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Prophets: Music-Industry Judgment Day Near

Music industry executives here foretold a future that doesn’t seem as fantastic as it might have only a few years ago.

If some of the prophesies made here at the 5th annual Music Industry Forum come true, then in the near future consumers will wirelessly download the bulk of their music collection to cellphones and Wi-Fi PDAs. They’ll share copyrighted music legally with friends and strangers through file-sharing networks that collect royalties for the music industry. Music will disappear from FM radio stations, replaced by Internet and satellite radio as consumers’ primary means of discovering new music. Most record stores will close, and in about 15 years, on-demand Internet downloads will replace physical CDs.

Consumers will also get used to renting music rather than owning it.

Those predictions came from a variety of executives, including top-echelon management at EMI Music, Sony BMG, Universal Music, Napster, Motorola and Yahoo. Also participating in the forum was Shawn Fanning, founder of the original Napster and developer of Snocap peer-to-peer (P2P) file-sharing technology, which promises to collect royalties for rights holders.

The forum, attended by about 400 people working in and around the music industry, also tackled such topics as copyright law and the relevance of the U.S. Supreme Court’s Betamax decision in the digital age.

“Globally, the phone could be the dominant platform for the initial purchase [of music],” said Thomas Gewecke, Sony BMG’s digital business group senior VP. There are four times more cellphones than PCs in the world and 10 to 15 times more cellphones than portable MP3 players, he said. “The [cellular] phone is capable of being the [driving] device worldwide, including the U.S., though not the only device.”

Mike Gaumond, Motorola’s media solutions VP, also saw a prominent role for cellular in the music industry. Music will be downloaded over the air to cellular phones, through Wi-Fi hot spots to PDAs, and over wired broadband networks to PCs, he predicted. “We must make it easy to get this content … on whatever device you want,” lest consumers turn to illegal file-sharing services to get content, he contended.

“It’s extraordinarily difficult to take [downloaded] music from the home to the car and outdoors” because of multiple codecs and multiple digital-rights-management (DRM) technologies, he continued. “If we don’t fix that, this could be the biggest factor [stunting legal digital distribution].”

Universal business development VP Jeff Bronikowski agreed. “Multiple DRMs will definitely stunt the market,” he said. Even if progress toward a dominant DRM is made, however, “I don’t think it will ever be as easy as popping a CD into a CD player,” he noted.

Some participants looked favorably upon legal P2P file-sharing networks and subscription-download services.

Authorized P2P sharing will capture a “huge portion” of sales in three to five years, Motorola’s Gaumond contended, because of the low cost of distribution. “In the long run, economics wins,” he said. The cost of digital distribution is about 20 cents compared to every dollar spent on traditional distribution methods, he said.

Universal’s Bronikowski said his company has licensed file-sharing technologies from Fanning’s Snocap and from one other company.

Fanning, founder of the original Napster file-sharing service, is developing a P2P system that allows consumers to share music legally over the Internet and collects and distributes royalties to copyright owners.

P2P, Fanning contended, allows consumers to “find content not traditionally accessible in record stores.” The original Napster “revealed demand that the music companies and artists didn’t realize.”

“[Music] exploring was the process of digging in record stores,” he said, but with P2P, “all content is on a level playing field and can be found quickly.”

Consumer frustration with existing P2P networks will drive them to Snocap’s planned network, where consumers won’t be inundated with pop-up ads, spyware, spoofed files and hard-to-use interfaces, he contended.

Snocap will identify content by matching the acoustic fingerprint of a shared file with the acoustic fingerprint of masters provided by participating music companies, he explained. Acoustic fingerprinting will enable Snocap to identify different versions of the same song, such as a version played live at a concert and one recorded in a studio.

Each rights-holder can create its own set of rights-management rules and select its own DRM technology, but “we will encourage people to unify around specific DRMs,” Fanning said.

Some participants also forecast a leading role for new portable subscription-download services that allow for the transfer of subscription downloads to portable devices. Some expect such services to grab a major share of the download market from Apple.

Subscription downloads are “a winning model” because “it allows consumers to discover new music and acquire it,” said Motorola’s Gaumond. “You don’t scan lists of artists to discover new music. You listen to it.” He likened subscription services to “self-programmed digital radio” vs. radio programmed by someone else.

Portable subscriptions, said Napster’s Duea, “will be the first major dent in Apple.” Napster launched a portable subscription service late last year to complement its PC-tethered subscription-download service and its download-to-own service. The number of tethered subscriptions, he noted, is greater than expected, and the margins are better than paid-for downloads, he noted.

Almost a dozen portables support Napster’s portable subscription service, and the company is working with Audiovox to develop a car radio that plays Napster’s subscription downloads via plug-in memory cards, Duea said.

“The subscription model could be a big driver,” Universal’s Bronikowski agreed.

EMI’s business affairs VP Ken Parks foresaw an “uphill battle” for portable subscriptions “but not a steep hill.” Consumers once resisted leasing a car, and they will learn to like leased music once they understand that they can listen to any song they want for a monthly fee on a PC or on a portable MP3 player, he said. The subscription services would also give consumers useful options to buy a song once they rent it, he noted.

Napster’s Duea questioned whether consumers ever owned the music they bought. “How many still play your eight tracks?” he asked.

The new Internet-radio and satellite-radio services will play a greater role in consumers’ music-discovery process, lifting music sales whether in digital or physical form, many participants agreed.

XM and Sirius, said Universal’s Bronikowski, “would love” to offer “a seamless way for consumers to buy the music they hear.” XM, he noted, has filed some patents to make it happen.

With consumers turning to alternate sources to discover new music, “Music will disappear from terrestrial radio,” claimed David Goldberg, music VP/GM at Yahoo, Yahoo. He also said most record stores will die, and Wal-Mart, Best Buy and Target may be the only places left to buy physical media. In about 15 years, however, on-demand digital distribution will replace physical CDs, he claimed.

Other participants also forecast a dramatic decline in physical media sales. When asked when the bulk of consumer dollars will shift from physical media to digital, one panelist said the industry is already “40 to 50 percent there.” That panelist was Peter Diemer, sales and marketing VP of digital-distribution infrastructure supplier

Jupiter Research analyst David Card projected digital distribution will account for only 15 percent of music sales in five years, and Napster’s Duea quipped, “For a certain demographic, the CD is dead.”