Chapter 1

Development of Music Marketing on the internet

BACKGROUND ON THE INTERNET

The Internet is described as a global network connecting millions of computers. Unlike online services, which are centrally controlled, the Internet is decentralized by design. Each Internet computer, called a host, is independent. It got its start as several universities and government organizations saw the benefit in connecting mainframe computers together to share information. The military saw its use for communication in case the country was ever under attack. Little did they realize that in 2007, a blockbuster Bruce Willis movie would feature the country under attack of just such an infrastructure.

Electronic mail was introduced in the early 1970s along with communication protocol still in use today: Transmission Control Protocol/Internet Protocol (TCP/IP), and File Transfer Protocol (FTP). The domain name system was introduced in 1985 with the extensions of .com, .org, .net, .gov, .mil and .edu. Then in 1989, Tim Berners-Lee of CERN (European Laboratory for Particle Physics) developed a new technique for distributing information on the Internet he called the World Wide Web. Based on hypertext, the web permits the user to connect from one document to another at different sites on the Internet via hyperlinks (specially programmed words, phrases, buttons, or graphics). Unlike other Internet protocols, such as FTP and email, the Web is accessible through a graphical user interface. This brought the development of web browsers that could decipher coding in documents and display them according to a set of instructions called hypertext markup language. Meanwhile, the first efforts to index the contents of the Internet were introduced in the early 90s.

In 1995, several online services (America Online, CompuServe and Prodigy) began providing their software to computer manufacturers to include on new computer hard drives.¹ This propelled Internet use as new computer owners took advantage of the free trial period offered by several of these services. By 1996, 43.2 million (44%) U.S. households owned a personal computer, and 14 million of them were online.

In 1999, college student Shawn Fanning introduced Napster, a program that allowed users to swap music files over the Internet. This began the downfall of the recorded music industry as it had existed until that time. By 2001, the courts had ruled that Napster was in violation of copyright laws and it was forced to shut down its file-sharing operations. Other new file sharing services sprang up to fill the void, including Aimster, Grokster, Kazaa, Limewire and BitTorrent. By January of 2002, 58.5% of the U.S. population (164.14 million people) were using the Internet. By 2003, it was estimated that illegal file-sharing of music files had grown to about 2.6 billion files per month.

WEB 2.0

In 2001, the “dot-com” bubble started to burst as traditional companies began to pull back on their Internet advertising budgets. Massive layoffs followed as content providers sought less expensive ways to provide content for Internet users. This brought about the development of Web 2.0, a system in which users are the content providers and the Web 2.0 companies just provide the platform. The term Web 2.0 was coined by media writer and analyst Tim O’Reilly, the founder and CEO of O’Reilly Media. Web 2.0 is basically the current generation of popular web applications that are democratic in nature, that put the user in control, and that rely on the aggregate wisdom of the masses to provide content and feedback. One of the early examples is Wikipedia, launched in early 2001 as “harnessing the wisdom of crowds to build an online encyclopedia” (Information Week); it went live in 2005.

MySpace was founded in 2003, which allowed casual users to build a web page for themselves and build social networks online. Flickr launched in early 2004, giving users the opportunity to store and share photos online. Yahoo bought Flickr in 2005. Other Web 2.0 innovations include Craigslist, Ebay, Digg, Facebook, YouTube, Second Life, etc. In 2006, Time Magazine awarded its person of the year award to “you—the creators on Web 2.0.” Time describes Web 2.0 as “… a tool for bringing together the small contributions of millions of people and making them matter.” By 2006, there were also more than 92 million web sites online.

Another innovation that has breathed life into Web 2.0 is Google AdSense. Introduced in 2005, AdSense provides a way for web site hobbyists to monetize their labor-of-love web pages. The millions of non-commercial web sites that were set up and run for personal interest now had a means to make money from their visitors by running ads. Many of these sites were simply advice, how-to, or other informational sites that did not necessarily sell products or charge money for the information they provide. So, with little setup and at no cost, these mom-and-pop web sites were able to sign up on Google to participate in AdSense and start allowing Google to run topic-related ads on these sites. Site owners are paid a small sum each time a visitor “clicks through” one of the ads to visit the advertiser’s web site. The advertisers participate through the other side of the equation, Google AdWords.

Table 1.1 Example Web 2.0 sites

MUSIC AND THE INTERNET

When the Internet was in its infancy in the late 1980s, only a few audiophiles and tech-savvy musicians were online, communicating through the few rudimentary online services such as CompuServe and General Electric’s Genie. The author of this book was one of those early online music pioneers, as a systems operator on CompuServe’s MIDI forum. Modem baud rates were such back then that even small text files took a while to download, and the online services were charging by the minute. One of the most progressive music exchanges occurring at the time was in the form of MIDI data files,² small enough to move through the dial-up systems. The MIDI forum had three sections, (1) the message section, where members could post messages for each other in the exchange of ideas, (2) the libraries section that hosted the MIDI library of songs, and (3) the conference room where members held live chats, sometimes featuring a well-known artist or producer. As musicians started to exchange ideas via MIDI files over the Internet, the first online musical collaborations were created. A musician would start a song, record the data in MIDI, upload the file to the forum or send it to a particular forum member, and then allow them to modify the file, thus modifying the composition. The forum was also a place for the exchange of ideas, and some members published articles about music and the music business. The forums were not consumer-oriented at first. Then in the early 1990s, Geffen Records decided to have an online presence for fans and opened up a Geffen forum on CompuServe.

By 1994, Geffen Records was trying new ways to reach consumers through the Internet with their debut of an Aerosmith song online through their CompuServe forum (EW.com, 1994). For one week, they offered an outtake of the song “Head First” from the band’s “Get a Grip” album. Early Internet adopters were able to download the song, which took up to several hours; the band waived their royalties while CompuServe suspended their usual $9.60 hourly charge. Geffen’s Jim Griffin commented at the time “We’re not saying this is how you’ll get your music in the future. But we did want to try it out.” Shortly after that, Geffen was one of the first labels to create its own web site. One way to look at old web pages from history is through the “Wayback Machine” at http://www.archive.org/web/web.php. Some of the original Geffen Records pages and assets are archived at http://web.archive.org/web/*/geffen.com/*

In 1995, Polygram Records introduced a prototype record label web site for consumers at the 1995 National Association of Recording Merchandisers (NARM) convention in San Diego. The label touted to skeptical music retailers that the site was not designed to siphon off retail business but to guide consumers to record stores that carried the products featured on the site. Soon after that, scores of record labels and artists began setting up web sites and procuring their domain names, while tiptoeing around the issue of cutting into retail store sales. Music writer Peter Spellman wrote in 1995:

THE MP3 FORMAT

By 1997, the first viable audio compression format, MP3, was being introduced to consumers through several computer audio players such as the popular WinAmp.³ Consumers were able to take audio files from their CDs or master tapes, compress the files and email them to other Internet users. In 1998, the web site MP3.com launched after noticing an abundance of web traffic using the search term MP3 to look for free music files. The site offered a way for people to post their favorite (or original) music files to share with others and was, at that time, strictly an advertiser-supported project. “At its peak, MP3.com delivered over 4 million MP3 formatted audio files per day to over 800,000 unique users on a customer base of 25 million registered users” (Wikipedia). In 2000, MP3.com launched a new service MyMP3.com that allowed registered users to upload a copy of music they already owned and then stream it to the computer of their choice. The company saw this as a legitimate way to honor copyright protection, but the Recording Industry Association of America (RIAA) and the labels did not agree, and sued MP3.com. The company settled with the labels and the service was discontinued, but by then Napster and other illegal peer-to-peer (P2P) file sharing networks were in full swing.

Also in 1997, the Rio was introduced as the first mass market MP3 player. The company, Diamond, was immediately sued by the RIAA who claimed the device allowed for copyright infringement and storage of illegal copies of songs. The RIAA claimed the Rio was made for illegal pirating. The courts disagreed and the Rio hit the market. In upholding this decision, the appeals court said the Audio Home Recording Act, which the RIAA had cited in its suit, prohibits devices that make copies from digital music recordings. The court said the Rio does not make copies but simply stores files it gets from computers (Salon, 06/16/1999). But the original Rio players were limited: storage capacity topped out at 64MB but most had only 32MB, and data transfer via the parallel or USB 1.0 port was very slow. Several companies created audio software to allow for MP3 encoding and playback facilities on the computer, both for the MacIntosh and the PC platforms.

Figure 1.1 The Diamond Rio MP3 player.

(Courtesy of Diamond Multimedia)

The original players were more of a novelty than a practicality: “for a mere $200, [you can] listen to 60 minutes of CD-quality music in the MP3 audio format” (Salon, 10/28/1998). Users had to return to their computers and reload the player to listen to more songs or use removable media such as SmartMedia cards to hold additional music. By 1999, portable MP3 players from a number of manufacturers were popular, and other software developers, such as Liquid Audio and a2b, scrambled to develop audio compression formats that were more secure and would appeal to piracy-conscious record labels. In the fall of 1999, Napster was in full swing and MP3 players were popular with college students. The RIAA began contacting universities and targeting college students, who were the most likely copyright violators. Access to high speed Internet on campuses was fueling massive peer-to-peer music file sharing. The RIAA sent notices to over 300 universities warning them that students were hosting illegal MP3 files on campus servers. Janelle Brown, writer for Salon.com, wrote in November, 1999 “there are probably millions of illegal MP3 files and music traders online -- pity the poor fool whose job it is to track them all down” (Brown, 1999a).

By 2001, Brown was writing that the promise of a digital revolution that takes power away from the major conglomerates and puts it in the hands of the creative producers was all but dead. “Innovation is being sledge-hammered out of existence by legal threats and buyouts” (Brown, 06/01/2001). Vivendi Universal purchased MP3.com, BMG bought Myplay.com, the RIAA had defeated Napster and gone after several other services. Consumer frustration was growing because the major labels were not providing a legal, commercial alternative to illegal downloading at a time when the consumer was more than ready to convert from CDs to digital tracks stored on a computer system. “Napster had single-handedly turned millions of consumers on to the world of MP3s” (Brown, 06/01/2001). Many of the startups that avoided legal action were having a difficult time with profitability because the labels were unwilling to license music for legal downloads. The major labels were creating online distribution services of their own, but failed to capture the commercial market with their cobbled-together group of startups such as MusicNet and Duet. They had yet to hit on a formula for success in making a dent in the illegal P2P file trading. Until Steve Jobs of Apple convinced them he had the answer.

ITUNES STORY

In January of 2001, Apple introduced the iTunes jukebox software at Macworld. Unlike the predecessors, iTunes was simple, with most of the screen dedicated to a browser for finding music (www.ipodobserver.com), but the initial release was only for Mac users, with the promise of a Windows version to follow. iTunes included support for creating mixes, burning CDs and for downloading to popular MP3 players, including the Rio. Unfortunately, the current crop of MP3 players did not offer a very Mac user-friendly interface. Steve Jobs ordered the development of an MP3 player that would work seamlessly with the iTunes system. Part two of that plan was to create an online music downloading store. Thomas Hormby writes “Apple was not the first to create such a store, but it was the first not to fail spectacularly. The most notable pre-Apple music store was Pressplay, which was a joint venture between major record labels” (Hormby, 2007). Unlike the other legal downloading services that used a cacophony of policy restrictions (limited number of downloads and streams per month), the iTunes store was simple: 99 cents per download, up to three copies. It was an instant success, quickly capturing 76% of the hardware market and 82% of the legal music download market (Silverstein, 2006).

In 2007 the record labels sought a price restructuring of iTunes but were unable to persuade Jobs, who believed the current pricing strategy of 99 cents was crucial for the continued success of the service. According to an article in Businessweek, “Universal Music Group chief Doug Morris and his fellow music executives realized they had ceded too much control to Jobs” (Businessweek, 2007). Morris refused to re-sign a multi-year contract with iTunes and instead opted for a month-to-month agreement while nurturing alternative retailing options, including a new service called Total Music. One of the big question marks about this new business model is that it doesn’t offer anything that hasn’t already been tried—and failed. The plan does call for hardware makers and cell-phone makers to absorb the cost of a monthly subscription service—something consumers themselves have so far rejected. Consumers don’t seem to want to “rent” music by the month; they prefer to own the music. Consumers are concerned about losing access to their music library if they leave the service or if the service increases their fees. The existing subscription services have only a few million customers whereas iTunes has hundreds of millions of users.

Figure 1.2 iTunes computer interface

(courtesy of Apple, Inc.)

Figure 1.3 Apple mobile devices and iCloud

(courtesy of Apple, Inc.)

This new model calls for hardware makers to add the $5 monthly subscription cost (for 18 months) to the price of the hardware, increasing the retail price by $90, so ultimately, the consumer is paying for the subscription service. Meanwhile, Amazon has launched an MP3 retail store and is in the process of licensing music from the major labels. Wal-Mart and Best Buy have also made an entrance into the music download market. None of these is giving the record labels a new pricing strategy that they were originally seeking from Apple. And in spring 2008, iTunes moved past Wal-Mart to become the leading music retailer in the U.S.

THE CURRENT ONLINE ENVIRONMENT

The development of social networking sites dedicated to discovering and sharing new music brings hope that the millions of unsigned musicians who have recently acquired the technology to create high quality recordings will now be able to achieve a moderate level of success, creating a middle class of professional entertainers that has been missing in the previous decades. A “record deal” with a major record label may no longer be necessary to enjoy the success of having a large fan base to purchase recorded music, concert tickets and artist memorabilia. Several chapters in this book are dedicated to outlining how to make that happen.

Notes

Bibliography

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