Dire Wolf

I sat down to my supper

T’was a bottle of red whiskey

I said my prayers and went to bed That’s the last they saw of me...

Don’t murder me

I beg of you don’t murder me

Please

Don’t murder me

When I awoke, the Dire Wolf

Six hundred pounds of sin

Was grinnin’ at my window

All I said was “come on in”⁹

By the mid-1990s, the music business was in dire trouble.

The railroads should have been GM and Ford and Chrysler, but they didn’t think that anyone would want to travel off the tracks... The telephone companies should have been the cellular phone companies, but they couldn’t imagine anyone wanting to talk on the phone in their cars. And then, of course, the networks are the best example most recently. They also should have owned the cable indus­try but they couldn’t imagine what anyone would want to do watching all those channels.... It was possible [the recording industry was] heading there if we were not moving quickly enough in a coordinated fashion.... Artists are prob­ably just going to have to figure out how to go on tour or sell their underwear once they’ve recorded this song because there’s no way to sell music on the Inter­net. The Internet is all about everything being free.¹¹

Business models predicated on the idea that it’s expensive to copy and to distribute music are unsustainable in a world of cheap, easy copying and distribution. Technology creates too many new opportunities, and economic incentives suggest that people will take them.

to give up. Otherwise, the legal tactics that we employ to protect music will start looking like those that we use in the drug wars. Remember Dmitry Sklyarov? The twenty-seven-year-old Russian programmer threatened with twenty-five years in prison and $2.25 million in fines for cracking the protection on Adobe’s software? Well, maybe it’s not a coincidence that his sounds like a story we usually tell about drug smug­glers. Maybe it’s a harbinger of future IP enforcement. But the truth is, I don’t think it is. I think that we’ll roll back some of the more absurd approaches to IP enforcement before we get there. At least, I hope that we will. Otherwise, the twenty-first century could become a pretty scary place.

We’ve already experienced enough of the music industry’s misadven­tures in the information sector to know that change is afoot. Everyone understands that the music business ten, twenty, fifty years from now will look very different from the industry to which we’ve grown accus­tomed. But no one knows precisely what it will look like, who will win, who will lose, or what the transition will entail. The issues are so con­fusing that I’ve heard numerous reports of meetings in which the debates pitch AOL and Sony Electronics (the technologists) against Time Warner and Sony Music (the record labels). Someone at Time Warner (formerly AOL Time Warner) and someone at Sony must be feeling more than a bit schizophrenic. How did it all happen?

For centuries, we had two distinct but related music businesses. In the “pure music” business, performers played, fans listened, and then every­body went home. In the “music information” business, someone sitting atop a distribution chain encoded music as information, copied the code onto a physical medium, circulated that medium, and then let consumers decode the information back into music using either specialized knowl­edge or a device capable of “playback.” Of these businesses, the pure- music side has been incredibly robust.

But the music-information business essentially redefines itself every time a new technology comes along. Sometimes we force the businesses to deal with the new technology. At other times, the businesses not only embrace the new technology, but force it upon us whether we want it or not. CDs were a prime example of this approach. Once upon a time, the record companies sold most music encoded on 12-inch vinyl LPs. At some earlier date, a performer had gone to a record company’s studio, and actually played some music. The record company’s expensive equip­ment encoded the music as an analog waveform, record company sound engineers manipulated the waveform to enhance its production quality, and still more of the record company’s expensive equipment imprinted the enhanced waveform on vinyl discs—and then made many, many copies. In other words, this vinyl LP was a joint production of the song­writers who wrote the music, the performers who played it, and the record company that enhanced, encoded, and recorded it. The record company’s distribution network then circulated the LPs among record stores, where fans paid money for them.

Fans took the LP home and treated it as if it were their own, despite the many IP rights latent in it. Fans’ record players decoded the analog information and played it back through an amplifier.

The basic idea was simple. A new digital code replaced the old analog waveforms. Recall that computers communicate by shifting voltages from low to high (or vice versa), and that computer engineers begin the arduous translation chain by encoding these shifts as 0s and 1s, respec­tively. Light can do the same thing—particularly when using lasers. The binary language of 0s and 1s can also encode dark and light, using the same concept of holes and disk that worked so well in paper piano rolls. CD players are thus computers based on optics and lasers rather than on electron flows.

That said, many steps are needed between envisioning laser encoding and selling a consumer product. A programmer must finish the transla­tion chain to relate sounds to bits. Record company’s studios must replace their expensive analog equipment with new equipment that trans­lates musical performances into binary code. Sound engineers must learn to work with this new equipment. Expensive imprinting and copying equipment must be swapped for laser-based machines that make CDs instead of LPs. And, of course, record stores must choose to carry these CDs and consumers must choose to buy them.

This challenge brings us back to network economics.

The first few CDs released didn’t sell particularly well. But by the mid-1980s, the price of CD players had dropped into an acceptable range for consumer electronics, and people began to buy them in substantial numbers. Meanwhile, the record companies decided to price CDs at roughly double the price of LPs, raising their profit margins on each unit sold. Then came the coup de grace. Prices were low enough and pene­tration was broad enough to embolden the vendors. They dropped the old technology and shifted almost entirely to the new—a move that was fairly smooth because they controlled both. Eventually the record com­panies decided to sell only CDs, and the electronics companies stopped manufacturing new record players (in both cases, with a few minor exceptions). For all but a few diehards, the age of the LP was over.

The music-information business had gone through a major transfor­mation. Fans received higher-quality playback, electronics companies sold more capital equipment to recording studios and more components to consumers, and record companies watched their margins soar. Every­one was pleased. While no one was paying attention, though, fans around the world amassed large collections of digitally encoded music. Our living rooms and dens became veritable libraries of bits, as discs with tiny little holes sat silently waiting for us to decode them back into music. The record companies were thrilled; fans didn’t much care. And for perhaps the first time in a century, the music business navigated a technological transformation without help from Congress or major changes to the IP laws. Everybody won. Or so it seemed. But danger lurked just around the corner.