The Digits on the Wall
Steven M. Zeitchik -- 8/23/99

As record companies scramble, form unholy alliances and sue, could publishing learn from its discordant sibling?

Trying to control the madness seizing the record business, says music lawyer David Lesser, "is like trying to kill cockroaches in a tenement apartment." It's a potent image for an industry that has been scurrying about in the pursuit of quashing piracy, appeasing artists, forming viable partnerships and winning lawsuits. Music fans are developing CD collections, of both copyrighted and non-copyrighted material, without spending a nickel, and record labels are struggling mightily to keep money coming into their coffers despite limited means and an elusive opponent.

The frenzy over author contracts notwithstanding, publishing has thus far avoided the upheavals wrought by the digital age. Penguin Group chairmanMichael Lynton's comment at BookExpo in L.A. summed up publishing's perspective: "If I were in the music industry right now, I wouldn't be able to sleep." But while the book business breathes a collective sigh of relief, there's also a sense, from Lynton and others, that the book business could change, if not with the blazing rapidity of music, then certainly with enough force to shake it up considerably. Publishers who talk about "opportunity" and "a new golden era" are using shorthand for how book selection will grow ever wider, how it will increasingly lend itself to impulse buying on the Web, how digitization will open up many more channels. But for many, opportunity implies change, and change implies cost. Whether because of a growing need for piracy protections, shifting retail channels, authors tempted by self-publishing or the possible elimination of wholesalers, the era for those who don't adapt might be more gilded than golden -- a lesson the music industry is now swallowing.

By now the particulars of MP3 and its cousins have been well-documented. An unlikely cabal of techies, audiophiles and capitalists have converged to frighten record executives more than any dismal sales report. Fans have started to "rip," or upload, CDs onto their personal computers and, with the help of compression/decompression technologies like MP3 (which converts files to about one-tenth their normal size), transmit music to others, who either download it for use on players like the Rio or listen to it on their PCs. Some of this music isn't copyrighted, but much of it is.

Hoping to capitalize on this frenzy, music retailers such as and CDNow-Columbia House have embraced the digital format Liquid Audio, a secure variation on MP3. (In Amazon's case, this is particularly noteworthy, as the bookseller has pointedly stayed out of the e-book game.) Most of these retailers still treat digital distribution as a promotional tool, but clearly they're looking both to test and establish a market, much in the way software companies hand out applications for free.

The Road Back

After pausing to ask, as David Byrne might say, "How did we get here?" the labels sprung into furious action. In the fall, they filed a lawsuit against Diamond Multimedia, manufacturer of the Rio (an equivalent of Rocket e-book in both utility and high-profile consumer awareness) to prevent the company from manufacturing its devices. They lost. Then they undertook negotiations with hardware manufacturers and format-creators. Two months ago, a compromise was announced -- but only for devices that will hit the market in about 18 months. The hardware companies will only make machines that are compatible with copyright-friendly formats, and the labels will cooperate in distributing music to them. But that still means a free-for-all until 2001, a time when any CD from any catalogue will be available for easy transmission and downloading via the Web.

Meanwhile, other efforts are underway. The five major labels have joined with record industry trade groups here and in Japan, the International Phonographic Federation and technology companies to form the Secure Digital Music Initiative (SDMI). The mission is to persuade hardware and software outfits to pursue secure formats and resulted in the aforementioned compromise. In a surreal alliance, the two largest American labels, Seagram's Universal and Bertelsmann's BMG, have united to form, an online retailer that will sell CDs via mail-order and, ultimately, possibly in digital format. The two companies have entered a parallel agreement with AT&T and Matsushita to develop digital delivery mechanisms. Universal, despite its image as a club-footed big label, has entered a separate agreement with InterTrust to facilitate delivery via the Net. And Sony has announced plans to test an in-store "digital vending machine," as well as direct digital sales through its site.

Nonetheless, the perception lingers that the industry is running a day late, if not a dollar short. The controversy alone has fanned interest in non-secure formats. Other embarrassments, like Warner Brothers allegedly twisting the arm of Tom Petty to remove a downloadable single from his site weeks before it was to be released, haven't helped. The record companies' image has become so tarnished that even establishment magazines like Business Week are running stories titled "Online Music: Why the Industry D sn't Get It."

The print media has long been accused of not getting it, but the current state of affairs in music shows how even a trend-obsessed industry can get blindsided by technology. It's even more staggering when you consider how the industry shot itself with its own gun by forcing the market to adopt CDs, perfect carriers of digital information. But perhaps the most shocking thing about MP3 is that it contains no technological breakthrough. Nothing in it qualitatively differs from what has already been in place. It's simply a way to make transmission more efficient, and it's threatened to topple an entire system.

The question for book publishing then becomes: By how thin a thread are we dangling? Bandwidth is far less of an issue with text than with music, so an MP3-like solution isn't necessary. Instead, what's holding back digital distribution is screen technology. Customers express a nostalgia for the tactility of a printed book and say their eyes will never adjust to reading on a monitor. But the success of a tweak like MP3 implicitly raises the question of whether something similar can happen here. As screen technology gets incrementally better, and the generation that learned how to click a mouse before it learned to read grows up, might the thread begin to fray? Thanks to music, book publishing d sn't have to enter this terrain without a roadmap.

Fear of an Electronic Planet

A primary reason music finds itself in this quagmire is its reliance on others to develop new technologies. While new digital formats were in gestation (the MP3 format is actually seven years old), record companies were concentrating on the signing and marketing of new acts. "I suspect that before they embrace this technology, the record companies will want to make sure they can dominate it," Ed Christman, retail editor at Billboard magazine, said in 1995. But by abstaining, it didn't create or set standards. It wasn't there to demand secure formats, it wasn't working with the hardware companies to make systems more restrictive and it wasn't linking up with other labels to find a piracy-proof, profitable way to distribute music. The price? Three small but costly characters -- MP3. Now it must sue, make concessions and face months of chaos. And even with all this, there are no guarantees that a startup won't break through with software or hardware that allows for non-secure formats.

On the book-publishing side, there are reasons to think we're not close enough to perfecting a technology that will make open standards a concern. Nobody knows exactly what delivery mechanism book publishing will use, or who will own it. And, of course, no one can predict how many people in 2005, or even 2000, will read books electronically. Publishers are thus approaching digital distribution as cautiously as book readers.

Faced with a similar state of uncertainty, record labels took a highly restrained approach. It's too far off, said many executives; digital distribution is not cost-effective. A story in the New York Times on October 1, 1995, went out on a limb when it said, "Some experts predict that within five years the on-line delivery of a full CD will be an affordable possibility." But just three and a half years later, more than 17 million people are downloading an MP3 track every day, and downloading entire CDs has become commonplace. When it comes to technology, the experience of the record industry has struck a blow to the notion that doing nothing is the best thing. The industry has learned that waiting for the market to assert itself can leave content providers vulnerable to a pickpocketing by a digital format that isn't copy-protected.

One place publishers have already begun to confront this is with PalmPilot. The device, along with the house that develops book content for it, Peanut Press, has made some executives queasy because the Palm uses a non-proprietary platform. Luckily for publishing, 3Com isn't terribly interested in penetrating the book market.

Publishers interested in heading off a similar eruption are putting their money where their concerns are. Bertelsmann has invested millions in NuvoMedia, although questions remain as to the extent of its collaboration in developing standards. And the AAP has engaged in ambitious testing efforts of the various devices. Still, the music experience seems to indicate that standards are most favorable to content-providers when the providers help to establish them.

Music is also grappling with other ways to ensure secure formats. One method is encryption, a famously expensive and not necessarily effective (who's to say new devices will accommodate them?) proposition. Another new trend in music is watermarking. Under this system, the content provider places an electronic fingerprint on its product. This allows for fair use, but if a particular copy is being circulated to a larger constituency, digital detectives can trace it to its original buyer. Of course, such defenses also rely on costly policing measures.

As houses move at various speeds to convert files (a task never undertaken by labels since CDs are already in a digital format), some urge that this must happen quicker. "Publishing tends not to do something until it's six years late," says Jason Kincade, marketing and content coordinator for Penguin Putnam Online. "There's no archiving; there's no storage. Rocket eBook editions have to be keyed in." But the slow pace of conversion also presents an opportunity for publishers to investigate built-in security measures.

Yet looking too closely at SDMI and other security initiatives is also fraught with danger. Some have warned that by making the formats too restrictive, the record industry could choke off the new technology before it has a chance to flourish. "A fan who gets permission to download one song, for example, may not be able to send it from one computer to another, even though taping for personal use is legal in the U.S." writes Steven Brull in BusinessWeek. Indeed, some digital publishers, such as Electron Press's Phillip Harris, have complained that e-book manufacturers threaten the industry when they restrict who can read a given "copy," and when. Formats like Glassbook, on the other hand, have shown flexibility by allowing some sort of "lending" and thus more closely mimicking the utility of a real book.

The Shortest Distance...

After swearing off direct-sales for many years, the digital distribution revolution has forced record labels to desperately jump into the game. Says James Gleick, author of the upcoming Faster (Pantheon), a book about the accelerating pace of daily life: "What we're heading toward is a world where there are content providers [artists or authors], end-users and some kind of middleman. But they [traditional publishers, wholesalers and booksellers] aren't necessarily the middlemen." Who, then, is? Record companies have grudgingly come to realize that although they have chosen not to build this bridge, other companies have. Some of them, like, show proper deference to secure formats, but for every one of those there's a non-secure format, like MP3. By waiting so long, labels have also been forced into such a game of catch-up that only by banding together can they hope to compete, which ultimately means a kind of incestuous competition, where competitors sell through one other.

All this from an industry that once made comments eerily similar to those now emanating from the book industry. "We're using the Internet as a marketing tool, because we don't want to be the ones interceding on the retailers," didn't come from a book publisher but Atlantic Records president Val Azzoli -- in 1995.

The jury will be out for a long time on whether direct sales are feasible where established channels are in place. But the current activity has provided music with both the impetus and political cover to try it. In the process, it has perhaps made the world safe for direct -- and maybe even digital -- commerce, or at least made it less shocking if and when book publishers decide to do it seriously.

For now, there are still many sensitivities for book publishers, who are showing the same caution that music once did. In a recent meeting with PW, Random House chairman Peter Olson reiterated that the company has no intention of selling online in the near future.

Beware Disintermeditaion

It is the channels that publishers worry most about offending that have jumped on the digital bandwagon fastest, perhaps because they realize that, as intermediaries, digital distribution poses a significant threat. Powell's Bookstore in Portland, Ore., has begun selling electronic editions via its site, and owner Michael Powell has said that, while he is reluctant, he will do it because that's the direction he sees the industry heading. Barnes & Noble has been beating the e-book-kiosk drum for some time. An investment in NuvoMedia, as well as the recent hire of a staffer who will specifically oversee e-books, signals the company's willingness to experiment with the form. Music retailers have been considerably less open. One ex-music insider complained that Tower "has no idea how to do digital music."

When it comes to MP3 and other formats, audiobook retailers have expressed some concern, but are also ecstatic at the profile-raising potential of the new avenues. "Music is paving the way. It will expand the audiobook market," states Audio Highway president Nathan Schulhof unequivocally.

Book wholesalers have also flashed some digital savvy. Most of this has been restricted to on-demand, and they still have far to go before they reach the point of music distributor Allegro, which is acquiring individual rights from its labels and considering the formation of a separate company for the purpose of selling music digitally.

Another group around which music has begun to tread carefully is authors. The fracas between artists and labels is, particularly in the case of The Artist (formerly known as Prince), practically mythic. To some degree, the fact that a publisher d s not own an author's entire backlist the way a label often owns a musician's catalogue makes the situations distinct. And the fanciful idea of authors ditching houses is a frightening one for major publishers, but is also a little overblown -- few major authors or artists have yet to fully sever ties with their publisher. Still, the music industry experience shows that content providers might need to offer more savory terms if they want to avoid alienating talent. "You can usually cut a deal with labels," attorney Lesser says. "I think book publishers will also have to adapt."

As with so many technological changes, alert publishers will not only survive, but get better. Those who don't? They may sing a different David Byrne lyric, the one where you find yourself saying, 'This is not my beautiful house.' "