from the New York times

      August 29, 1997

Era of Downloadable Music Is Coming,
Although Industry's Not Clear When

      By LAURIE J. FLYNN

                               Illustration:
                    Christine M. Thompson / CyberTimes

     W ith upward of 70,000 music-related sites online already, buying a
     CD on the Web is as easy as giving out your credit card number and
     then waiting for the mail to arrive. But you may soon find yourself
     waiting impatiently by your modem rather than your mailbox.

     Just how soon that practice becomes widespread depends on whom in
     the music business you talk to.

     Talk to M.C. Hammer, for instance, and he'll probably tell you the
     revolution has already arrived. The financially troubled rapper,
     who left his label and is now independent, is about to start
     distributing music via his Web site. Already he lets fans preview
     new tracks that way.

     Likewise, N2K, an independent label with a range of musicians that
     include Patti Austin, Chick Corea and Peter Noone, already makes 20
     tracks available for purchase and downloading electronically. Last
     fall, the record company released the David Bowie single "Telling
     Lies" exclusively on the Internet, allowing anyone to download it
     free.

     And later this month the Knitting Factory, an independent label
     featuring such popular artists as Pat Metheny, John Zorn and Zony
     Mash, says it will begin selling its complete catalog of more than
     135 titles the same way.

     What they all have in common is Liquid Audio, an Internet start-up
     in Santa Clara, Calif., that says it offers more than just an
     efficient method for downloading music from Web sites. Having raced
     to the front of the pack since its founding by a former record
     executive last year, Liquid Audio is perhaps more importantly an
     end-to-end solution that appeals to music industry executives
     looking to solve the two-pronged problems of guarding against
     piracy and protecting artist's rights.

     In addition to its core technology that compresses files to speed
     up downloading, Liquid Audio offers a method for encrypting files
     so they can't be copied by someone who hasn't paid for them. It
     also has a unique method of watermarking downloaded files to
     provide the music labels and artists with a reliable way of
     tracking the material's use. Files downloaded with Liquid Audio,
     for example, cannot be copied and redistributed, a feature that
     makes the technology particularly attractive to copyright holders.

     If the future pans out the way Liquid Audio pictures it, music
     buyers will soon be compiling their own collections of downloaded
     songs, paying only for those they want to download, and then either
     storing them on their hard drives or on CD's using a CD-recordable
     drive, said Scott Burnett, vice president of Liquid Audio. They
     will pay somewhere between $1 and $3 per track, but they won't
     necessarily buy whole albums.

     Electronic distribution promises to save the music buyer at least
     half what they would usually pay for a CD, says a promotion for the
     Knitting Factory, since you don't have to buy the songs you don't
     want.

     Burnett said Liquid Audio expects initially to see its technology
     used to creatively market singles, rather than disrupt sales of
     albums. But first, the price of CD-recordable drives needs to come
     down to well below $200, which is expected sometime next year.
     Network bandwidth needs also to continue to improve, with such as
     advances as cable modems.

     Today, the average song takes 13 minutes to download on a typically
     configured home PC; in 1991, it would have taken 14 hours,
     according to Michael Tchong, an industry analyst and editor of the
     Iconocast newsletter on Internet marketing. Five years from now, he
     predicts, it will take only 38 seconds.

     But while Liquid Audio might be the darling of the music industry's
     new media gurus today, it may not stay that way. AT&T, for one, has
     competing technology in the lab that promises to do much the same
     thing. Its technology, while still in the testing phase, is already
     being put to use by the Global Music Outlet, a music Web site.

     Two European companies, Cerberus Central of Britain and EuroDAT of
     France, also have developed similar technologies, though currently
     they are focused on their local markets.

     Yet the most significant competition may come from Real Audio, the
     market leader in "streaming audio," enabling users to listen in to
     audio presentations as they occur. And another half-dozen or so
     other Internet companies have streaming technologies they could
     decide to apply to serve the same purpose.

     But regardless which distribution technology becomes the standard,
     there are still plenty of other hurdles for the music industry to
     overcome. While the independent record labels seem to be embracing
     the concept of electronic distribution wholeheartedly, talk to the
     major record labels and you'll get the distinct impression that
     electronic distribution is a dim light at the end of a very long
     tunnel.

     [INLINE]

   Liquid Audio's player is launched by www.mchammer.com and other sites
                            with encoded music.
       ______________________________________________________________

     And it's no wonder. Unlike the major record labels, the smaller
     ones are unhampered by the entrenched music distribution network,
     not to mention the stringent contracts the major labels have with
     their artists.

     "This is a $12 billion to $13 billion industry that is going
     through a real shifting of the landscape," said Kevin Conroy,
     senior vice president of marketing for BMG Entertainment, a major
     label based in New York. "The small, independent labels have a lot
     less to lose, they face less risk. The major labels have a lot to
     protect. There's a whole industry here and we have to work to
     protect the dreams and goals of our artists."

     Rather than viewing the Net as a distribution mechanism
     immediately, Conroy sees it as a way to market to potential
     customers his company can't otherwise seem to reach, like aging
     baby-boomers who appear to have retired from music-buying and no
     longer go to record stores.

     "What we have is an opportunity to embrace a new medium as an
     awareness-building tool." That way, he says, the Net can only
     expand the music market, rather than have the result of simply
     shifting customers from one purchasing vehicle to another.

     Besides, he added, "We're very far from determining the technical
     means," for distribution.

     As of last year, BMG began including Internet access software on
     its music CD's that, rather than simply pointing customers to
     random music sites, points customers of one genre of music directly
     to sites featuring similar artists. That way, customers are exposed
     to music they might like but might not otherwise have come across.

     And, Conroy points out, even when the many complex issues of
     electronic distribution are worked out, there may still be only a
     small percentage of music customers who will want to buy that way,
     much like other consumer markets in which catalog sales are on the
     rise but still minuscule compared to retail sales.

     Steven Fabrizio, vice president of antipiracy and civil litigation
     for the Recording Industry Association of America (RIAA), agrees
     that the biggest uncertainty is with the customer.

     "People don't know how this model will develop," Fabrizio said.
     "The biggest impediment now is uncertainty on the demand side."
     But, he added, "Once the demand is there, the music business will
     follow."

     Likewise, Capitol Records is moving cautiously. "There are still a
     lot of issues we as a company and an industry need to address
     before we venture out there," said Liz Heller, executive vice
     president of Capitol Records Inc. in Los Angeles., whose list
     includes Bonnie Raitt, Paul McCartney and the Beatles. The company
     is completing its first major Internet deal now, as it prepares to
     release a Duran Duran single on the Web. "We're going to see if we
     can put our toe in the water."

     But record executives such as Heller and Conroy are quick to point
     out that, despite its hazards, the Internet is more likely to help
     music sales than hurt them. According to the RIAA, the rise in
     recorded music sales has slowed considerably the last few years,
     with 1996 sales languishing at $12.5 billion. At the same time,
     however, music sites on the Internet have skyrocketed, increasing
     by nearly 500 percent in one year, according to Inconocast.

     But the problem of piracy is no small one. Of the nearly $3 billion
     in sales the music industry says it is currently losing annually to
     piracy, an increasing portion of that is due to the downloading of
     MP3 music files from hundreds of illicit Web sites that continue to
     spring up. Music companies worry that putting their material in
     electronic form is an invitation to hackers.

     "Eventually, however, everyone will have to jump aboard there's no
     question where the train is going," said Dick Wingate, an
     interactive music and media consultant and a former executive for
     several major labels. "It's a big question how fast it will get
     there."

                 Copyright 1997 The New York Times Company