Next month, after two years of planning, the world's biggest record company will unveil its answer to Internet piracy.
Seagram's Universal Music Group will start selling digital downloads on the Web, hoping against reason that fans will cough up $2 each for songs they still can easily download elsewhere for free.
It's a Hail Mary shot that few executives believe will work.
Universal's "bulletproof" technology is too unwieldy and too expensive, costing more to operate than fans want to pay for the music itself. But worst of all, it's really not bulletproof. Sources inside the company say the encryption code is likely to be hacked and rendered obsolete before the corporation ever makes a penny on its investment.
Still, all the music companies have similar plans.
This is just the latest blunder by the music industry, which has managed to miss every major development on the Internet. And Seagram isn't the only laughingstock online. EMI, Time Warner, Sony and Bertelsmann also are flailing in cyberspace.
So far, the music giants have been unable to come up with any practical alternative to innovative file-swapping technologies such as Napster. Instead, the companies have pursued a piecemeal legal strategy, trying to sue the electronic bandits out of existence.
So it's no surprise that chaos is crippling the $40-billion music business as the five biggest record conglomerates find themselves torn between the old world establishment and the Internet unknown.
After years of infighting, turf battles and just plain dithering, they now have only a brief window of opportunity to move their industry out of the record store and into cyberspace.
They could easily lose the whole game by destroying the value of intellectual property in the process.
Copyright industries have been the leading agent of U.S. economic growth over the last 20 years, currently accounting for $68 billion in annual foreign sales, the nation's biggest export. The music industry already stands to lose nearly $1 billion to Internet theft by 2002, analysts at Sanford C. Bernstein say.
The top managers in the recording industry were late to grasp the crisis.
It took his 11-year-old son to alert Martin Bandier, group executive at EMI, the world's largest music publishing company. Bandier was challenged one evening to "Name your favorite song, Dad." After a few keystrokes, the requested tune came pouring out of two tiny computer speakers.
"I almost passed out," recalls Bandier, watching his son cue up composition after composition. Bandier knew kids were downloading free music from the Internet, one song at a time. But now the entire Motown catalog--a collection of 1960s hits worth $20 million annually for EMI--was stored in the family's personal computer, all accomplished with Napster in one afternoon.
"It's time to put up or shut up," says Jimmy Iovine, a veteran record producer who now runs Seagram's Interscope and Farmclub.com divisions. "The industry needs to move right now."
The stakes have never been higher. Several global giants are earning billions of dollars from manufacturing, distributing and selling music, films, books and other forms of intellectual property. As the Internet becomes an easy distribution system, these firms are championing the Web as the next frontier full of hundreds of millions of untapped customers.
That's the sales pitch behind the recent multibillion-dollar mergers of Time Warner with America Online and Seagram with Vivendi. Online distribution will allow them to charge less and make more money, boosting profits exponentially by cutting out the retail middleman and dramatically expanding the consumer base.
Vivendi envisions a world where fans will buy music from a menu of music subscription services, downloading songs on portable digital devices anywhere on the planet. Under that scenario, consumers will be able to download music on a cellular phone in the car, transmit to a hotel laptop and then zap it back to a TV set-top box in the living room of their home.
"We're talking about a future with unlimited options where music will become a service," Vivendi Chairman Jean-Marie Messier says. "Would you like to preview the latest song by Shania Twain before it goes to radio? Or download the whole CD? Maybe you would prefer unlimited access to the entire library of New Orleans jazz music. What we will offer is an a la carte menu. In the end, you, the consumer, will decide exactly how much you want to pay--not us."
Like Messier, most music executives are relentlessly upbeat about the industry's prospects online, forecasting a booming future with boundless new revenue streams.
Yet, these same executives were painfully slow to grasp the power of this new medium. And so far, they have failed to make it work for them instead of against them.
