The MP3 Losers of 2002.

By Richard Menta 1/12/03

The second of a two part year in review, we run through the losers of 2002. As with last year's list it has been a year of controversy, but also one showing a clearer trend to the future. Despite several court victories by the record industry, file trading is up significantly and record sales are down. Madster and Napster are dead and gone, but KaZaa has more than replaced them.

The jury is still out on Ogg Vorbis, the Digital Millenium Copyright Act (DMCA) and fair use in general, but this coming year may become a watershed one for the formative direction that digital content distribution will take.

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1. The RIAA and Record Industry

Record Industry Association of America (RIAA) president Cary Sherman (Hilary Rosen is now the CEO) told BBC News Online "that music would always be available for free somewhere on the net despite costly court battles to shut down illegal music sites…It has got to be accepted that file sharing will always be there just as shoplifting is accepted as wastage in the retail sector."

That comment says quite a bit, at least that the heads of the music industry lobby are being more realistic to the realities of the Net. That doesn't mean that the RIAA is going to try any less to take control of online music - he did equivacate file sharing with shoplifting - it just means they have accepted the fact they will need to adjust their strategy. Still, this is an organization run by American lawyers whose weapon of choice is the American legal system so don't expect the lawsuits to lighten up.

And the RIAA has had excellent results in the courts. They saw the destruction of Napster by the California legal system. They have left Madster (formerly Aimster) bloodied on the ropes and about to be called for a TKO and this month they won the right to sue Australian-based KaZaa in the US.

What has this won them so far? To be quite blunt, nothing.

KaZaa alone claims 140 million worldwide users, a figure that is double Napster's at its peak. Add to that the traffic from more than a dozen other P2P clients and you can see why Mr. Sherman made his somewhat conciliatory statement above. More people are trading than ever. Many more people.

Furthermore, the legal exploits of the RIAA make front page news and each time leave a bad taste in the mouths of the very people who spend hard earned money on their products. This is not just the Napster and Madster trials, but in the recent case where the music industry was the defendant.

In 2002 the music companies were nailed for price-fixing CDs and agreed in an out of court settlement with the Department of Justice to reimburse consumers to the tune of 67.4 million dollars (anyone who bought a CD between January 1, 1995 through December 22, 2000 is eligible and can claim reimburssment here). The very industry that calls its own customers pirates and thieves proved themselves to be the real criminals in full view of the record buying public. Blame file trading all you want, but don't dismiss bad PR. And they wonder why sales are down?

But wait, have sales really dropped? That's what industry released statistics say, claiming that this past Christmas season alone was down 10%. But evidence is showing that the record industry is only manipulating the numbers to gain legislative sympathy.

If the music industry really did witness a drop in sales - and they very well may have - then they have a problem because right now I and many others now have doubts (doubts openly expressed in research relying on industry numbers like Stan Liebowitz's "Record Sales, MP3 downloads, and the Annihilation Hypothesis"). I don't doubt that they have alienated a piece of their audience to a point where these people just aren't buying, but the magnitude of that drop and the industry reasons for it remain suspect.

The credibility of the music industry is strained and I personally tend to find more believable the research from the likes of Jupiter, Ipsos-Reid, and Edison Research that showed file trading induces record sales, or at least has had a minimal effect depending on how you want to interpret the statistics.

On that thought, maybe the perfect example is the report from Edison Research who took their acquired data and gave it a pro-RIAA spin. While their interpretation concluded that there was a file trading problem, they never fudged the numbers to support that conclusion. That is why when I did my own interpretation of their results I came to the opposite conclusion, one that supported the notion that trading music on the Net has not had a detrimental effect on record sales. I detailed my reasons here.

There are other issues here that made 2002 a down year for the entertainment conglomerates. The broadband providers and electronic manufacturers are starting to resist their legal and legislative moves. Used CD sales are skyrocketing as more consumers reject high CD prices. Lawrence Lessig is attacking the Sonny Bono Act that extended copyrights to 95 years.

In Europe, where copyrights are only good for 50 years, a high percentage of music including early Rock and Roll is falling into the public domain. Right now if two Europeans trade the music of Hank Williams or the complete video of Walt Disney's Snow White and the Seven Dwarfs there is no copyright infringement. This content is all presently in the public domain on the continent. Now if an American trades this content with a European is there copyright infringement? Be prepared to spend 10 years in US court to argue that point (it's interesting that the RIAA wants KaZaa bound to US copyright laws even though they do no direct business here, but they don't want to be bound by the European copyright laws that have a different interpretation regarding the term of those copyrights.)

All of the above ranting does not mean that the movie and record industries will not prevail in the long term. If the Berman Bill were to actually pass, then the RIAA would probably top the winners list for 2003. What I am saying is reflected in this fact; when I pick up and purchase a CD of an artist whose music I truly love I can't help but think "am I being manipulated or even cheated?"

So far I have been buying the CD anyway. As a knowledgeable consumer something must be still compelling me.

2. Morpheus

At the start of 2002, Tennessee-based Morpheus was the number one P2P client riding the advantages of the FastTrack network. A few months later they were kicked off that network and watched as their user base flocked to KaZaa. They still are in the top 10 of's most popular list, but pull in less than 1/10th of the traffic KaZaa does. One more note, as a US company they are more vulnerable to music and movie industry lawsuits and any negative court rulings they may bring.

3. Madster (Aimster)

As the foreign KaZaa zoomed to popularity and profitability, US-based Aimster lost the rights to its own name and was crushed in the courts by the entertainment industry, even before the trial itself started. Bankrupt and barely hanging on by a thread, even after an early 2003 court ruling reversed a prior order to shut down, Madster is all but over.

4. Regional American Net Radio

Regional broadcast radio over the airwaves died a few years back with Clear Channel Communications' acquisition of 1600 some radio stations. Fortunately, Net radio proved to be an ideal (and cheap) way for local Net DJs to spin the lastest local hits, catering to the regional tastes of their home audience and sharing that perspective with a world audience. As I wrote in my commentary Raising the Barriers to Entry the media industry was not going to allow such easy access to continue. Now the Library of Congress, with the help of the media lobbies, has killed regional Net radio by killing personal Net radio. A tragedy that hopefully will see some reversal this year. Sadly, I'm not optimistic.

5. Copy Protected CDs

An acquaintance recently purchased the new Peter Gabriel CD. It played fine on her standard CD players, but would not play on her computer at work where she regularly listens to music to pass the tedium of her job. What did she do? She simply downloaded the files from the Net onto her PC and played that instead.

The problem is she was still angry that the CD she bought was intentionally disabled, preventing her from using it as she wished. Do you know what she did next? She returned the CD.

A perfect example of a dissatisfied consumer who already committed to the purchase and was completely discouraged by the intentional hampering of the product. Scariest for the music industry was when I heard her angrily mutter these words…"I won't make that mistake again."

6. Napster

Actually killed off in 2001, the final indignity came in 2002 where it was dismantled and sold piecemeal at public auction. The name and technolgy were purchased and will probably resurface, but it doesn't matter. KaZaa and others have long ago replaced it.

7. IBM 1GB Microdrive

This tiny and remarkable drive should have taken over an MP3 portable market littered with 32MB and 64MB players, but Big Blue - a strong believer in premium pricing - arrogantly kept the street price high on their Microdrives despite the fact the technology was already several years old. Then came the Apple iPod and the Microdrive became a footnote. Oh well, they still have the pro-digital camera market...until someone puts the Toshiba drive found in the iPod inside one of them.

8. Pressplay, Musicnet, Rhapsody and similar pay digital download sites.

Too many restrictions and prices that equal or exceed that of a standard CD have dampend consumer interest in these services. Frankly, they give you less - much less - that what you can download for free. This is especially true with their song catalog, which are still missing many artists and songs.

The good news for these services, despite the anemic response from music fans, comes from research by Ipsos-Reid and Jupiter. They found that there is a significant number of consumers online who are open and willing to pay for digital downloads, even with the free P2P services in existance. They are just waiting for the right terms.

The key is to offer better services or at least the perception of better services. The big analogy of 2002 came from Janis Ian who commented that the bottled water industry is doing quite well despite competition from free tap water. There will be changes in the industry-approved services this year. Success will be dependent on how much and how fast.


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Other MP3 Stories:
The MP3 Winners of 2002
Shareaza Interview
Jon Johansen - v - Hollywood
Blubster: Reloaded


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