How a file format brought an industry to its knees

By Mona Lalwani 

MP3. It's the format that revolutionized the way music's been consumed since the late '90s. When Karlheinz Brandenburg, a German acoustics engineer, discovered that an audio file could be compressed down to one-twelfth of its original size without distortion, he created the file-shrinking technology. Stephen Witt's debut book, How Music Got Free, traces all digital music piracy back to the invention of that format, which inadvertently made it possible for people to download and share music illegally. The book details the science and struggle behind the widely used audio technology. And his investigation uncovers the politics and the manipulative men who kept MP3 files from seeing the light of computer screens for years.

GALLERY|7 PHOTOS

How Music Got Free

• 
• 
• 
• 
• 
• 
  + See all 7

When the MP3 format became accessible, after a long corporate battle, it eventually led to the rise of music piracy and simultaneous demise of CDs. But Witt reveals more than just the technology that systematically tore the music industry to pieces. He narrows the story down to two men at opposite ends of the same spectrum: Doug Morris, one of the most powerful record label CEOs in the industry, who made rap music top the charts and eventually led the fight against piracy; and Dell Glover, a factory worker at a Universal Music CD-manufacturing unit in North Carolina, who leaked about 2,000 albums, made Eminem change his album release date and became one of the biggest pirates in the largest underground scene, Rabid Neurosis (RNS).

When pirated music found its way online in the '90s and early 2000s, almost all of it came through RNS, which relied on Glover's access to the CDs weeks before release. Tech-savvy teens spent hours scouring the internet and loved having access to music before it hit the record stores, even if that meant jeopardizing the careers of the very artists they worshiped. At the time, it became virtually impossible to not download the MP3 files or know someone who did.

Witt's book is filled with nostalgic moments for a generation that grew up on piracy. But it's also informative for people who skipped that phase completely. He draws parallels between the inventions, the decisions and the theft that led to the downfall of the booming music industry -- an industry that never quite regained its glory. I caught up with the author to get the lowdown on his expansive work on digital piracy and his views on music streaming.

When and why did you get interested in music piracy?

I showed up at [the University of Chicago] in 1997 with a 2GB hard drive and by the end of the year, I filled it with pirated MP3s. This was really the first time in history that you could do it. Even a couple of years earlier the technology wasn't there. Over the next decade, I was a serial media pirate. I just hoarded tons of stuff. I was on all the underground pirate networks. It was such a thoughtless action to go and take something from the internet; I never really thought about who might have put it up there in the first place. As I got older, around 2010-2011, I wondered where all this stuff came from. When I started investigating it, I found all this fascinating stuff that turned into this book.

The original iPod from 2001

Your book underscores the technology that led to music piracy and the corporate drama behind it. It was fascinating and frustrating to know that half a dozen German engineers sat on a gold mine but couldn't share it with the world for years because their invention was systematically and viciously suppressed. Why was the music industry snubbing MP3 even though it was clearly a superior format to the MP2, which was widely accepted?

The music industry was [made up of] technophobes. When this information [about the MP3] first became available, they rejected it multiple times. The pirates [started] providing leaked compressed music through the internet and filling a vacuum that the music industry would not. The music corporations could've done that. They ended up being forced to do it much later anyway. But for a long time, they had to be dragged screaming into the modern era. Now I think anyone who owns a music company is thinking 20 years ahead about distribution. They've learned their lesson. But at the time they were totally clueless.

There's a moment when Ricky Adar, an entrepreneur, asks Brandenburg, "Do you realize what you've done? You've killed the music industry." Did the invention of the MP3 really destroy the industry or did it, in fact, push it to change and adopt a new way?

It was a bit of both. Adar was trying to push a service similar to what we call Spotify today. This was in 1995. He faced enormous resistance from the industry and at the time it wasn't even clear such a thing was technologically possible. When he saw the MP3, it was the first time he saw a device that actually shrunk music, but made it listenable. Previous devices did it, but they sounded pretty crappy. Why did he say it killed the industry? I think once the stuff got out, it wouldn't be copy protectable, people would start trading it online, which is exactly what happened. The profits would disappear because you could get it for free. It pushed the industry into the future, but even today they're only operating at about half the size that they were at the peak of compact discs in 2000. Still, it's not clear if they're ever gonna recover. They actually shrunk last year, even with Spotify.

The music industry eventually fought back against piracy. They went after Napster for copyright infringement. The RIAA also sued Diamond Multimedia, the company that created the first-ever commercially successful MP3 player. What was going on with these lawsuits?

"Apple almost acted like a money launderer for the spoils of Napster."

The judges ruled Napster was illegal, so the industry won that one. The legality of Napster wasn't obvious at first. Now it's clear that it was in violation of the law, but at the time there was no basis for ruling that. Simultaneously, there was a lawsuit against [Diamond] -- the earliest version of the MP3 player. But the judges ended up ruling that the MP3 player was just a hard drive and they could not limit its sales. So the music industry lost that suit. When it happened there were all these music files everywhere and then [the lawsuit] made all these portable players available. Essentially, the music industry won the wrong lawsuit.

Daniel Ek, founder of Spotify

Napster had the potential to shrink the massive profits that the music industry was making from CD sales, but for a time it wasn't impacting the sales at all. People couldn't go anywhere with their downloaded files. But when the MP3 player won the lawsuit (RIAA vs. Diamond), it made digital piracy portable and even led to the launch of the iPod, right?

For sure. Apple came kind of late to this. iTunes debuted in 2001. The iPod came in [later that year]. It didn't make an impact right away, but eventually people wanted to take all these files and make them portable. The iPod made that possible. So for a time it became the best-selling gadget ever. Apple's retail store had the highest sales per square foot of any retail business in history and a lot of it was from these $200-300 iPods. Eventually they moved to iPhone, but you can trace these developments in the global market all the way to the earliest days of piracy. It's like I say in the book, Apple almost acted like a money launderer for the spoils of Napster.

At one point in the book you say: "Controversy was temporary. Royalties were forever." I couldn't help but wonder how you perceive the aggressive shift from downloading to streaming services like Spotify and Tidal?

The stuff in the book is really nostalgia now. That era is closing and we've moved on to a new form. Instead of owning files, we license them from a large corporation; we're at their mercy. The trade-off is that artists get paid and we get access to everything ever written instantly. It's a pretty nice deal, but it limits the freedom of the user. What's going on right now is that there's more than half a dozen companies attempting to crack the music-streaming space. All of them are losing money and artists are making very little from these sites. But if they can get hundreds of millions of users to subscribe, it can work. They just have to make people willing to pay $120 a year. Half of Spotify's subscribers are under the age of 27 and these are people who grew up with piracy, including me.

I wonder if there's an all-powerful Doug Morris-type of the streaming world?

Daniel Ek -- the CEO of Spotify. He's Swedish and he founded the company in 2008 during the height of Pirate Bay frenzy. His entire mission statement for the company was to get people to pay for music again. Surprisingly enough, I would say he's been successful in doing that. Spotify is not a sustainable business right now. It's losing about $200 million a year and it's paying its artists a pittance. It's possible in the future it could evolve into a commercially viable model. It's not there yet. But for consumers it's been great.

If they can get their goal of 40 million [paid] subscribers, which is the size of the music industry right now, they might save everyone.

This interview has been condensed and edited.

[Images: Viking Press (top image); 37prime/Flickr (First gen iPod); Taylor Hill/FilmMagic (Daniel Ek, Spotify)]

In turmoil again, music industry once more looks to Apple to save it

By Cecilia Kang 

Taylor Swift will allow her album “1989” to be part of Apple’s service, the first streaming service to include her music. (L.E. Baskow/Reuters).

More than a decade ago, the music industry was in crisis. Songs were being passed around the Internet illegally free of charge. CD sales were in decline. So major labels and musicians embraced Apple, which convinced consumers to open their wallets again by buying digital songs through iTunes.

Now again in turmoil, the music industry is looking once more to Apple, which launches its new $10-a-month streaming service Tuesday. The challenge this time: Find a solution for the industry as it struggles with Web sites that are legally streaming songs for free online.

With its paid service, Apple will go against the grain of these proliferating sites — which partly fund themselves by requiring consumers to hear a few ads once in a while. Google, which has 1 billion music listeners through YouTube, introduced its own free streaming service last week. Pandora, the early streaming specialist, has 85 million listeners, and Spotify has doubled the number of its nonpaying users to 75 million in the past year.

3 times Taylor Swift was a savvy businesswoman

Taylor Swift's big win over Apple Music isn't the first time the pop star has proven her savvy business skills in the music industry. (Nicki DeMarco/The Washington Post)

The trends are a source of deep unease in the music industry, which would see a drastic change to its business model if it had to largely rely on advertising for revenue, rather than song sales.

“We are at an important inflection point of the evolution of music,” said Larry Miller, a professor of music business at New York University’s Steinhardt School. “After more than 15 years in digital music transition . . . only Apple has the potential to push streaming — paid streaming — into mainstream adoption.”

Apple is coming relatively late to the scene, but the tech giant arrives as labels and musicians have been searching for an alternative to Spotify. The privately-held firm was actually once championed by the music industry as an alternative to Pandora, but is now feared as it sees exponential growth.

After months of negotiations with music labels and artists big and small, Apple committed a vast marketing budget for glitzy TV ads and direct marketing to the hundreds of millions of e-mail accounts it holds. It also promised slightly better royalties to artists than Spotify and other streaming partners, according to people familiar with the company’s plans.

And in a departure from its rivals, Apple promised to strictly enforce its policy that users must pay after a free, three-month trial.

“Apple is generally positive for artists in getting better pay because subscriptions pay about seven times as much as free services do to artists,” said David Lowery, a member of the bands Cracker and Camper van Beethoven and a lecturer in music economics at the University of Georgia.

“But we don’t want to create another monopoly where we end up like authors did with Amazon. What we want is more options,” Lowery said.

The stakes are just as high for Apple, which for the first time saw music downloads decline on iTunes for the first time last year. Two-thirds of U.S. consumers, meanwhile, are listening to streaming music each week, according to Nielsen Entertainment research.

When Spotify first launched in the United States in 2011, the three major music labels — Universal, Sony and Warner — threw their support behind the company and took equity in the privately-held firm. Spotify chief executive Daniel Elk pitched the labels, saying most users would come first as free listeners but then become hooked and eager to pay $10 a month for the service’s premium tier, which is ad-free and gives users more control over what they hear.

In a May earnings call, Warner Music chief executive Stephen Cooper reiterated the importance of getting users to start paying. “We continue to believe that the long-term sustainability of the ‘freemium’ model is predicated on high levels of conversion from ad-supported ‘free’ to paid subscription,” Cooper said. “Of course, in order to achieve those levels, the benefits of paid subscriptions must be clearly differentiated from the ad-supported offerings.”

But in the last four years, Spotify has struggled to grow its paid service. Almost all new users started out with the fee plan, but only about 20 percent to 30 percent of them became paying customers, according to industry executives.

Privately, music labels began to express frustration. Spotify wasn’t putting enough money into marketing its premium service and didn’t collect credit card numbers of new users to ease the transition to the premium tier, executives said. They complained that Spotify, preparing for a public offering, appeared more interested in bulking up its overall user numbers to impress investors than generating revenues that could be passed down to labels, writers and musicians.

“The irony of it is that there is nothing more that we wanted than to make Spotify a significant player, but what happened was that Spotify revealed its true colors — that it is no different than any Silicon Valley company that wants to build a whole business on audience and not subscribers,” said a music industry executive who spoke on the condition of anonymity because of ongoing relationships with streaming providers.

Apple and Spotify’s recent dealings with Taylor Swift was also telling, two music industry executives said.

Earlier this month, Taylor Swift complained that Apple wasn’t paying artists for their music during the new service’s three-month free trial period. Apple quickly agreed to reverse its policy.

But in November, Swift said she would keep her “1989” album off Spotify because she believed the company’s free tier of ad-supported streaming would never make enough money to support artists. She insisted her album “1989” should only be available to subscribers of Spotify’s premium tier. Spotify, however, wouldn’t budge; the company said it was sorry to see Swift leave.

“Our feeling was that Spotify is too entrenched in very simple principles. They said they would never put anything just on premium and were unwilling to take a nuanced approach,” said one industry executive who spoke privately to protect an ongoing relationship with Spotify.

Spotify disagrees that it hasn’t grown the number of paid users quickly enough.

“Nobody is more interested in driving subscriber growth than we are. Nobody has more data about what works and what doesn’t, and nobody has had anything close to our success in actually getting people to subscribe,” said Jonathan Prince, a spokesman for Spotify. “The numbers speak for themselves — 100 percent growth from 10 to 20 million in just a year, the highest conversion rate of any ‘freemium’ business, whether it’s music, video, news or games, and orders of magnitude more subscribers than any of our competitors.”

Cecilia Kang is a staff writer covering the business of media and entertainment.