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September 9, 2003

NEWS ANALYSIS

Fighting the Idea That All the Internet Is Free

By STEVE LOHR

With the club of lawsuits and the olive branch of an amnesty program, the music industry is waging a campaign against online piracy that relies on both public relations and economics to attack the idea that everything in cyberspace can be free.

That will not be easy. The Internet sprang from a research culture where information of all kinds was freely shared. That mentality still resonates with the millions of Internet users who routinely download music onto their computers. But the emphatic message of the music industry's two-step program announced yesterday is that the days of plucking copyrighted songs off the Internet without paying for them are numbered.

The Recording Industry Association of America said yesterday that it had filed 261 suits against online music pirates, and it promised thousands more. Under its amnesty program, contrite file sharers who have not yet been sued will be spared if they erase their illicit music files and promise never to do it again.

"These lawsuits certainly tell consumers that `free' ultimately has a price," said Michael J. Wolf, managing partner in charge of the media practice at McKinsey & Company, a consulting firm. "Originally, there was this perception that consumers would not pay for content — entertainment or information — over the Internet. But that perception is changing."

Mr. Wolf observed that in their own way all media companies will have to confront the overarching issue that the music industry is grappling with: how to respond to the challenge of digital distribution and find a profitable business model. "Nobody is immune," he said.

For the struggling music industry, there are at least some encouraging signs. Raising the price of illegal file sharing, according to a recent research report, could have an impact on the behavior of today's carefree music downloaders.

In the United States, about half of all young people ages 12 to 22 with access to the Internet have downloaded music from file-sharing networks like KaZaA and Morpheus, according to a survey conducted by Forrester Research in July. Of those, 68 percent said they would stop downloading music if there was a "serious risk" of being fined or sued.

"If the issue is, can you scare people? The answer definitely seems to be yes," said Josh Bernoff, an analyst for Forrester Research.

Yet scaring the customers is a tricky strategy for the music industry. Other industries, to be sure, have sued customers who misuse a product or service. The software industry, for example, has long waged a campaign against people who illegally copy or use software, and the credit card industry has aggressively pursued people who commit fraud with their cards.

But the problem group in other industries typically represents a small portion of potential customers. In the music industry, by contrast, young people are the most active users of music file-sharing systems and they purchase more CD's per person than older music listeners.

In beginning the crackdown campaign yesterday, Cary Sherman, president of the Recording Industry Association, took pains to portray the step as one reluctantly taken to protect the livelihoods of gospel singers, pit musicians and record store clerks — not just record executives and millionaire divas.

The music industry's actions yesterday dealt with one side of the economic ledger: raising the cost of illegal file sharing.

But the industry, according to analysts, must pay at least as much attention to its own economics if it is really to address the challenge presented by Internet file sharing.

The industry, they said, must provide convenient, reasonably priced and legal ways to download music digitally, and reduce the price of CD's. As positive steps, they point to Apple Computer's iTunes service, which allows users to download songs for 99 cents each; Real Networks' Rhapsody online music service; and the decision last week by Universal Music Group, the largest record company, to cut wholesale prices on CD's by up to 30 percent.

"The industry has to increase the price of illegal file sharing and make it more attractive to download music legally or purchase CD's," said Hal R. Varian, an economist at the University of California at Berkeley. "That is the economic gap the industry is trying to close."

The music industry's travails, analysts agree, are in part self-inflicted — a result of reacting slowly and ineptly to the challenge of Internet file sharing. Still, other media industries face similar issues. Movies and television programs, though nothing like music yet, are beginning to be distributed over file-sharing networks.

"The movie industry and broadcasting is obviously watching this playbook with great interest, wondering if someday they may have to do the same thing," said Harold Vogel, president of Vogel Capital Management, an investment firm specializing in media companies.

Hollywood has far more time than the music industry to adopt business alternatives, like Movielink, which allows users to download movies legally. Movie files are much larger than music files, so downloading a film over the Internet is still inconvenient and time consuming. But the barrier to widespread movie file sharing will drop as Internet connections to homes continue to get faster.

Part of the challenge facing not just the recording industry but all media companies is how to deal with the lingering perception that the Internet is somehow a free resource. It never was, of course. In the early days, the government and universities subsidized it. E-mail continues to be free to users, though one unintended byproduct is the spread of spam, an irritation to consumers and a costly burden to corporations and network operators handling Internet traffic.

Most commercial Web sites still do not charge for viewing, though some do, and others charge for "premium" offerings.

"It was never really free," said Thomas R. Eisenmann, an assistant professor at Harvard Business School. "The hope was that advertising would pay for everything. That's not necessarily a flawed model. It has just been a lot harder than most people thought."


Copyright 2003 The New York Times Company