Digital Noise: Music and Tech

I'm not a lawyer, but I'm well-acquainted with legal filings from analyzing Microsoft's legal travails for the last nine years. I've seen a lot of aggressive lawsuits, but a copyright infringement suit filed Monday in the U.S. District Court for Middle Tennessee is one of the boldest--and, I'd argue, short-sighted--filings I've ever seen.

The suit appears to have been initiated by Music Copyright Solutions (MCS), which claims to administer copyrights for more than 45,000 compositions. MCS is named as the lead plaintiff, along with a number of songwriters including Mark Farner of Grand Funk Railroad fame. These folks allege that Microsoft, Yahoo, and RealNetworks improperly licensed the rights to more than 200 compositions that they offered as on-demand streams or limited downloads via the Zune Marketplace, Yahoo Music, and Rhapsody.

Surely these companies paid somebody for the rights to offer these songs. But there's a catch, which TechDirt pointed out earlier Tuesday: these companies may have licensed the rights to the recordings, but that doesn't mean they licensed the rights to the compositions (also known as publishing rights). As section 23 of the legal filing puts it:

In order to transmit, perform, reproduce and deliver any sound recording of any musical work via 'On-Demand Streams' or 'Limited Downloads,' Defendants must first obtain not only the rights for the sound recording itself, but also the rights for the underlying musical composition that is embodied on said musical recording.

Maybe, maybe not--that's up to the court to decide. But that's not the insane part. The insane part is that the plaintiffs are alleging that each time one of the defendants made any recording of a covered song available, that's a copyright violation, and they're seeking damages of $150,000 per violation (or the amount the defendants earned from streaming those songs, whichever is more). So, for example, the lawsuit claims that Yahoo Music offered Conway Twitty's recording of "Fifteen Years Ago" on six different greatest hits albums. The plaintiffs allege that constitutes six copyright violations, which would mean damages of $900,000. Overall, the lawsuit names more than 200 songs, and a far greater number of recordings, meaning that the potential liability for each defendant would be tens of billions of dollars--that's far greater than the total amount of revenues these companies ever earned from any of these services.

These types of cases are usually settled for a relative pittance--something much closer to what the defendant would have paid to license the songs properly in the first place. But imagine for a minute that this lawsuit actually goes to trial and the plaintiffs win damages amounting to 1 percent of what they asked for. No company would ever risk building an online music service again--the legal liability would simply be too high.

When it comes to online music, big legal music services like Zune, Yahoo Music, and Rhapsody are the copyright owners' friends--unlike file-trading networks or free on-demand streaming services, these companies actually collect money from users and disburse it to copyright owners. Perhaps the plaintiffs have a legitimate complaint. But by filing such an aggressive lawsuit to recover billions in supposed damages--I mean honestly, how many Grand Funk Railroad streams have been delivered via the Zune Marketplace?--these folks risk killing their allies and driving music back to the darknet where nobody in the value chain sees a dime.

RealNetworks began public beta-testing version 12 of its venerable RealPlayer today. Like the last version, the free RealPlayer SP (which stands for "social and portable") lets you rip streaming Flash videos from the Web to your hard drive. What's new: you can also transcode them into appropriate formats for playback on portable devices. If you're using an iPod or iPhone, the RealPlayer will even generously insert the transcoded version directly into your iTunes library.

CNET's John Falcone has already done a rundown of the RealPlayer SP beta, but I was intrigued enough to try it myself. My first thought was to rip YouTube videos, but then I realized that it's much more convenient simply to use the built-in YouTube icon on my iPhone to stream them directly to the phone (as long as I've got a wireless connection, which I usually do).

Then I remembered that one of the best features of Microsoft's new Bing search engine, which launched earlier this month, is its video search. (The predecessor to Bing, Live Search, had most of the same video search features as well.) There's nothing wrong with Google's video search, but I personally prefer the Bing interface, and I like the way the video is previewed right in the search results.

Using them together was a breeze--once installed, the RealPlayer automatically adds a small pop-up message to any embedded video in your browser (I tested it with both Internet Explorer and Firefox), asking you if you want to download the video. Transcoding takes a few minutes, particularly for long videos, but in the last half-hour I've managed to rip the new Grizzly Bear video, the reunited Pink Floyd's entire Live 8 performance, and a live version of Ozzy's "Crazy Train" with Randy Rhoads into iTunes in both video (H.264) and audio-only (MP3) formats. All came from different original sources, but all were available through Bing.

I'm particularly impressed with the RealPlayer's video-to-audio transcoder--my 8GB iPhone is way too small to fit a lot of videos on it, and transcoding video to audio files has been a bit of a hassle in the past. Now I can do it on the fly, as I download them. Kudos to RealNetworks on a nice piece of software.

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Back in January, I criticized Palm for not having a reasonable music strategy for the upcoming Pre, the touch-screen superphone that could save the company. At that time, I mocked Palm for suggesting that consumers would have to drag and drop music files from their PC to the Pre, which would appear as a mass storage device. As I wrote, "without iTunes, there's no iPhone. And without the iPhone, there's no consumer smartphone audience." (Users will also be able to buy downloads over the air with an Amazon MP3 client, but the vast majority of music on portable devices comes from the user's computer, not downloads.)

It looks like Palm took my criticism to heart: Thursday at the D7: All Things D conference, the company demonstrated the Pre and announced that its media sync capability would be built around...iTunes. That's right: when you plug the phone into your computer and hit the "media sync" button, it will launch iTunes and begin letting you transfer any DRM-free files to the phone. You'll still be able use iTunes to rip and store and organize your music, to sync it with any iPods you have, and to buy downloads. Why try to reinvent the wheel and risk disaster? Heck, why not go all the way and let iPhone applications run on the thing as well?

There's only one problem: what if Apple decides that it doesn't want a competitor using the software it built and developed? Could Apple force Palm into the sort of arms race that RealNetworks experienced when it tried to reverse-engineer iTunes' DRM scheme?

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AUSTIN, Texas--At South by Southwest here, I had a short but interesting conversation Wednesday afternoon with Tim Quirk, the vice president of music programming for Rhapsody, wedged in around a set from Jersey punks Titus Andronicus (who had very tight and well-constructed songs with incredible energy and some interesting triple-guitar work, but I don't know if the singer's going to make it another three days).

Quirk, who's been with Rhapsody since before it was acquired by RealNetworks, suggested that streaming music on demand will change the mechanics of the music business because artists (and other stakeholders) won't be compensated based on how many people buy a song or a record, but rather on how many times people actually listen to it.

For labels, it won't make sense to sign cute, disposable artists, and prop them up with hired-gun songwriters and producers in hopes of selling a couple million units over a single summer. Rather, the real moneymakers will be bands whose fans absolutely can't live without their music, and who listen to songs over and over again, for years.

That requires finding artists who already have sizable fan bases and then cultivating them over the years. Terrestrial radio might become even less important--there's no reason to saturate the airwaves with a single song in hopes of selling as many copies as possible before the buzz moves to the next thing; instead, you'll want word to grow more organically, creating lifelong fans along the way.

Of course, this is all predicated on a big "if": somebody has to find a business model for streaming music that works for all parties involved. First, money has to change hands--whether it's through users paying a subscription (the Rhapsody model) or advertisers paying to reach those users (the model espoused by Spotify and others). Then the operators of these services will have to convince copyright holders to accept a level of payment that doesn't drive the operators out of business.

That level of payment may be lower than the percentage derived from CD sales today, which is a big stumbling block for labels to accept. But in the long run, streaming music will lead to greater music consumption overall. When you have no limits on the amount of music you can sample, you're more likely to become a music geek.

Quirk had some statistics to bolster this point: in traditional CD sales, nearly 50 percent of the revenue comes from the top 100 selling records. With Apple's iTunes, it's about 33 percent; lower prices translate to people willing to sample more music. With free peer-to-peer networks, it's less than 30 percent--again, it makes sense that users would sample more music when it's free.

With Rhapsody, it's even lower--less than 25 percent. I suggested that that's because Rhapsody self-selects for music geeks--who else would pay a subscription for unlimited music? But Quirk countered that his usage statistics suggest that Rhapsody turns people into music geeks. That is, once people realize that they can consume unlimited music for the same price, they begin exploring related songs and bands, checking out recommendations from friends that they never would have bothered with otherwise, and so on.

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On Friday, I pondered if Microsoft would kill Yahoo Music. Now, it looks like Microsoft won't have to bother: this morning, Yahoo announced an agreement with RealNetworks to transfer all Yahoo Music subscription customers to Real's Rhapsody service. In all likelihood, this deal was well underway before the Microsoft announcement--Yahoo's been rumored to be considering a free service for several weeks now--but the timing certainly makes it look like Yahoo's accelerating its cuts. And it appears that Rhapsody's the default partner of choice for companies that want to cut their digital music ties with Microsoft--recall that MTV signed a similar deal last August after Microsoft stabbed the Urge service in the back with the Zune Marketplace.

A few select reviewers got an early hand on the Ibiza Rhapsody player from Haier, but CES was my first chance and I walked away quite impressed, and wondering again why Microsoft hadn't done this much--or more--with the 2nd generation Zune player.

The devices are not exactly objects of art--the 30GB player, available now from Amazon.com for $288, is a simple metallic block, and the forthcoming 4GB and 8GB players look like smaller versions of the same design--but the screen is adequately bright and clear, and the company is offering a wide array of downloadable skins and themes to change the look of the player. But the big questions in my mind were (1) how easy is it to connect to a public Wi-Fi spot and (2) once connected, how easy is the process of streaming and downloading songs?

At the CES booth, the Ibiza passed both tests quite well. It provides an available list of Wi-Fi networks arranged by signal strength--nothing more complicated than connecting to a network on a laptop--and connects easily to the strongest one. A Mozilla-based browser lets you get through any sign-in screen, although the on-screen keyboard is a line of letters across the top, which is a bit kludgey. Once connected, searching from Rhapsody's 4-million-plus library is fairly quick (although text search is limited by that on-screen keyboard) and once a song is selected, it starts streaming within a couple of seconds. The streaming sound quality at least as good as FM radio. (I know they use WMA over the air, but not sure of the bitrate.) The song downloads in the background as you stream it, so next time you can access it from your hard drive.

I also discovered that the underlying software was developed not by Haier, but by Varia Mobile, a Seattle-based company specializing in Linux-based mobile apps. Kudos to them and RealNetworks for coming up with a workable celestial jukebox.

Correction: this story has been corrected to remove the implication that iTunes sells audio files in formats other than AAC. iTunes did begin selling DRM-free songs earlier this year, but those files are still in the AAC format. Other stores are selling DRM-less MP3s, but not iTunes.

In 1998, the European Commission began investigating Microsoft on grounds that it was illegally using its desktop operating system (OS) monopoly to squeeze into new markets. At some point along the way, RealNetworks complained that Microsoft was repeating its kill-Netscape tactic by bundling the Windows Media player into Windows. In 2004, the EC agreed, and (among other things) ordered Microsoft to ship a version of Windows without the Media Player in Europe. Microsoft appealed, but was forced to comply while the appeal wound its way through the system.

So Microsoft shipped versions of Windows XP without the the Media Player. But because it didn't have to offer any discount, almost nobody bought these versions at retail, and hardware makers didn't preinstall them. (Even if the free Media Player version had been a few bucks cheaper, I don't expect there would have been much demand. Especially from PC makers--the more different software alignments they have to install and support, the higher their expenses.) The company followed up with similar versions of Vista in 2007.

As anybody who follows technology news now knows, yesterday a European court denied Microsoft's appeal on almost every count. (The full ruling is available from the first link on this page--it's long. Lawyer and technologist Mary Kirwan, writing for The Globe and Mail, had an excellent write-up of the ruling as it relates to Windows/non-Windows interoperability, which I'm not covering here.)

In the wake of the ruling, EC Commissioner Neelie Kroes spoke at some length about the harm Microsoft has done to the consumers, but one statement made me check my eyesight. As reported by Todd Bishop in the Seattle Post-Intelligencer, Kroes said, "Microsoft's media player format has, as a result of its conduct, come to dominate the market."

Say what? I suppose that's true if you define the relevant market as player installations--Paul Thurott reports Nielsen/NetRatings figures showing the Windows Media Player at 50 percent, with the RealPlayer at 22 percent and iTunes at 19 percent. Or if you measure it in terms of the number of commercial stores selling music in the Windows Media Audio format versus some other format.

But in terms of actual usage? Apple's iTunes Music Store owns about 70 percent of the market for legal downloads and has sold more than 2 billion songs. Those songs are in the AAC format, a variant of MPEG-4. And illegal downloads still far outweigh legal ones, and most of those are in the MP3 format. Microsoft's attempt to dominate the digital media market with the Windows Media format has failed so completely that the company is now mimicking Apple's end-to-end, control-all-parts strategy with Zune (which will be lucky to get 10 percent market share any time soon.) In fact, Microsoft's moved so far away from Windows Media, it's even licensing a new DRM technology to wireless phone carriers and handset makers that doesn't rely on or use Windows Media in any way.

In other words, Microsoft's OS monopoly hasn't helped it dominate the digital media market one bit. Turns out that users don't care so much which digital media player is preinstalled on their PC--if a competitor (Apple) sells a separate set of products (iPod, iTunes) that are good enough, people will use them. In fact, I'd argue that--apart from the profits and cash flow Windows generates, which fund money-losing businesses like the Xbox--the OS monopoly hasn't really helped Microsoft enter or dominate a new market for many years. (RealNetworks might disagree, but I wonder if its own actions did more to help Microsoft than Microsoft's monopoly. No slam on Rhapsody, which is a good service...I'm talking about the old RealPlayer and the way Real promoted it.)

Meanwhile, Microsoft's European competition just got harder--the iPhone launches in the U.K. on November 9.

(UPDATE: RealNetworks has filed an 8-K form with the SEC that contains some more details about Rhapsody America. Most notable: MTV is contributing a $230 million note to the deal, and RealNetworks will in exchange be required to spend that amount with MTV on advertising. The joint venture is between RealNetworks and MTV, with Verizon as a distribution partner.)

The 2007 Consumer Electronics Show must've held some awkward moments for Microsoft.

The previous year, the company had trumpeted MTV's Urge music store as the showcase for the Windows Media Player 11 that was due to ship with Vista. Bill Gates had Justin Timberlake on stage to promote the forthcoming service, which would be integrated into the Windows Media Player (as was previously the case with other stores, such as Napster and MSN Music), and would "bring people's emotional connections with music to the forefront of the digital entertainment experience" (said a particularly ebullient press release). At the same show, Microsoft also made a big deal out of Verizon's V Cast service, which was the first to offer both over-the-air and PC-based music downloads using Microsoft's Windows Media Audio technology.

A year later, in 2007, Vista was still not out--the result of a final delay that had the OS missing the 2006 holiday season--so Microsoft was forced to trot out Urge and Windows Media Player 11 yet again as examples of how great digital media would be in Vista. Only this year, there was a new wrinkle: in the interim, Microsoft had announced and launched its own competing music player, software (why "integrate" with the Windows Media Player if you can build your own dedicated app?), and store. None of which were compatible with the vast array of products from long-standing partners, such as MTV and Verizon.

At the time, Microsoft insisted that its PlaysForSure initiative (which identified compatible Windows Media-based players and stores from third parties) was not dead, but would remain on a separate but equal development path from Zune. Apparently the partners didn't believe it. First, Samsung jumped ship, creating its own player-store-software combination. Now MTV and Verizon have teamed up with Microsoft's oldest competitor in the digital music space, RealNetworks. The ink's still drying on the deal, but their goal is to launch a new company, Rhapsody America, that will give users access to a huge library of music from almost anywhere--the "celestial jukebox" that many music fans have been wanting for years.

The alliance makes sense. Rhapsody, which consistently wins praise from reviewers and users, would get a huge marketing boost from both Viacom/MTV (which recently announced plans to spend $500 million expanding its game portfolio) and Verizon, as well as a new distribution channel (inclusion on Verizon phones, sales of over-the-air downloads). MTV gracefully shutters Urge--which never had a chance to get off the ground--without abandoning the online music market altogether, and gets a way to distribute music to mobile phone users. Verizon gets an online subscription service to add to its over-the-air and download-based services.

So now it's Microsoft's move. Will they respond by adding an over-the-air component to Zune? (As SanDisk and Yahoo teamed up to do, and RealNetworks and iRiver plan to do.) An announcement should be coming in the next couple of months if they're going to get anything new out in time the holidays.

Tomorrow, some of the most popular and prominent Internet radio stations will go silent to protest the imposition of new fees that many Webcasters claim will drive them out of business.

The protest stems back to a Mar. 2007 decision by the Copyright Royalty Board to impose per-song performance royalties on Web radio, starting at 0.08 cents per song (retroactive to Jan. 1, 2006) and increasing gradually to 0.19 cents per song by 2010. The former rules forced Webcasters to pay a minimum annual fee and 12% of their revenues. (Small Webcasters might be able to abide by these old rules until 2010.)

The protest is being organized by SaveNetRadio.org, which has calculated that the new fees could increase Webcasters' costs by between 300% and 1200%. In a letter to Congress, CEOs of major Webcasters claimed that SoundExchange, the organization responsible for collecting these fees,will collect $1 billion from the three biggest Webcasters--Pandora, RealNetworks, and Yahoo--alone, up from $20 million previously.

So who's SoundExchange? Today, it's an independent non-profit organization devoted to claiming performance royalites on behalf of copyright owners. But it was originally created by--surprise surprise--the RIAA. That's the same organization of copyright holders that's known for sending threatening letters to alleged file-traders demanding a settlement payment (although a recent judge's decision may put an end to that tactic).

Now, perhaps it's too easy to hate the RIAA. After all, I can sympathize with the recording industry, which has seen the digital writing on the wall for years, and is finally suffering the consequences in a big way--CD sales are down 16% this year from last year, and some are predicting that the 2007 holiday season will be the final curtain for CD sales.

I also understand that royalties are necessary to enable composers, performers, and, yes, distributors, to make a living. (This page has a good overview of how these royalties are collected and distributed.)

What I don't understand is why Internet radio should be subject to performance royalties, which are paid to the copyright owner of a particular recording (usually the record company), while over-the-air ("terrestrial") radio pays only royalties to the copyright owner of the song (the composer and publisher). One justification for exempting terrestrial radio is that it offers promotional value, leading to greater sales. Doesn't Internet radio do the same thing? Other arguments center around technical differences--Web radio results in a temporary digital copy of a song being made; Web radio listeners can skip songs they don't like. But these seem like nit-picks to me.

At any rate, bills have been introduced in the U.S. House and Senate to overturn or modify the CSB's ruling, and SaveNetRadio has a Web page that will help you communicate your support to your representatives.

And for those of you who've never been interested in Internet Radio, allow me to recommend Radio Paradise. Programmed by real live humans who like music and do things like segue songs together in intelligent and meaningful ways. You know, like terrestrial radio used to be?