Among these tools, data compression algorithms for data transmission, (revitalized by the explosion of the Internet) have been the core of many technologies for sound and video transmission. Products like RealAudio, InternetPhone or VivoActive use lossy data compression ("lossy" means the compression algorithm deteriorates the quality of the data to achieve higher compression rates) to broadcast real time data over the Internet.
One of these standards, the 2nd generation algorithm for data compression from the Motion Picture Experts Group or MP3, is gaining increased support from the Internet community. It was quickly adopted by a large number of hackers that posted copyrighted works of many music artists on their web sites. The small size of MP3 compressed files (1/12 of the original size), the playback quality (indistinguishable from a CD for a normal listener) and the fact that a few companies plan to release their first portable player during this year, sent the major players in the music industry into red-alert.
Our purpose in this paper is to analyze the reasons why the MP3 standard was so quickly adopted, to speculate on the impact it might have in the music industry, and to give some recommendations to the music industry concerning how to take advantage of these new developments.
Using MP3 compression, digital music takes up one-twelfth of the original space without any discernible loss in audio quality, and therefore, becomes viable for Internet download. For example, a five-minute song uncompressed would take about 50 megabytes in the original format but when applying MP3 compression, the size reduces to approximately 4 megabytes. Therefore, downloading a song would only take a few minutes even on a 28.8 modem.
In order to record and listen to information using this format you need an encoder and a decoder. The encoder analyses and compresses the data by removing the irrelevant and the redundant parts of the signal (parts of the sound that we do not hear). The player or decoder reads this streamlined file and converts it back into audio data. An MP3 file can be broken up into pieces, and each piece is still playable which means that MP3 files can be made to stream across the net real-time (assuming the speed of the Internet connection is compatible).
The Future of the Standard
For each Layer, the standard specifies the bitstream format and the decoder. It does not specify the encoder to allow for future improvements like the MPEG-2 AAC. MPEG-2 Advanced Audio Coding is based on the MPEG standard and represents the current state-of-the-art in audio coding. It is able to include up to 48 audio channels, 15 low frequency enhancement channels, and 15 embedded data streams and has multi-language capability. It also offers files half the size of MP3 with the same quality.
The MPEG group continues to control the standard and keeps it widely accepted by inviting major companies like AT&T, Dolby, the Fraunhofer Institute, Lucent Technologies, Sony and others to contribute to the development of new generations of algorithms. Currently, these companies are holding several meetings and seminars concerning the future standard, MPEG-7.
Participation in setting the standard can be very important and profitable. For example, the recognition that the Franhuser Institute got from developing the first generation of MPEG enables them to licenses a proprietary algorithm for compression (used by most professional products) for $70,000. However the standard is open and free to anyone who wants to implement it.
An article published by Forbes shows how the music industry is the quintessential illustration of the middleman. Less then $1 on average of a $16 CD makes it back to the artist. A special issue of Guitar World (July 1996) profiled a hypothetical band, which sold 500,000 copies of an album. Their share was $78,900--less than $.16 cents per CD.
Disintermediation and the Restructuring of the Value Chain
The explosive growth of the PC and the Internet penetration to non-professional users changed the status quo of this industry. The advances in speed in the communications infrastructure have made information more accessible and created some of the most compelling strategic decision points. Some of these decisions will eventually restructure the value chain and reconfigure the way value is created across a broad spectrum of industries.
One of the implications of this restructuring is the disintermediation of information industries (we should probably say re-intermediation). The Internet provides an inexpensive and immediate way to distribute information goods and to create new ways of adding value to the final consumer.
Unfortunately, with such high profits and so many intermediaries involved, the industry has little motivation to change. Until innovative companies start taking advantage of this new distribution medium or piracy begins to substantially eat into that profit, there will be no incentive to risk changing the way the industry works now.
The major music companies are aware of the possibilities and technologies, but are waiting to embrace a digital system, which they believe will protect the current retail model and will not drastically displace their existing business. Security concerns and reluctance to upset the retail channel are the justifications the major labels have for not embracing commercial downloads of music. However, by waiting they risk missing an opportunity similar to the one missed by film studios that resisted VCRs only to lose valuable distribution to companies like Blockbuster. One provocative quote was from Tom McPartland, CEO of TCI Music saying, "The major labels have taken their heads out of the sand, but still have their feet in concrete." An example of the forces involved was outlined in a recent Business Week article which referred to the Capitol Records attempt to sell a Duran Duran single on the net for $.99 cents last year. The article claimed it was a "nightmare" as retailers revolted and the piracy concerns dominated the ensuing discussions.
One of the companies that started breaking this pattern is AT&T's a2b. This wholly owned subsidiary of AT&T uses the MPEG AAC algorithm that AT&T helped to develop to deliver the highest quality sound available for digital music distribution. The a2b music platform is based on three core technologies from AT&T Labs: AT&T proprietary compression algorithms that deliver music over the Internet at CD-quality; the CryptoLib Security Library, which encrypts compressed music for secure transmission via the Internet; and PolicyMaker, an electronic licensing system which controls how music is distributed and used across the network. Starting in November of 1997, a2b music was the first to promote a major label artist (RCA's The Verve Pipe) through both online and traditional outlets and this might be one of the steps necessary to break the inertia of the industry.
Why is MP3 Winning the Standard War?
In our opinion there are a few reasons why MP3 is being increasingly adopted as a de facto standard:
It is not difficult to see that this started a holy war between the recording industry and thousands of pirates over the issue of MP3 encoding, usage, and distribution. The latest craze on the World Wide Web, IRC, FTP, and Hotline, is to download and/or trade copy-written MP3 songs or albums, entirely for free. The number of these trading sites grows daily. There are MP3 search engines that let you select a song name or artist, then direct you to the corresponding Web site or FTP archive. The media also helped to project the standard by publishing numerous articles and debates about MP3 issues in high circulation publications like Business Week, Forbes, Wall Street Journal and CNN.
Playing music on your computer may not sound like a threat to record companies, but if you take into account that most computers have multimedia capabilities, and that many people work in front of a computer for extended periods of time, this becomes a major issue for record companies. Because of this, music labels have taken a stand by sending threatening letters to Webmasters of sites containing pirated MP3 material demanding immediate closure of their sites and in some cases, they have taken MP3 pirates to court and won.
The entity responsible for protecting the interests of the recording industry is the RIAA (Recording Industry Association of America). Supporting one side of the argument RIAA considers MP3 copyrights infringement a very serious crime that threatens the recording industry. "Downloading an MP3 is no different than walking into a record store, putting a CD in your pocket, and walking out without paying." The RIAA is one of the major supporters for the National Information Infrastructure (NII) bill now before Congress, that asks for support for a developing a global copyright management system that encodes copyright information and buries it in recorded music, using techniques that prevent it from being stripped. Such a system will allow authorities to precisely identify music no matter where or how it is stored. More importantly, it can be used to determine a customer's "privileges" for using a given piece of electronically obtained recorded music. For example, coded information might allow a user to hear a piece of recorded music just once for one fee, while allowing another user to store the piece indefinitely and listen to it repeatedly for another fee.
The "MP3 evangelists" support the other side of the argument, charging the music industry for over-inflating the price of retail CDs and for not creating alternatives. Another valid argument is that disintermediation is an excellent way to level the field by giving the chance of making a new artist's work known at a low cost.
Yet another important issue raised in the debates is the lack of bundling alternatives. Many users don’t want to buy a CD with 10 songs from which they want just one. They prefer to pay a premium for having just the songs they like and the Internet is a great way to achieve that.
In response to this, major consumer electronics companies want to prevent digital pirating of music and movies on the Internet. Intel, Sony, Hitachi, Matsushita and Toshiba just announced a joint encryption standard aimed at protecting digitally distributed music and videos.
Our recommendations are:
"CDs, as Easy as MP3", Wall Street Journal by Rafer Guzman
Capitol: 'Electric Barbarella' release touches a nerve, CNN Interactive - http://cnn.com/TECH/computing/9803/26/saltzman_mp3/index.html
http://www.mp3.com/ - The MP3 resource on the web
‘Information Rules’, A Strategic Guide for the Networked Economy – Carl Shapiro, Hal Varian
‘Converging Technologies and Value Creation’, a paper by A.T. Kearny
‘The Search for the Infocosm’, a paper by Andersen Consulting
THE MPEG-FAQ, ftp://ftp.powerweb.de/mpeg/faq/mpegfa41.zip
http://www.riaa.com, Recording Association of America
http://www.a2bmusic.com/, a2b music – the future of music on the Internet
http://tillbm.stu.rpi.edu/mp3/mp3search.html - MP3 Search Engine in FTP site