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Music Biz Blues

By Shannon Zimmerman (TMF Zman)
November 28, 2005

"What fresh hell is this?" 

According to literary legend, that's the way Dorothy Parker used to greet phone callers, and while I haven't dialed up any music biz execs lately, I wouldn't be at all surprised by a similar greeting if I did.

To wit: Despite its ill-advised legal strategy of suing customers over file-sharing and a recent courtroom victory (file under: pyrrhic) that led to the shuttering of the popular Grokster service, the industry still finds itself largely where it was back when Napster fever was first sweeping college campuses: mired in a sea of musical mediocrity and, not coincidentally, ongoing lackluster CD sales, as well.

Adding insult to inanity, the music biz has lately fired another couple of rounds into its collective foot. Last Tuesday, word came that Warner Music Group (NYSE: WMG) had settled with New York State Attorney General Eliot Spitzer, whose office has been investigating allegations of "payola" -- i.e., a practice whereby labels provide financial incentives to radio stations to play their acts' music irrespective of, ahem, "artistic merit."

Quite a shocker, I know.

Face the music
Still, in settling, Warner conceded that certain promotional practices -- which, according to Spitzer, included such things as iPod giveaways and "[d]irect bribes to radio programmers" -- were improper. By way of restitution, the company will make a $5 million charitable contribution and cover the State of New York's legal costs to the tune of $50,000. Beyond that, the company will cease the improper practices (natch) and, in the future, fully disclose anything of value it gives to radio stations. (One suspects that promotional copies of upcoming Kid Rock records don't quite rise to that standard.)

Warner is the industry's third-biggest player and the second to reach an agreement with Spitzer over "pay-for-play" practices, which the N.Y. AG's office describes as "rampant" and "industry-wide." Earlier this year, Sony's (NYSE: SNE) BMG Music Entertainment unit coughed up a cool $10 million to settle with Spitzer over similar payola allegations.

But wait -- that's not all!
Speaking of Sony, heard any bad CD jokes lately? How 'bout this one: The company is currently the target of several lawsuits related to the copyright-protection software that recently (dis)graced millions of its CDs. After a great hue and cry, Sony announced earlier this month that it would stop using the technology -- dubbed XCP -- and for good reason, too.

Indeed, according to the lawsuit filed last week by the state of Texas, the software Sony used to prevent unlimited copying is alleged to have violated the state's recently enacted spyware law "by using new technology on certain music CDs to install files onto consumers' computers that hide other files installed by Sony. This secret 'cloaking' component," the complaint continues, "is installed without the knowledge of consumers and can cause their computers to become vulnerable to computer viruses and other forms of attack."

Great, Sony, just great. Fans of Neil Diamond, Rosanne Cash, Trey Anastasio, and, um, Celine Dion -- Sony artists all -- must be thrilled to learn of the news. (For a list of the afflicted CDs and information on how to proceed if you have one, click here.)

But seriously, folks
Don't get me wrong: Intellectual property rights and copyright protection are serious issues -- issues that deserve a serious response from both customers and corporations alike.

The customers, for their part, are speaking up loud and clear: They don't like software that essentially makes a legitimately purchased product defective right out of the shrink wrap, and they certainly don't like having potentially hazardous files installed on their hard drives.

On the other hand, music fans do like the ease of use and portability that Apple Computer's  (Nasdaq: AAPL) iTunes provides. And while they've not yet become nearly as successful, subscription-based services such as the legitimatized Napster (Nasdaq: NAPS), RealNetworks' (Nasdaq: RNWK) Rhapsody, and Yahoo!'s  (Nasdaq: YHOO) Music Unlimited pack plenty of consumer appeal, too.

So what is an ailing music biz to do?

Well, how 'bout this: Recognize that your always-fragile business model -- readers of a certain age will remember the Napster-like willies the industry experienced over blank-tape "technology" -- is in dire need of an extreme makeover and that your copyright-protection antics are generating enormous ill-will among the very folks who are supposed to be your customers. Talk about biting the hand that feeds you.

Moreover, the corporate suits might also consider lowering CD prices, and while they're at it, licensing fees for the subscription services, as well. While Yahoo! is well-heeled and diversified enough to use its Music Unlimited service as a loss leader if need be, that's not true of either RealNetworks or Napster. And since everyone will benefit from a little healthy competition among online music distributors, the majors could provide a much-needed shot in the arm -- in the form of fee reductions -- during the industry's formative years.  

Or the majors could just go the way of the dodo bird, which would also be fine. Indeed, the adage "lead, follow, or get out of the way" seems to apply here. The technological infrastructure is in place to support a major-label-free music industry, after all. And at the rate the big boys are going, that "fresh hell" may arrive soon enough. 

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Shannon Zimmerman is the lead analyst for the Fool's Champion Funds newsletter service, which you can test drive for free by clicking right here. Shannon doesn't own any of the securities mentioned, but he is a satisfied Rhapsody customer. The Fool has a strict disclosure policy.