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While there are many signs of the recording industry's
struggle with the Internet, the Napster episode arguably provides
the best example. Napster is a website that, until recently,
offered its users free access to musical recordings. It did so
with a computer program that links the hard drives belonging
to the community of Napster users. The program, in turn, allowed
users to search for and download without payment digital files
of music on their peers' computers. Many downloaded files contained
songs copied from commercial recordings--copies made without
the permission of the songs' composers, publishers, performers,
and record firms. It is not surprising, then, that the Recording
Industry Association of America (RIAA) and others filed suit
against the website in December 1999, alleging that Napster facilitated
copyright infringement. The allegation received support in February
2001, when a court ordered Napster to prevent its users from
trading copyrighted music.
The Napster episode has generated much discussion. Some claim
it is unparalleled in the history of the recording industry,
implying that the past tells us little about the present episode.
In contrast, I argue that it is the most recent episode in which
the recording industry has confronted new media, thereby grappling
with copyright issues and the divining of new business models.
Consequently, past episodes provide a purchase on the Napster
episode and its possible resolution. I fully develop this argument
elsewhere; in the present piece, I motivate it by briefly describing
an earlier episode and alluding to lessons it offers.
recording industry and radio
The recording industry had existed
for nearly three decades when it encountered the rise of commercial
radio in the 1920s. The earliest radio stations broadcast the
pre-recorded music of record firms, and most did so without compensating
record firms. Some thought this practice would benefit both industries;
it provided cheap programming for the infant radio industry and
free promotion for the booming recording industry. The fortunes
of both industries soon diverged, however. The total number of
record firms in operation steadily declined, while the number
of radio stations swelled. The frailty of record firms was matched
by their declining output, with the total value of production
plummeting from $105.6 million in 1921 to $5.5 million in 1933.
Concurrently, radio mostly enjoyed growth; its annual advertising
earnings went from less than $5 million to $57 million.
Recording industry personnel eventually concluded that their
firms suffer when stations broadcast pre-recorded music. Their
conclusion rested on what would later prove to be a flawed assumption:
consumers will not buy records when they could hear them "for
free" on radio. Their conclusion also rested on an accurate
evaluation of U.S. copyright law. When broadcasting pre-recorded
music, radio stations must pay royalties to the composers, lyricists,
and publishers of the music, but they need not pay royalties
to record firms. In other words, radio stations can generate
income by repeatedly playing hit records and, aside from the
initial purchase price, they need not compensate record firms.
Given this conclusion, the recording industry developed a business
model that featured two elements. First, record firms sought
to prohibit broadcast of their pre-recorded product by stamping
inscriptions on recordings (for example, "Not Licensed for
Radio Broadcast"). They received validation from the courts;
three rulings required that stations cease broadcasting records
with prohibitive inscriptions. Second, record firms proposed
that stations broadcast live performances by recording artists,
thus offering material that did not duplicate the pre-recorded
products of record firms. Powerful actors in government and broadcasting
concurred with this proposal. Both CBS and NBC, for example,
had long emphasized live shows and were receptive to the entreaties
of record firms. Indeed, both networks discouraged their stations
from broadcasting the products of record firms.
The record industry's successful adoption of the "anti-airplay"
model corresponded with its economic recovery in the mid- to
late-1930s. The model not only skirted what recording personnel
viewed as a failing of copyright law (that is, radio's ability
to broadcast recordings without paying royalties to record firms),
it also encouraged a symbiotic relationship between the recording
and radio industries. "While the impact of radio in broadcasting
in its earliest years disturbed the sale of phonograph records,"
noted one report, "appreciation of recordings has been further
stimulated by broadcasting."
Two factors undermined the anti-airplay model in the early 1940s.
First, the New York Supreme Court ruled that once radio stations
purchased a record, they were free to broadcast it-even when
it bore a "Not Licensed for Broadcast" inscription.
Displeased with this ruling, the dominant record firms pursued
plans for obtaining fees from stations that broadcast pre-recorded
music. Second, a new record firm broke ranks and introduced a
"pro-airplay" business model. Capitol Records (est.
1942) executives believed that broadcasting recordings would
stimulate rather than harm sales. In search of airplay, Capitol
routinely promoted its recordings at radio stations, and it became
the first record firm that routinely delivered free recordings
to disk jockeys. With a dramatic increase in record sales, Capitol
quickly rose to dominance in the record industry. Unable to ignore
Capitol's successful "pro-airplay" model, other dominant
record firms begrudgingly ceased their quest for attaining fees
from radio stations. In fact, in search of symbiosis, they likewise
courted disk jockeys with free recordings. "The past few
years have seen the emergence of the radio disk jockey as one
of the most important factors in record sales," gushed one
company document. "The record manufacturers are happier
than they have ever been."
Since the mid-1940s, when the "radio episode" was resolved,
Capitol's "pro-airplay" model has prevailed with ambivalence.
On the one hand, recording industry personnel concede that the
broadcasting of pre-recorded music can be a great boon to the
sales of recordings. On the other hand, they still chafe at current
copyright law. In fact, for five decades, the recording industry
has lobbied for changes in copyright law, so that record firms
may receive royalties from radio stations. They have been mostly
unsuccessful in their attempts. One success occurred in 1998,
when the Digital Millennium Copyright Act required that web broadcasters
(but not radio stations) pay licensing fees to record firms.
The actual amount of such fees has yet to be resolved, however.
for the Napster episode
History offers a number of lessons
for the Napster episode, of which I mention two. First, it provides
a perspective frequently absent from current discussion. Many
journalistic accounts, for example, portray the Napster episode
as merely a struggle between the "Goliaths" of the
recording industry and the "Davids" of the dot.coms.
To be sure, Napster lacks the resources of multinational record
firms like Bertelsmann. Nevertheless, this episode entails more
than large corporations bringing their collective power to bear
on a fledgling website; it also entails the recording industry's
longstanding concern with copyright and compensation. When the
recording industry sought to prohibit the broadcasting of pre-recorded
music, it was clearly weaker than the radio industry. When it
subsequently confronted new media, the recording industry sometimes
proceeded from a dominant position, and sometimes it did not.
It just so happens that the recording industry occupies a clear
position of power in the present episode.
The radio episode also suggests that the Napster episode will
not be resolved until the recording industry develops a viable
business model. Recording industry personnel frequently tout
the symbiosis that could occur between record firms and websites
like Napster. In fact, Bertelsmann executives are so enamored
with the idea that they dropped their suit against Napster and
may loan the website up to $50 million. No record firm, however,
has demonstrated how downloaded music files can stimulate sales
of pre-recorded music, nor has one shown how websites may provide
an alternative or complement to traditional retail sites. The
development of a business model is no small task, for as the
radio episode shows, models that are based on contradictory assumptions
can both be successful. Moreover, a successful model can become
obsolete in the face of legal and competitive challenges.
If copyright issues are eventually defined as the recording industry
wishes, it still must address a host of issues that include the
extensive catalog of digital music files that it has yet to create
and the system for compensating record firms for downloaded music.
If copyright issues are defined as Napster wishes, then the recording
industry must ponder, once again, the pros and cons of "free"
music. While the specifics of the eventual business model may
be unique to the Napster episode, the process whereby the industry
adapts to new media is common. That is, the Napster episode is
but a recent variation on an old theme.