For Liquid Audio, the deal announced Monday opens a door into the consumer market for downloadable music. For Diamond (Nasdaq:DIMD), the partnership eases some -- but not all -- of the concerns of a recording artists' association that believes Diamond's Rio PMP300 downloadable music player promotes digital piracy.
"Liquid Audio provides a secure environment for music from a number of well-known labels who have recently used [it] to promote major artists," said Ken Wirt, vice president of corporate marketing at Diamond. "This is a market in which Diamond intends to participate."
Although just what final form the agreement will take is unclear, supporting Liquid Audio's secure-music format may help Diamond dodge a legal bullet shot by the Recording Industry Association of America. Last month, the music industry filed a suite against Diamond alleging that the company's Rio player violates the Audio Home Recording Act. The Rio is a controversial Walkman-like device that can play audio files made from a user's CD collection or downloaded from the Internet in a format called MPEG-1 Layer 3, or simply MP3.
While a California District Court judge gave Diamond the thumbs up to ship its product later this month, the RIAA has already appealed the decision. That hearing isn't expected to be scheduled until next year. Cary Sherman, senior executive vice president and general counsel for the RIAA, said the partnership itself won't change RIAA's stance on the Rio player, but that "any steps Diamond takes to add security to their product is a step in the right direction, as far as the RIAA is concerned."
At the heart of the suit is the MP3 audio standard. The format delivers near-CD-quality music in files one-tenth the size of those on compact disk. A five-minute song on CD may require 50MB, but the same song in MP3 format only requires 5MB -- allowing it to fit into the relatively small memory of the Rio and other such players.
MP3's major drawback -- for the established music industry, at least -- is that it only compresses music and has no security to copy-protect songs. Once a song has been "ripped" into the MP3 format, anyone can distribute the music on the Internet. In fact, at present, the majority of MP3 music on the Internet is pirated copies of songs. That spells lost profits for the music industry.
But Liquid Audio gives the music industry unprecedented control in managing its copy-protected work. "MP3 has no protections," said Diamond's Wirt. "[Liquid Audio] is like Fort Knox." The format creates files called Liquid Tracks that are compressed and encrypted so they can only be played back on a single user's device. Liquid Tracks are also digitally watermarked, so that even audio recordings of the music have a signature. "A Liquid Track not only has the music on it, but has the album cover, the notes and a button so you can order more music," said Rick Fleishman, senior marketing director for Liquid Audio.
In fact, everything about Liquid Audio is glitzy and big -- from the coalition of well-known studios voicing support for the music format to the lengthy list of big-name artists that have released material on the format. By joining Diamond's push to get compressed music off the PC and into portable players, Liquid Audio hopes to move its user base from tech-savvy to mass-market. "A lot of times you download music on your computer and that's nice," said Fleischman, "but there are times that you want to play it on the computer and others when you want to take it with you."
Diamond and Liquid Audio have no clear idea when the partnership will bear fruit, but expect the final solution to be a Rio player that can play both MP3 files and Liquid Tracks.