6.5 Influence of New Technology

In the mid-1990s, CD sales reached record heights. Their boom made cassette tapes all but obsolete, and record companies reaped the benefits of selling to consumers who wanted their music collections in the latest technological format. This boom mirrored a familiar step in the evolution of technology. In past decades, records seemed to have an ironclad lock on sales, but cassette tape sales eventually surpassed them. Cassettes, as previously mentioned, then saw their sales decline as CD sales rose. However, despite a few advantages in quality and convenience, CDs had disadvantages. Consumers had to pay high prices to purchase them and buy a full album even if they only had an interest in listening to one or two songs on it because every album came as a complete package (with the exception of CD singles).

At the height of the CD revolution, computer scientists would develop new digital technology that would eliminate these disadvantages and revolutionize digital music storage. In 1989, German company Fraunhofer-Gesellshaft discovered how to compress digital audio to approximately one-tenth the size of the original audio with almost no discernible loss in quality to the average listener. (the MP stands for Moving Pictures Experts Group, which is the group that sets the standard for audio and video compression and transmission, and the 3 refers to the most popular layer or scheme with the standard)   Due to MP3’s small file sizes, modems could easily transmit the sound files onto a website or FTP site in a relatively short amount of time. Initially done only by a tech-savvy elite, the process of downloading and sharing audio files took time and precision because MP3 files did not get stored in one centralized location. Peer-to-peer file sharing—the process in which two or more computer systems connect over the Internet to share music or video files—became a worldwide phenomenon in 1999 with the development of the centralized online file-sharing system Napster.

File Sharing: From Illegal Downloading to Digital Music Stores

In 1999, Northeastern University student Shawn Fanning dropped out of school to complete work on a software project that would simplify finding and downloading MP3 files on the Internet (Doyle, 2000). This resulted in a free downloadable Napster program that transformed PCs into servers for exchanging music files over the Internet. The program also sported a chat room feature that served a community of music fans eager to discuss their favorite bands. Originally an experiment between Fanning and his friends, the program’s popularity spread through word of mouth. By the end of the first week, 15,000 people had downloaded the program (Riedel, 2006).

Although their newfound ability to download free songs (albeit illegally) thrilled music fans, the record industry did not share their enthusiasm. In December 1999, all four major record labels, together with the Recording Industry Association of America (RIAA), launched a series of lawsuits against Fanning and his site for copyright infringement. Citing the nonpayment of royalties and the loss of revenue through lost CD sales, the RIAA also claimed that artists would no longer want to create new songs now that their audiences could obtain them for free. In response, Napster argued that it merely provided the software for people to share music files and no copyrighted material appeared on the site itself. In addition, Fanning claimed that the site encouraged people to go out and buy CDs based on the exposure artists received from Napster (Riedel, 2006).

As the number of the Napster program users grew, the lawsuit began to garner publicity. Some Napster supporters, many of them college students, viewed the legal battle as a David versus Goliath situation and rooted for Fanning to beat the corporate music giants. Most recording artists sided with the record labels, with heavy metal rock group Metallica and rap artist Dr. Dre launching their separate lawsuits against Napster in April 2000. However, some bands discovered a way to use the site to their advantage. Alternative rock group Radiohead promoted its album Kid A by secretly releasing the record to Napster three weeks before its street release date, creating a wave of publicity that launched the album to the No. 1 spot on the Billboard 200 chart in October 2000 (Menta, 2000). Reggae-rock band Dispatch poured free recordings onto the site, increasing its fan base to such an extent that it sold out multiple nights at Madison Square Garden in early 2007 (Knopper, 2009). Dispatch bassist Pete Heimbold said, “What we found was it really didn’t deter kids from coming to shows and buying CDs. In fact, I think it had the opposite effect—people heard songs off Napster and had a lot of merchandise and CDs (Knopper, 2009).”

Despite the Napster program’s many advantages, including a built-in user base of 26.4 million people, the major record labels could not reach a deal with the site to create any form of fee-based service. In 2007, former EMI Executive Ted Cohen said, “The record labels had an opportunity to create a digital ecosystem and infrastructure to sell music online, but they kept looking at the small picture instead of the big one. They wouldn’t let go of CDs (Mnookin, 2007).” A court injunction in 2000 ordered Napster to remove all copyrighted material from its servers, and within two days the website shut down for all intents and purposes. Following a bankruptcy liquidation, the Napster program reinvented itself as a paid subscription service in 2003. After facing legal challenges and subsequent bankruptcy, Napster pivoted to a subscription-based model in 2003. This new approach required users to pay a monthly fee for unlimited access to a vast library of music.

The Post-Napster Universe: Gnutella and Kazaa

Napster’s initial success resulted in a wave of similar sites emerging throughout 2000. The creators of these new services recognized that Napster’s legal problems resulted from maintaining a central file server. By keeping a list of all the users on the network, Napster could control its users’ activities by blocking illegal downloads. When the court ordered the service to halt illegal downloading, the absence of a central database destroyed the entire Napster network.

To avoid a similar fate, new peer-to-peer (P2P) systems adopted two different approaches. The Gnutella network, which serves clients such as LimeWire, BearShare, and WinMX, avoided maintaining a central database. Instead, it dispersed information about file locations across computer “nodes” around the world. Users could find each other to share files, but the service could disclaim the ability to prevent copyright infringements. The lack of a centralized server and multiple client bases meant that, unlike Napster, the music industry would find it impossible to shut down the entire Gnutella network through a simple court order. Courts would need to block all Gnutella network traffic at the Internet service provider (ISP) level of the Internet, a far trickier prospect than simply shutting down a central database.

In addition to a lack of a central database, some P2P providers set up in offshore locations to take advantage of less restrictive copyright laws and weaker enforcement. Kazaa initially based itself in the Pacific island nation of Vanuata and operated out of Australia. However, the company’s offshore location did not protect it from copyright infringement laws. Following legal challenges and a significant court ruling in Australia in 2005, Kazaa faced substantial fines and was required to modify its software. As a result, the platform pivoted to a legal music download service in 2006 (BBC News, 2006).

Not content with pursuing providers of illegal music downloads, the RIAA also took legal action against the users of sites such as LimeWire and Kazaa. In 2003, the recording industry sued 261 American music fans for illegally sharing songs on P2P networks (Kravets, 2008). Although fines under U.S. copyright law can rise to up to $150,000 per illegally downloaded track, most of the defendents settled for much less. As of 2008, the RIAA had sued or threatened to sue more than 30,000 individuals for copyright infringement (Kravets, 2008).

Busted! Woman Fined $1.92 Million

In an ongoing legal battle with the RIAA, Minnesota woman Jammie Thomas was found guilty of copyright infringement for a second time in 2009 and fined $1.92 million for illegally downloading 24 songs on file-sharing Kazaa website. First fined $222,000 for using the Kazaa service, the 30-year-old single mother of four refused to settle with the recording industry out of court. Thomas claimed her innocence, maintaining that she was not the Kazaa service user whose files had been detected by RIAA investigators (Kravets, 2008).

The case became the first of its kind to go before a jury in 2007, and Thomas faced fines ranging from $18,000 to $3.6 million under the Copyright Act of 1976. After deliberating for 5 hours, a jury found her guilty of copyright infringement and awarded the RIAA $222,000 in damages. The verdict was thrown out a year later when a federal judge declared a mistrial. However, jurors in Thomas’s second trial found her guilty again, upping the fine to $1.92 million. A federal judge later reduced the damages to $50,000. In January 2010, the RIAA offered to close the case for $25,000, but Thomas continued to refuse to pay (Kravets, 2010).

Thomas’s case has provoked strong reactions on both sides of the debate. RIAA spokeswoman Cara Duckwork said, “It is a shame that Ms. Thomas-Rasset continues to deny any responsibility for her actions rather than accept a reasonable settlement offer and put this case behind her (Kravets, 2010).” Joe Sibley, one of Thomas’s lawyers, argued, “They want to use this case as a bogeyman to scare people into doing what they want, to pay exorbitant damages (Kravets, 2010).” The RIAA is currently winding down its 6-year campaign against illegal downloaders, approximately 30,000 lawsuits in all. Instead the RIAA is focusing on creating a program with Internet providers to discontinue service to users who continue to break online copyright laws (Kravets, 2010).

The Advent of Digital Music Stores

With the closure of the Napster program and the crackdown on illegal downloading, a void in the music distribution market opened. Almost immediately, fee-based online music providers filled the void, with Apple leading the way. They launched iTunes—a free application for the Mac computer that converted audio CDs into digital music files, organized digital music collections, and played Internet radio—and the iPod—a portable media player compatible with the iTunes software—in 2001. In 2003, the company signed deals with all of the major record labels and launched the iTunes Store, a virtual store that enabled people to buy and download digital music on demand. Initially featuring 200,000 songs at a cost of $0.99 each to download, the store quickly revolutionized the digital music industry. Within a week, iTunes Store customers purchased 1 million songs (Apple). Six months later, Apple convinced the record labels to expand the service to Microsoft Windows operating system users, and by the following year, the iTunes Store had gone international. Within five years of its launch, the iTunes Store sold more music seller in the United States than any other retailer, and in February 2010, Apple celebrated its 10 billionth download (Williams, 2010). However, in recent years, Apple has transitioned away from iTunes, gradually phasing it out and replacing it with Apple Music, a subscription-based streaming service.

While competitors like Amazon and Napster attempted to challenge iTunes with downloadable music stores, streaming services like Spotify and Apple Music ultimately became the dominant force in digital music consumption.

The Impact of Digital Music Technology

Once digital music technology entered the world, its domination of the music industry occurred almost instantaneously. MP3 players have several key advantages over CD players. Their smaller size made them more portable, eliminating the necessity of lugging around bulky CD-carrying cases. Whereas CDs can only hold a relatively small amount of data, MP3 players compress thousands of songs onto a single device. The lack of moving parts means users could take MP3 players jogging or cycling without the risk of a song skipping every time the user hits a bumpy patch of road. Users are also no longer obligated to buy entire albums; instead, they can pick and choose their favorite songs from a catalog of online music. The iPod, launched in 2001, revolutionized the digital music industry. However, with the rise of smartphones and their integrated music capabilities, the iPod’s dominance waned, leading to its discontinuation in May, 2022. While digital licensing fees for ringtones, internet radio, and music videos were once significant, the rise of streaming services has altered the landscape. Streaming platforms now dominate these areas, offering artists and labels new opportunities for revenue generation.

CD Sales

The rise of digital music has significantly impacted CD sales since 2001. Although illegal downloads were once a major concern within the industry, streaming services have now become the primary way to consume music. Although the CD market has decline, it still contributes to overall music revenue. However, the industry’s focus has shifted toward monetizing streaming services and exploring new revenue streams like merchandising and live performances.

Utilizing the Internet: A New Level of Indie

Over the past few years, the Internet has begun to level the proverbial playing field between major and independent record labels. Exemplifying how smaller indie labels can latch on to trends more quickly than the Big Four, indies have embraced new technology, including blogging, online video sites, and online social networking sites, as a means of promoting their music, while the major labels have fallen behind the curve. With social networking sites enabling artists to communicate directly with their fans, the need for extensive financial backing or an industry middleman has vanished. Now, artists can upload their music onto a social networking site for free and generate record sales purely through word of mouth.

Although a few indie artists have become household names entirely through the buzz generated on social networking sites, many others find that they need some guidance. The direct-to-fan business model has created opportunities for web-based companies such as Nimbit and ReverbNation , which provide software that enables independent artists and record labels to market their music online, keep track of sales, create demand for their music, and communicate with fans. The companies offer social networking applications that enable fans to purchase music directly from the artists rather than redirect to a third-party website. Other advantages for bands include providing automatic updates to fans across a variety of networking sites, digital distribution through music platforms and other stores, and real-time sales updates.

Many established artists have also embraced the direct-to-fan business model . In 2007, Nine Inch Nails frontman Trent Reznor announced that the band split from its contractual obligations to Universal Music Group to distribute its next albums independently. Well known for his vocal distaste of major record labels and their profiteering, Reznor encouraged fans in Australia to steal his album Year Zero because he believed it was priced too highly there (SPIN, 2007). Commenting on the state of the music industry in a 2007 interview he said, “I’ve got a battle where I’m trying to put out quality material that matters and I’ve got fans that feel it’s their right to steal it and I’ve got a company that’s so bureaucratic and clumsy and ignorant and behind the times they don’t know what to do, so they rip the people off (Johnson, 2007).” Following the band’s split with Universal, they released studio album The Slip as a free digital download in 2008. Reznor stated, “This one’s on me,” on his website, thanking fans for their loyalty. Fans downloaded the album 1.4 million times within the first six weeks of its release (Kent, 2011). A similar technique used by tech-savvy alternative band Radiohead reaped even higher rewards in 2007, when its retail release of In Rainbows entered the album chart at No. 1 even though they had offered the digital version online at a price of the customer’s choosing several months earlier (see Chapter 11 “The Internet  and Social Media” for more information about Radiohead’s In Rainbows release) (Brandle, 2008).  The web-based direct release model allows bands such as Radiohead and Nine Inch Nails to obtain vital information about their fan bases—including e-mail addresses—that they can use for future promotions. The traditional music industry model has shifted as new technology makes it easier for artists to communicate directly with their fans.