SMART Letter #87
Face the Music
May 6, 2003

SMART Letter #87 -- May 6, 2003
Copyright 2003 by David S. Isenberg - "restoring chaos out of order" -- -- 1-888-isen-com

> Quote of Note: George Gilder on Thievery
> Face the Music, by David S. Isenberg
> Another Content Scenario, by David S. Isenberg
> Quote of Note: Barry Diller on Three Networks
> If it's Funny it must be True, by Scatt Oddams
> Conferences on my Calendar
> Copyright Notice, Administrivia

Quote of Note: George Gilder

"When your product is stolen by thieves, you have a
police problem. When it is stolen by millions of honest
customers, you have a marketing problem."

George Gilder in Gilder Technology Report, December 2001,

Face the Music
by David S. Isenberg

Even as the Recording Industry threatens to launch
questionably legal countermeasures to damage the computers
of music lovers ( ), even as
Madonna's ugly epithets assault her most enthusiastic fans
( ), three music biz events
indicate an inflection in the battle between Internet-as-
threat and Internet-as-opportunity.

First, a federal judge rejected the Recording Industry's
most current legal attack on file sharing. U.S. District
Judge Stephen Wilson ruled that Grokster and Morpheus were
not contributing to copyright infringement when their
software lets users share Internet music files. This
countervenes the momentum of the 1999 court decision that
shut down Napster. The Napster decision was a seen as a
harbinger of slower network growth. Furthermore it was
coterminous with the beginning of the telecom crash.

The Grokster/Morpheus decision pivots on looser-than-
Napster coupling between the software architecture and the
music. The Court said that Grokster and Morpheus, "do
nothing to facilitate, and cannot do anything to stop, the
alleged infringement." This is because neither Grokster
nor Morpheus operates its own directories. "Grokster and
[Morhpeus] are not significantly different from companies
that sell home video recorders or copy machines, both of
which can be and are used to infringe copyrights," said the
decision. "In contrast, Napster indexed the files
contained on each user's computer, and each and every
search request passed through Napster's servers 'site and
facilities' for the alleged infringement, affording it
perfect knowledge and complete control over the infringing
activity of its users." Perfect knowledge and complete
control is a know-know no-no.

The RIAA and the MPAA promise an apoplectic appeal. But if
the Court's decision stands, make way for all kinds of new
network growth. Can you spell 'TVoIP'?

The second recent cyber-musical event is Apple's initiation
of iTunes, which makes it easy for users to download songs
at 99 cents per. It is the first pay-per-tune service that
gives music fans reason to celebrate. My early-adopter
friends rushed to buy songs on the day iTunes opened. Then
they rushed to email each other about the great experience.

"So easy and simple and seamless. Best delivery system
yet," my friend Emily Davidow gushed. "Searching is easy.
Oh rapturous joy! Dangerously easy. I fear I'm going to
be one of their best customers." Apple's iTunes sold over
one million tunes in its first week.

This belies the piracy rhetoric of the MPAA and RIAA. We
music lovers have always said we'd *buy* the music when we
can get the music we want at a reasonable price with a
system that is easy to use that doesn't cripple our ability
to play it on devices of our choosing.

The best thing I've ever read on Big Music's "piracy" meme
is a 1999 article by musician-scientist-inventor-
commentator Jaron Lanier, entitled "Making an Ally of
Piracy," -- it is still worth a

[Notice that Apple isn't an incumbent record company, just
like it says in Clay Christensen's _Innovator's Dilemma_.]

The third recent noteworthy event was the appearance in my
inbox of a preview of a Cap Gemini Ernst & Young "Office of
the CTO" Report on the Recording Industry. It was
delivered as an edition of John Jordan's always-excellent
Networked Commerce Update (contact to
get on his list). It details twelve shocks to the music
industry since 1990. The last (and among the least) of
these is Internet file sharing. Here's my summary of the
other 11:

1. CD counterfeiting -- 28% of CDs worldwide are

2. The rise of "big box" stores (e.g., WalMart, Price
Club) and other non-record-store outlets for recorded music
(e.g., Amazon), and the consequent decline of the power of
"the labels."

3. Consolidation of media (especially radio) ownership
resulting in fewer airplay opportunities and a power shift
from "labels" to broadcast giants exemplified by Clear

4. Subscription-driven 100-channel digital satellite music
services like Sirius and XM. [Myself, I'm not impressed.
Each channel is formula-built. If you dial up contemporary
bluegrass, you don't hear, you don't hear
newgrass, you don't hear jazz-influenced grass, you don't
hear Bela Fleck's classical forays, you don't hear olde tyme
or gospel, you don't hear MacArthur genius Edgar Meyer's
latest collaboration with Yo-Yo Ma. It's not compelling
listening. I don't think XM and Sirius will get enough
share to constitute a 'shock'. What I really want is
streaming Internet audio in my car. -- David I].

5. MTV's glory days as a music channel appear to be over -
- music video production costs are rising, MTV plays fewer
of them, and viewer attention spans are shrinking [but in
addition to MTV, I now get VH-1 and MuchMusic as part of my
enhanced basic cable package; is the repurposing of MTV by
itself a shock? -- David I]

6. For many performers, touring is becoming a larger
source of income than recording. Furthermore, touring is
being taken over by corporate interests, the largest of
which is (surprise!) Clear Channel, which shifts power away
from the "labels." [Clear Channel will offer concert CDs
"within minutes" of the end of their concerts. Do you
think they'll use Digital Restriction Management?
-- David I]

7. Performers have had a few recent successes in loosing
the Recording Industry's iron grip on the contractual
relationship. Most notably, performers successfully
persuaded the U.S. Congress to reverse Recording Industry
sponsored legislation to treat recorded music as "work

8. The DVD is coming on fast; DVD videos might be
competing against (i.e., are cross-elastic with) CD-based
recorded music sales.

9. The Recording Industry's anti-trust settlement with the
U.S. government regarding Minimum Advertised Prices for
recordings did not help Recording Industry P.R. (and
weakened its ill-gotten bottom line).

10. Cell phone minutes now surpass landline minutes
(according to a recent Yankee Group report cited by Kevin
Werbach in ) and this almost certainly
reduces the time listening to music on mobile devices.

11. New entertainment options, such as gaming, DVD
viewing, e-mail and chat, and telephone conversations tend
to make listening to music more of a background (as opposed
to a primary) activity.

To summarize, rather than count the shocks, I prefer to see
Recording Industry troubles as part of a larger process.
New technology's attack on the status quo has weakened or
destroyed three of the four pillars of the Recording
Industry's business model. Of the four -- finance,
manufacture, distribution and marketing -- three have been
irrevocably weakened or made irrelevant by technology.
Only marketing remains, and it too is vulnerable. Now the
Recording Industry is losing marketing power to newly
powerful big-box stores and corporate conglomerators like
Clear Channel, as well as to performers use the new
technology to reach fans directly. Meanwhile, on the
demand side, listeners are finding new things to which to
devote their time and attention.

In 1982, MPAA president Jack Valenti told the U.S.
Congress, "the VCR is to the American film producer and the
American public as the Boston strangler is to the woman
home alone." Maybe he was a bit too specific about the
technology -- today the Recording Industry's noose is
tighter than ever. Solution: a thinner neck.

We won't stop listening to music, but, as Andrew Odlyzko
explains, content is not king ( ).
The Internet is a two-way medium that changes content into
communication -- for direct evidence check out the latest
MadonnaWTF.mp3s at For more
evidence, observe how any teenager talks with her peers
about music she likes.

Pushing the edge of digital music was my last technical
project at AT&T (before I began work on how networks create
value). Bell Labs acoustics researchers had developed
Perceptual Audio Coding (PAC), which encoded music that was
almost indistinguishable from CD quality at 128 kbit/s
(better than 10:1 compression).

The year was 1995; we all had 14.4 kbit/s modems. PAC
project head Sandy Fraser was focused on the goal of making
CD-quality music. I suggested a second goal to him -- to
make a version of PAC that would run in next year's 28.8
kbit/s modems. He grudgingly assented, and a week later
one of Bell Labs' Digital Signal Processing genius, JJ
Johnston, had demonstrated that PAC-coded music sounded
pretty durn good at 28.8.

At the same time, I heard Rob Glasser debut RealAudio at
Mitch Ratcliffe's Digital Media conference. RealAudio R1.0
was strictly for voice. But the instant Glasser's session
was over I jumped on stage and asked if he'd like RealAudio
to do music. Two weeks later he was sitting in the audio
lab with Bell Labs' DSP gurus. RealAudio and AT&T tried to
cut a deal. Negotiations dragged on and on. The Lucent
split was announced. PAC became part of an AT&T/Lucent
squabble over which company owned which patents. RealAudio
signed with Dolby Labs. Nobody at that time saw MP3

As the AT&T/RealAudio agreement was grinding exceedingly
slow, AT&T's digital music program struggled in other ways.
AT&T's geeks were under pressure to make research into
business. AT&T's digital music program, dubbed A2B (for
atoms-to-bits) sought out the Big Five record companies and
tried to sign them up for a Recording-Industry-financed
study. In the mind of A2B's managers, it was where the
money was.

I thought AT&T should find some new, hot, unknown musicians
and use the new technology to give the Big Five some
competition. I figured that a small probability of success
was better than certain failure. I didn't have a chance.

Predictably, the Big Five was not in a hurry to know about
the demise of their business. They asked AT&T for pre-
revenue results and more detail and more rework before
they'd sign. They never did. The incumbents of telecom
thought they were courting the Recording Industry; I saw it
as a dance of death. Now my non-disclosure obligations to
AT&T have long expired, so has AT&T's A2B Music Project.

Another Content Scenario
by David S. Isenberg

The gurus of scenario planning caution that since we cannot
predict the future, scenarios always come in multiples.

In "Face the Music," I've assumed that the 'net's capacity
and performance continue to grow. But the Internet has
enemies. Suppose the rollout of the 'net hits a regulatory
or financial reverse? Porter Stansberry's Investment
Advisory (April 2003, for more info see
suggests a plausible storage-based alternate scenario.

"Areal density, the standard measurement of hard drive
efficiency, has been doubling every 11 months since the
early 1990s . . . By 2010 common mass-market hard drives
will be capable of storing every movie produced since
WWII (assuming 425 new movies are made each year). Or,
assuming each channel of the TV broadcasts 100 hours of
new content each week, a typical hard drive in 2010
could record every show on every TV channel for three

This is plausible, but degenerate. Content is not
dethroned. There's little or no interconversion between
content and communication. On the flip side, TV as we know
it is on the verge of disappearing given just a little more
Internet development Channels (a scarcity-based concept)
would be superceded by TVoIP, what you want to watch, when
you want to watch it, direct from the video maker, by 2010.

But even if the 'net does develop fully, a personal
portable video player with the complete preloaded Hollywood
archive (or, say, the complete library of classical
performances) would be quite a product.

Quote of Note: Barry Diller

"30 years ago, three companies controlled 90 percent of
everything we heard or saw . . . It has been
reconstituted. Instead of it being three channels that
were controlled by a few people, there are now 500
controlled by a few people."

Barry Diller on "NOW with Bill Moyers," April 4, 2003, see for complete transcript. [A third
scenario? Is it plausible that information would be
filtered through three channels in the future? -- David I]

If it's Funny it must be True
by Scatt Oddams

Funny that the Bush administration has presented a spectrum
of fear but only uses two colors --
Here's more on that --

Funny who's playing with a full deck

Having fun yet? Don't bother Dave, write to me directly --
Gotta go!


June 11-14, 2003, Philadelphia PA. TedMed3. Come if you
possibly can.

June 24-25, 2003, San Francisco, World Technology Network
Summit and Awards. Jim Clark's brainchild (not that Jim
Clark) is a deliberate attempt to create serendipity.
Previous WTN Summits have been great!

COPYRIGHT NOTICE: Redistribution of this document, or any
part of it, is permitted for non-commercial purposes,
provided that the two lines below are reproduced with it:
Copyright 2003 by David S. Isenberg -- -- 1-888-isen-com

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