MP3: kill or cure for the music industry?

Entrepreneurs who want a glimpse of the future should pay attention to the roller coaster controversy surrounding MP3 technology. The stakes were raised again last week when heavy metal band Metallica blocked 317,377 user names from accessing the Napster website.

The venerable New York Times recently highlighted the importance of the MP3 issue. It took the unusual step of giving Chuck D, the confrontational Public Enemy rapper and record company scourge, an editorial to defend MP3 and Napster.

What is ultimately at stake are the profits from projected sales of music, software, games and general entertainment of $275bn by 2003. It's clear that if copyright issues are resolved, online companies are poised to capture a large slice of this revenue.

The net effect
The music industry has always been at the cutting edge of new technology, and is sensitive to the commercial and legal consequences that follow from new media.

Take, for example, the emergence of music videos in the 1980s. It may have been an extraordinary marketing opportunity for bands, but the music video directors who often shape artists' 'brand' image have no rights. As a record company executive you can see why. With worldwide wall-to-wall 24 hour music TV, just imagine the repeat fees.

But the conventional offline industry is undoubtedly suffering at the moment. In 1998, its estimated losses worldwide due to the impact of MP3 were $11bn, and last year there was a swathe of mergers and lay-offs in the sector. p>At least as significant for the music industry is the way that musicians have been seeing pots of gold at the end of the MP3 rainbow - and the means to take on the power of the major labels. Even before the MP3 issue, The Artist Formerly Known as Prince had 'Slave' tattooed on him in protest over his treatment by his record company, while George Michael famously took his label to court in an attempt to get out of his contract.

Money for nothing?
Musicians are slowly realising that MP3 is a double-edged sword. It potentially offers a way of cutting out the middlemen of the record company. But aside from the issue of copyright, musicians are also beginning to see MP3 as a cash-cow for others.

Andrew Farrow, head of business development at digital rights specialist Magex, says: "I was at an event in New York a month ago and there was a big backlash by artists against MP3.com's. Their thinking was 'you set yourself up as a big music site, we give you our content for free, you distribute it to consumers for free, you get the consumer relationship, we don't. Then you take the consumer relationship to the market, you raise lots of money. You are now perfectly wealthy and we don't have any money'."

But in some respects the current chaos and uncertainty is a variation of what happened in the 1980s. Bands believed they would have more control over their music and money by signing up to newly established independent labels. But the independents were limited by their powers of distribution and most were swallowed up by major labels.

There is another lesson to be learned by those who see MP3 as a nail in the coffin of the big labels: the independents simply didn't have the marketing muscle to promote the bands. "It was popularly held perhaps 12 and 18 months ago that the internet was this huge opportunity to disseminate music and cut out the record label," says Farrow. "If you are a George Michael or a Prince, or even if you are just small band with a well established fan base, then yes it's fine. But it won't work for bands setting themselves up."

The irony is that the internet demands an even bigger marketing budget, he explains. "You need more marketing dollars to set yourself up on the internet than on the high street because the background noise of the internet is much greater."

The great divide
The net has emphasised a culture clash that already existed in the music world. On one side there is the stereotype of the 'stuffed-shirts' in the big and nasty corporate labels. On the other side of the divide there are alternative music-loving fans whose anti-establishment ethos has been fanned by the freedoms of the net.

You might think that someone such as Nick Moore, who runs the celebrated Barfly Club in London that showcases new bands, would embrace the anti-corporate ethos. In the past, his club has given early gigs to then unknown alternative bands such as Oasis and Supergrass. But Moore is firmly on the side of Metallica.

"The frightening thing is that over the last two years with MP3s on the web, we are educating 14-year-old kids to believe that music should be free. Metallica know perfectly well they were massively unrecouped in the first year or two they started. Record companies invest vast sums of money in bands and some never ever make money back," he says.

Moore also believes it is vital that the copyright issue is resolved for the sake of emerging new talent. It costs a small fortune to support bands and unless record companies can recoup some of their money, there won't be anything new to download from the net.

"The average recording cost of a Top 20 album in the UK is about £120,000. Pulp's last album cost £800,000," he says.

The Barfly has its own website promoting new bands and the club has done deals with Liquid Audio and Magex. "It remains to be seen which of these digital rights management systems work, but it's crucial for the survival of the music industry for one or more of these to work," adds Moore.

One irony in the Napster/Metallica furore was the fact that it is a heavy metal band defending the rights of the label.

When it's all done and dusted, squaring the circle between bands that sell themselves as riotous rebels but fight on the side of law and order will eventually be a problem for the marketing men.

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