Internet music under the gun?

A day after a company with close ties to the music industry released a report identifying online music swapping as the culprit in the decline of retail music sales near colleges, TVT Records Inc. -- the indie label behind rap star Snoop Dogg -- let loose a lawsuit on Internet music site MP3.com. (mppp)

Add to that record labels' testimony in front of a Congressional committee lamenting the increase in casual pirating, and it increasingly looks like the music industry is on the warpath.

"The current culture of the Internet could be described as a culture of infringement," said Tom Silverman, CEO of Tommy Boy Records, in remarks submitted to the U.S. House of Representative's Small Business Committee on Wednesday.

"The result ... is that perfectly reasonable people who would never walk into a Tower Records and steal a compact disc because the believe it is wrong are doing (just that) on the Internet."

Silverman's testimony is the latest in a number of salvos being fired by the music industry at consumers who swap digital music and services, and at technologies that make such swapping easier.

The TVT suit, filed Wednesday in the U.S. District Court of the Southern District of New York, accuses MP3.com of copyright infringement stemming from the creation of a massive database of music that is the centerpiece of its My.MP3.com service. The suit "is the first to be brought by an independent label," said TVT's spokesman Paul Freundlich.

The database contains digitized tracks from more than 80,000 albums -- the majority of which MP3.com has no rights to copy. "The vast majority of TVT's roster is represented on MP3.com's database," said Fruendlich.

Previously, the Recording Industry Association of America sued MP3.com on the same basis and has won some key arguments in the ongoing case.

The suit follows a long line of other legal efforts attempting to derail companies whose services and technologies allow the free exchange of digital music.

Napster has been sued by artists Metallica and Dr. Dre over the issue, as well as by the Recording Industry Association of America. A spokeswoman for the RIAA told The Associated Press that the Reciprocal study "confirm(s) our worst fears."

And, as far back as October 1998, the Recording Industry Association of America sued multimedia hardware maker Diamond Multimedia Inc. (now S3 Inc.), after the company announced the imminent release of its Rio PMP300 MP3 player. After an initial victory, the RIAA lost a critical motion and then settled the suit.

Yet, the music industry seems content to wage its war in the courts, not in Congress.

While Tommy Boy Records' Silverman lambasted the music-swapping services, he didn't want more legislation. "It's too early for legislation," he said. "It still isn't clear how this thing will shake out."

"The mode we're in right now is kind of a Prohibition period where the rights holders and the RIAA are shutting things down -- but they're not providing an equally attractive, legal alternative," said Rob Glaser, CEO of RealNetworks Inc. (rnwk), in remarks following his keynote speech at RealConference 2000 in San Jose, Calif.

"The test is, is it easier to go to a licensed bar or liquor store and pick up a six-pack of beer with a liquor board seal on it ... or is it easier to get a bootlegger to give you something in a dark bottle?"

For college students, bootlegging seems to be a heck of a lot easier, according to a study released on Wednesday.

The study, commissioned by digital rights management firm Reciprocal Inc., found that sales of CDs within a five-mile radius of colleges declined 4 percent over the last two years. The study was conducted by VNU Entertainment Marketing Solutions, a sister company of SoundScan, a music sales measurement firm. It surveyed SoundScan reporting retail stores, which covers some 85 percent of all retail sales.

VNU said in contrast to college stores, overall retail sales increased between January 1997 and March 2000.

Another poll published by research firm Webnoize Inc. this month showed 73 percent of college students use Napster software at least once a month.

"It is now clear that the controversial practices of companies that provide directories and an easy interface to libraries of unlicensed music are in fact detrimental to the growth of the music business and those artists whom they claim to support," Reciprocal President Larry Miller said in a release. "Record sales are up despite the widespread use of MP3, not because of it."

While the study attempts to link music downloading to the decline in retail sales near colleges, a key fact disputes any relationship between Napster and the decline: The biggest decrease -- of 4.7 percent -- between the first quarter of 1998 and 1999 occurred before Napster even existed.

Hank Barry, interim CEO of Napster, downplayed the study's conclusions. "Overall, record sales are up more than 8 percent year-to-year," he said. "The problem with the study is that big box retailers and online retailers are not within the area studied."

"In general, sales at independent record stores are down more than 4 percent. So the campus record stores are actually doing relatively well. This has to do with consumer choice to shop at large retail stores and online. It has nothing to do with Napster," said Barry.

Even more telling, multimedia market watcher Jupiter Communications Inc. (jptr) sides with Napster.

"This was an inherently flawed study," said Aram Sinnreich, an analyst with the New York-based company, which estimated that over the past two to three years, 4 percent of retail sales have shifted to the online market. The decline found by the VNU study in retail stores "is exactly what we predicted would shift from brick and mortar to online," said the analyst. "If anything, channel shift is going to be higher around colleges."

By 2003, Jupiter predicts 14 percent of all music sales will be through online stores.

Despite all the noise the music industry is making, it's doing quite well.

The market for recorded music jumped 6.3 percent in 1999 to land at $14.6 billion. Moreover, while CD sales increase more than 10 percent, the cash from those sales jumped 12 percent, showing that the price of discs has increased, not decreased with time.

That is one trend that may not continue. While the industry continues to decry the pirates, music companies are facing the music as well -- over pricing of CDs.

Just this month, the five largest music publishers reached an agreement with the Federal Trade Commission, settling an accusation that the Big 5's in-house distributors used their collective power to set artificially high prices in the CD music market.

Universal Music and Video Distribution, Sony Corp., Time-Warner Inc., EMI Music Distribution and BMG -- which handle 85 percent of all CDs -- reached separate settlements to avoid charges of illegal coercion of retailers.

"It is a bold new world out there -- either you embrace change or you don't," said Jupiter's Sinnreich.

"Ultimately, the industry will embrace change or it won't, and 10 years from now we will all laugh at how we thought the Internet was going to destroy everything."

Margaret Kane, Marilynn Wheeler and Reuters contributed to this report.