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Sharp Darts: Clash of the Titans

In a bid for leverage in the digital marketplace, Universal unlocks some of its catalog--and cuts iTunes out of the action.

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The big players in the music industry have had a hell of a time adjusting to the Internet. Until recently the major labels have seemed almost as panicky about legal downloading as they are about piracy--maybe because peer-to-peer networks like Napster had already created an extensive black market for digital music by the time legitimate commercial outlets came into their own. And until recently, because of these fears the majors did business only with online stores that locked down their wares using some form of digital rights management (DRM), limiting what the buyer could do with the music. DRM perversely punishes law-abiding customers with crippled files while actual pirates trade in unrestricted formats, and that's just one of its many flaws.

Fortunately even the biggest, slowest behemoths in the industry seem to be realizing that DRM won't fix their problems. Back in May, EMI became the first major to offer DRM-free files on a large scale, selling them through Apple's iTunes store, among other outlets. Now the biggest of the big, Universal Music Group--a conglomeration of labels that includes Geffen, Interscope, and Island Def Jam and collectively accounts for 26 percent of the global market, including one in three new releases in North America--is making its first meaningful move toward a post-DRM business model.

On August 21, Universal began a five-month trial period during which it will offer a fair chunk of its digital catalog, including many top sellers, without DRM. The label is partnering with several retailers, including Best Buy, Wal-Mart, and Rhapsody, and it plans to work with Amazon once its digital-music store (rumored to be shooting for a primarily DRM-free inventory) goes live. The prices, file formats, and bit rates will vary according to each vendor's standards, but all the music will be unlocked--the songs will behave like tracks ripped from a CD or downloaded from a file-sharing site. It's even likely that some of them will end up on file-sharing sites--the tracks will be watermarked, allegedly to help Universal determine whether abandoning DRM will feed piracy, but unlike the DRM-free offerings on iTunes they won't be encoded with personal information that could be used to connect illicitly traded music to the original buyer.

The iTunes store is absent from the list of outlets selling unlocked Universal tracks, and that's no accident. Universal and the other majors have been complaining about iTunes for a while, especially its rigid pricing. The store sells individual tracks for 99 cents and albums, with some exceptions, for $9.99. The DRM-free EMI tracks, encoded at a higher bit rate, are $1.29, but Apple has refused to fiddle with its price structure for anyone else. In the brick-and-mortar world, Universal can usually pressure retailers to do what it wants--charge more for a hot seller, discount a release that needs a push--and it seems seriously pissed about Apple's failure to cave. In late June, Universal announced that it was declining to renew its annual deal with iTunes and would continue selling through the store on a month-to-month basis only, so it could withdraw its offerings with little notice.

These are ballsy moves, considering that Universal earned 15 percent of its revenue with digital sales in the first quarter of 2007 and that iTunes represents 76 percent of that market. Right now iTunes is the third largest music retailer in the country, after Best Buy and Wal-Mart, and on July 31 Apple announced it had sold its three billionth song. (Universal has also left eMusic and Microsoft's Zune Marketplace out of the loop, but their shares of the market are hardly significant in comparison.)

Universal has tried to make its beef with iTunes seem like it's about encouraging good old-fashioned capitalist competition among retailers, and there's some truth to the label's characterization of Apple as a hegemon, writing and rewriting the rules of the game as it pleases. Apple's domination of digital music via the iTunes-iPod suite has allowed it to force some real crap on its customers: it has its own proprietary DRM scheme, and the company has stripped certain features from the iTunes player with sneaky software updates.

But for the most part Apple has used its position to encourage a relatively sane relationship between the music industry and the public--to me it looks like Universal is only bitching because it's used to being able to call the shots. Still, I'm happy to see DRM suffer another blow, whatever the circumstances. This could be one of those rare instances when a showdown between two giant corporations actually ends up benefiting the rest of us.

Could a New Trade Group Help Salvage Indie Webcasting?

Back in May I reported on a March ruling by the Copyright Royalty Board that threatened to sink the webcasting industry with a huge increase in royalty rates. Since then public outcry and congressional action have earned webcasters a reprieve, but there's no telling how long it'll last. The Internet Radio Equality Act, which would put webcasting on the same footing as satellite radio, is still in committee, and negotiations between SoundExchange (the digital-royalty-collecting spin-off of the RIAA) and the National Association of Broadcasters seem to be dead in the water--on the NAB Web site there's a counter ticking off the days that have passed since the group made its "good-faith offer" to SoundExchange, and it's gonna hit 80 this weekend.

At the time of my original story, Daniel McSwain of local webcasting outfit AccuRadio explained one of the ways the new royalty rates might benefit major labels. SoundExchange collects royalties whether the rights holders ask for them or not, but a label can sidestep the system by negotiating a different rate with the webcasters playing its music--probably a lower one, to make its catalog more attractive than the competition's. The trouble is that these deals have to be struck one webcaster at a time. Major labels, with their large staffs and huge rosters, can do this more effectively than indies, offering cheap access to a heap of music at one stroke--and webcasters playing lots of major-label material are more likely to be bigger operations themselves, able to handle the extra red tape. Nothing in the rules would prevent indie labels and indie-leaning webcasters from doing the same thing, but in the real world I can't imagine a two-man living-room operation pulling it off.

Fortunately reinforcements are on the way. On Monday the UK-based Association of Independent Music announced the incorporation of Merlin, a nonprofit rights group for the indie sector, which by AIM's reckoning accounts for 80 percent of the world's new releases and 30 percent of the music market. This international coalition of labels says its job is "ensuring competitive terms" for its members in the new-media marketplace, and it's already struck a deal with the online store Snocap, whose other clients include MySpace. Merlin promises to undertake negotiations with streaming-media providers in the future, and if the new webcasting royalty rates go into effect, it could give indie-oriented outlets a way to secure a survivable rate with hundreds of like-minded labels at once.

Merlin calls itself a "virtual fifth major," and that's not much of a stretch. The American Association of Independent Music, now a subset of Merlin, includes labels like Matador, Victory, Sub Pop, and Tommy Boy, all of whom have a history of landing indie releases on the mainstream charts. It also includes Koch Records, which has acquired a reputation as a retirement home for MCs--thanks to the majors' growing discomfort with hip-hop (it's under attack again by cultural conservatives and has long been a favorite target of file sharers and bootleggers), more than a few industry people have speculated that Koch could take over the rap game.

It'd be naive to imagine that a group like Merlin could totally level the playing field for indies, but it's nice to know that when the big boys throw their weight around, the little guys will be able to do something besides run for cover.

For more on music, see our blogs Crickets and Post No Bills at chicagoreader.com.

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