If you don't have a futurist bent, it isn't worth the effort to think overmuch about the Internet. The reality continues to be so underwhelming, the claims for the future so grand. In recent weeks I've ordered a hundred dollars of groceries online, e-mailed photos of my infant son to people all over America, and found a 24-hour net radio station that plays nothing but Bhangra music. These are all fine things, of course, but getting excited about what you can do right now on the Internet seems so pedestrian, like being easily wowed by the fact that a $1,500 machine can duplicate all the functions of a manual typewriter, or for that matter, a pad of paper and a pencil. Remember that TV ad, "Have you ever faxed a memo... from the beach? You will." Is that supposed to be exciting?
So the future is where it's at, for everyone involved. We don't make money today, says the CEO of a dot-com start-up. In fact, we're losing gobs and gobs of it, and plan to lose much more. But someday (the unsaid sentence appends itself to the spoken ones) we will rule the world's commerce in doohickeys, widgets, and thingamabobs, and you'd better get on board now. And the guy sitting in front of his computer--me--thinks: Someday I won't have a phone, a TV, a VCR, a stereo receiver, a CD player, or this gigantic messy pile of tapes, CDs, books, and magazines that resist every storage solution ever devised by the minds of Ikea. I'll only have the computer. And the guy who works for a company that makes all that other junk, a company with a long history of huge revenues, wide profit margins, and great brand recognition, has to figure out how to keep his piece of the pie from evaporating in a matter of years.
There are two ways of thinking about Internet commerce. The first sees it as an immensely powerful market for businesses. This way of thinking is the cause of the still-high-flying Wall Street valuations given to money-losing companies like Amazon. The second sees the Internet as a powerful tool for consumers, making price comparisons easy, and minimizing or eliminating profit margins for retailers. This is behind the precipitous drop in valuation some brick-and-mortar businesses experience when they give up and embrace Internet business models. For casual observers, the whole thing is confusing. Nobody's making any money except a few search engines and AOL, right? And nobody knows exactly how the people who are going to make money will make that money. So if someone comes up with a plausible idea of how it will happen, that idea begins to seem like a revelation.
This is what happened to me two weeks ago when I saw Rob Sobel speak. Sobel's not a techno-visionary who makes his money babbling in glossy magazines about how our neckties will connect to the Internet by the year 2000, nor is he a dot-com CEO about to take his two-year-old company public. He's a vice-president at the L.A. office of ASCAP, an 85-year-old non-profit organization that collects royalties for composers and songwriters. He spoke two weeks ago to a small group of composers and songwriters, along with two reporters, in a Bellevue recording studio.
Few people outside the music industry understand what ASCAP does, and the few of them who've brushed up against it don't have a very positive opinion of it. That's because the only contact they're likely to have had is a visit by a ASCAP representative to a coffeehouse or bar they work in, who tells them that their business needs to give ASCAP a couple hundred dollars in order to continue playing recorded music. The business has little recourse, though a recent congressional act has made it easier for bars, restaurants, and cafes to play the TV or radio without paying ASCAP. But with recorded music, there's no loophole. If you play a CD in your store, it counts as a public performance of any song played. That means a copyright owner--generally the songwriter--needs to give his or her permission. Of course, you're not supposed to contact the songwriter directly, call Desmond Child up and say, "I really like that 'Livin' la Vida Loca' song of yours, mind if I play it in the store?" You're supposed to buy the right to play the music by making out checks to ASCAP and BMI, its main competitor.
While ASCAP is very active in licensing cafes and bars and restaurants, licensing makes up only a small percentage of its income; most comes from network TV stations and commercial radio broadcasters. ASCAP's expenses amount to about 15 percent of the income it receives--$508 million last year. The rest is doled out to songwriters and composers based on complex formulas; basically, money goes out based on where it came in from. You get a lot of money if you wrote the theme song to Friends, and very little if you wrote the score to a show on the Discovery Channel, because NBC pays ASCAP gobs of money and Discovery has little revenue and thus pays ASCAP little fees. Likewise, if you had a Top 10 radio hit, you're in the money, but if you were very popular on college radio, you're not going to see much.
But what's really interesting about ASCAP's system is, it has absolutely nothing to do with record sales. If you are the Rembrandts (the awful pop duo whose failing career was saved by their 45-second Friends ditty "I'll Be There for You"), you'll see more money from the once-a-week playing of your song on NBC prime-time than you could dream of earning in record sales, since nobody buys your album. While record companies profit only from selling copies of recorded music, ASCAP gets money every time a song is publicly performed: in a stadium, over the radio, on TV, in a cafe. And anytime anyone downloads a song file or receives streamed audio over their computer, ASCAP is there.
Major record companies freaked out this year when a couple-year-old file downloading format called mp3 suddenly became a popular way to exchange music over the net. The main reason for its popularity is that anyone can make a copy of an mp3 file that sounds as good as the original (though neither sounds as good as a CD). The industry, which has fought blank cassette tapes and digital recording media in the past, found a new threat to their high-margin CD and cassette sales. The result is the Secure Digital Music Initiative, a coalition which is setting voluntary standards for digital media devices, hoping to find an mp3-type medium which won't allow copying, so the record companies can sell downloadable music without worrying about endless copies circulating.
But mp3 is only part of this story. While uncountable songs are available in the format, the only legal recordings of any quality come from technology-friendly independent dance labels; the pickings are slim in any other genre. If major record companies stick to their agreement not to use the mp3 format, this will likely continue to be the case. But a large portion of these companies' catalogs is already available on the net, on streaming music sites like spinner.com and netradio.com. And these, Ron Sobel suggested late in his presentation in Bellevue, are the places to watch.
These sites allow consumers to listen to music without actually downloading music files. It doesn't sound great right now, but that'll change as computers get faster, connections get better, and you get better speakers. The song plays much the way it does on the radio: it's coming out of your speakers, but you don't own it, and it won't be there once it stops playing. Thus, you owe the record company nothing for listening to it. The site providing the content does owe ASCAP, though. ASCAP expects to collect a million dollars from websites this year, and given the rate at which their online revenues have been growing (300 percent a year), they expect the net to bring in as much money as TV or radio by 2003 or 2004.
The record industry has built its economic model on your need to own the music you want to hear. From radio airplay to movie soundtrack placement to concert tours to music videos, the record company's goal is always, ultimately, to sell high-profit-margin CDs and cassettes. But as more and more music becomes available in streamed formats, you might have less and less need to buy it. Right now, you just select a genre or a radio station, and passively receive the playlist--generally, you can't choose what song you want to listen to. But if you can hear any song you want, whenever you want, why do you need to actually own a copy of the song?
How is anybody going to make any money off this? Sobel didn't completely answer this question. ASCAP can collect from websites, but if those sites aren't making any money, ASCAP won't make much either. Sobel thinks subscriptions will ultimately be ASCAP's main income source, but they've had little success on the net so far. In any case, for the consumer, the future looks good. And for the record label, a lot of what they've built since Edison's wax cylinder looks threatened.
