The future of digital music delivery is at stake as technology companies and record labels try to bridge their multibillion-dollar industries. But the two sides are making little progress, reports one tech-industry insider, who says that the music industry is taking a "my way or the highway" approach.
Facing the loss of its lucrative distribution chains and existing contracts with retailers, the record industry has a plan to force hardware and software companies to exclusively adopt its Secure Digital Music Initiative as the standard for delivering music online.
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At last week's SDMI meeting in London, a handpicked committee proposed a plan that could force hardware and software developers to choose among wannabe SDMI, the de facto standard MP3, or a different compressed file format for the development of digital music players and similar hardware.
SDMI backers want manufacturers to build a time-bomb trigger into their products that, when activated at a later date, would prevent users from downloading or playing non-SDMI-compliant music. The hardware would initially support MP3 and other compressed file formats, but a signal from the RIAA would activate the blocking trigger.
Hardware and software developers that refuse to build in the switch would not have access to the SDMI specifications or the major-label music that will be made available when the specification is complete.
According to a source who attended the SDMI meeting last week, participants discovered that the Internet and music industries have precious little in common. Coming to a consensus on the delivery of digital music may be all but impossible, said the source, who requested anonymity.
Committee members from the technology industry were convinced that record labels don't "get" the Internet, where open standards are the norm. Others were upset that the subcommittee was so exclusive. Microsoft, Lucent, and a handful of PC manufacturers were the only technology companies present in sessions dominated by the RIAA and its record labels.
"There was a lot of distaste around the room and loud conversations in the hallway with Leo [Leonardo Chiariglione, executive director of SDMI] and Cary [Sherman, senior executive vice president for the RIAA]," the source said.
The RIAA refused to comment on the negotiations.
"Ultimately, if it continues down this path, there will be an unworkable solution for the customers," said the SDMI source. "Will I buy a Rio that supports MP3, or possibly a Samsung player that does not? The labels are concerned about their distribution channels and how the stores will treat them. But while there are 30,000 titles in brick-and-mortar, the labels own 10 times that."
Another source who attended the meeting, and who also asked to remain anonymous, said that PC and hardware makers are resisting the RIAA's plans because they see an immediate market for MP3-based players. Already there are many players on the street and under development, and the market for selling legitimate MP3 music and products is in its infancy.
"This transition group asked the question, 'do we ban MP3s?' and the answer was a clear and resounding 'no' from PC makers. They are not going to drop support for MP3 anytime soon, and more and more manufacturers want to have players ready for Christmas," said the source.
For other companies caught in the middle of the debate, the issues were not so clear-cut. "With companies like Sony, that sell both content and hardware and are on both sides of the battle, it's very interesting," the source said.
The initial SDMI specification for portable players is due by the end of June, and a full-blown architecture by March 2000. There are several encryption and security companies currently working on the proposed trigger device that will present their solutions within the next few weeks. The next SDMI meeting is scheduled for next week in Washington.
"This reminds me of the early days of the CD recording market, with all the different file formats and people jockeying for position. The same thing is happening here, but there are 250 participants," said Dave Ulmer, general manager of Adaptec's software products group, who was at the SDMI meeting in London. "There are companies that see their future hinging on being part of this SDMI solution, and others just want to know what it is."
One source said that "there is no way in hell" that SDMI-compliant products will be ready for the Christmas season because "the individuals involved in these conversations are too concerned about their interests and [are] not looking for a real solution. Some guy with a digital kiosk wants everything for kiosks, and another guy with encryption wants his stuff in, and so on."
Steve Grady, vice president of marketing at MP3 retailer GoodNoise, said that if the record labels don't put the consumer first in their architecture plans, piracy will only increase and the industry could ultimately lose out on new business opportunities on the Web.
"The problem is that you're talking about consumers and people adopting a technology and using music in a certain way. But you have to stay focused on the consumer here. What you're competing against is free product, and that won't go away," Grady said. "Something better than MP3 will come along. The ability to move music around is key, and if you try to force something that has attributes they don't want, it won't be successful."
While the SDMI specification may ultimately become the standard for the music industry, there is no guarantee that it has the inside track.
During the past few weeks, recording industry companies have formed alliances that could undermine SDMI's acceptance. BMG Entertainment and the Universal Music Group are teaming up with AT&T and Matsushita on a music delivery system, while Microsoft has allied with Sony on content distribution deals.
In the coming months, the SDMI equation could get even more complicated if the major labels decide to go their own way.
"What's interesting is Universal and Sony. It's like the Oklahoma land rush with their marketing power and Microsoft's monopoly," said one source. "If they get the market to adopt their standard, it's wide open. I don't think SDMI has a lock on what the standard will be."
"Welcome to the software business," was the general sentiment among sources who recalled the similar battles over standards within the Internet industry.
"[It's] turning into the Unix battle of the music industry," said one source, who said that ultimately open standards will prevail. "Any company that tries [proprietary formats] realizes it fails. Look at IBM, one of the oldest computer companies, and they've embraced the Web. It's a hard lesson, and the labels may have to learn it."
The RIAA has made it clear that it's willing to fight for its interests in the courts. It has the money and the muscle to try to convince technology companies and Internet music vendors to see things its way. But just the same, it may not win the battle.
"There is a big gap in the way major labels think about the world and what's going on today on the Internet. For all the discussion on format battles, is there really a battle going on in the consumer space?" Grady said.
"There is only one player right now, and it's MP3. The only battle is taking place is in meeting rooms. The Internet is a different environment, and the labels need to understand the culture and what you are dealing with here," Grady said.
