to do that."'

Now he can. His brother can, too. In fact, hundreds of thousands of young people across the country have turned listening to downloaded selections into their generation's musical pastime. Like boomers who as teenagers (and later as nostalgic adults) followed the Grateful Dead from concert to concert, today's youth scours the Net for their favorite bands.

Moved by the power of music and the convenience of buying online, young people are expected to push Web music sales beyond $1.6 billion by 2002. Jupiter Communications Inc. found that 72% of 13 to 18-year-old Internet users had visited music sites in the past year. And of 19 to 34-year-olds, nearly half had done the same in the past month.

Most Web sales these days go to the purchase of CDs. But that's not where the real promise of Web music lies. At the core of this phenomenon is MP3, a technology that lets Web users compress songs into a digestible format and download them to their computer's hard drive. It's mostly a fringe movement for now, but for the record business to succeed online, stores and record labels must overcome their reluctance and embrace digital music.

SHIBBOLETH. If you haven't heard of MP3, either you're not into the Net or you're over 40. But get familiar fast. It's one factor that's driving 18 to 25-year-olds to toss out tape players and hunker over a PC. So listen up, online merchants: Whether you're a clothier or a record label, you ought to get hip to MP3--by tying in music downloads with ads for concert tickets or distributing singles over the Net. After all, teens pumped some $150 billion into the U.S. economy last year. And by 2003, consumers 16 to 22 are expected to shell out $60 billion a year, mostly online, according to Forrester Research Inc.

More than any ad, music is the way to lure young consumers. Call it the shibboleth of today's youth. MP3 has become a kind of password that distinguishes the techno-hip from an older, stodgier generation. "It makes you part of an underground cult," says Sean Striegel, an avid 28-year-old downloader from Orange, Calif. "People think that's cool."

Why? The power of music digs deeper when we're young. For kids, popularity, if not identity, is defined by what bands you listen to. Indelible moments, from our first slow dance to our first speeding ticket, are marked by song more than anything else. Music's extraordinary influence gets multiplied when it combines with the Internet. The Net's free and open structure fuses with the appeal of music, creating the ultimate in cool. A generation ago, hip college kids had to have a hi-fi stereo. Now, they've got to have a computer, and downloading music sure beats using it to do homework. "I could spend an hour a night, easy," says Brian's twin brother, Mike.

What's more, MP3 appeals to the outlaw side of youth. In truth, most digital music is not downloaded legally. Few bands or record companies authorize it. People find singles from bootleg sites, download them, and the swapping proliferates. "You become a music fan in this insidey way," says John Flansburgh, part of the alternative rock duo They Might Be Giants, among the few bands that have welcomed MP3 as a method of distributing music.

It's Flansburgh's chance to break out. Some 80% of music on the radio and in stores is distributed by the Big Five studios (Sony, BMG, Time Warner, Polygram Holdings, and EMI). Trouble is, after a while it sounds like a stream of homogeneous pap. It's not stuff that compels youth whose interests lie at the creative edges. If you like jazz saxophone, you can always find soprano-sax player Kenny G at the store, but alto blower John Handy won't be so easy to locate. The Web, on the other hand, with its scores of digital music sites, is an "inherently deep catalogue," says Flansburgh. "It's huge."

Netrepreneurs and record labels are scrambling to catch up with the craze. Just this summer, several Web companies have gone public, including MP3.com Inc. and EMusic.com Inc., which began trading on the Nasdaq in May. While much of the content they offer is free, some sites sell downloads of single songs for 99 cents and entire albums for $8. Public Enemy, the platinum-selling hip-hop group, broke ground in late May when it became the first popular band to sell a full album on the Web. Chuck D, the group's leader, won't give sales figures, but the album's first single logged 300,000 free downloads in six weeks. "It's resonated all over the planet," says Chuck D. "For the first time, the public has access to material straight from the artist."

Despite the success of Web sales, the recording industry has been slower to embrace digital downloads. The major studios first dismissed MP3 and are now working behind the scenes to develop technology that can't be easily copied and shared. But they've hardly jumped on the bandwagon. "They're all hiding in the barn," says Al Teller, CEO of Atomic Pop, the Web site selling Public Enemy's music.

KILLER APP. Meanwhile, upstart Web sites from Atomic Pop to listen.com are nabbing artists with profit-splitting deals unheard of in the land of vinyl and disks. An established artist can make $3 to $5 for each record sold online, vs. $1.50 to $2 through the record company and retail outlets. "While major record companies are viewing MP3 as a threat, we view it as an opportunity," says Bob H. Kohn, chairman of E-Music.com.

No doubt digital music downloading is more than some late-'90s fad. MP3 is to the distribution of music what the browser was to the Internet--a killer app that redefines how business is done. The recipe for success includes basic ingredients: convenience and variety.

As things stand now, downloading is no piece of cake. But in time, the technology will improve. More important, acceptance will increase once record labels sign artists to distribute online. That would probably boost record and concert sales. After MP3.com sent e-mail to its members who had expressed interest in the rock diva Alanis Morissette, fans bought 40,000 tickets online in one day. "That goes to show the power of the model," says Michael Robertson, CEO of MP3.com.

So far, the music conglomerates fear they'll cannibalize record-store distribution. What music moguls fail to see is that the two complement each other. As Brian Crissie says, even with the digital download, he'll still buy CDs to get all the liner notes, photos, and lyrics. "I want to have it, just to have it," he says.

Heard Any Good Computer Files Lately?
Heard Any Good Computer Files Lately?

The lesson also applies to Web merchants outside the music industry. MP3.com's 40,000 ticket sales were done through Ticketmaster. All sorts of retailers can strike deals with digital-music businesses to market products. For example, MP3s downloaded from a jeansmaker or shoe-store site could come packed with an e-coupon for their merchandise. Still, few Web sites have promoted downloadable music on TV, radio, or in print. For MP3 to become a commercial success, it must reach the masses. "They need to get the message out more," Crissie says, turning down the volume on a Dave Matthews Band song. It's a Gen X thing, Brian. The masses might not understand.

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