How Music Got Free (11 page)

After some discussion, leadership passed to another member, who went by the name of “Al_Capone.” Capone had discovered the Scene at the age of thirteen, after being banned from AOL for trolling. He’d established himself in RNS by making online friends in Europe, then arbitraging offset transatlantic launch dates to source prerelease albums. But his reign at the top was short. Capone was undisciplined, and under his leadership, the group ballooned in membership to more than a hundred members, violating basic principles of Scene security. After a few tumultuous months, Capone gave up his duties, claiming that he was “too busy” to lead the group. (In reality, he’d just turned seventeen, and was moving out of his parents’ house.)

The mantle finally passed to a permanent presence. This was “Kali,” who was selected through what amounted to an executive search committee. Kali had not previously been an especially visible member of the group. Unlike Havoc, he did not have insider access. But, unlike Capone, he never claimed to. What he did have was Scene cred. For years Kali had been a member of another Scene group, a games-cracking crew named Fairlight, and his exploits there were celebrated. Also, he was old enough to vote.

Kali’s leadership brought a kind of military discipline to the
group. He was a natural spymaster, a master of surveillance and infiltration, the Karla of music piracy. He read
Billboard
like a racing form, and used it to untangle the confusing web of corporate acquisitions and pressing agreements that determined what CDs would be manufactured, where, and when. Once this map of the distribution channels was charted, he began an aggressive campaign of recruitment, patiently building a network of moles that would over the next eight years manage to burrow into the supply chains of every major music label.

Dockery—known to him only as St. James—was his first big break. They’d been in a chat channel together and Dockery had started bragging about an unreleased CD. Kali, skeptical, had asked him for proof, so Dockery had sent him a track. Kali, recognizing the importance of what he’d found, immediately recruited him into the group. At first a peripheral player, following the Universal merger Dockery had become RNS’ single best source. But now, thanks to the new security regime, his access had dried up, and he was proposing to pass the responsibilities on to Glover.

Dell was in an unusual position. With his street cred and his technical expertise, he was one of the few people in the world capable of securing the trust of both low-level physical smugglers and top-level online pirates. RNS invites were handed out rarely, and typically on a probationary basis, but, if Glover wanted, Dockery could arrange to have Kali fast-track him into the group this same day.

Glover hesitated: what was in it for him?

Dockery explained: Glover needed Kali just as much as Kali needed Glover. As head of RNS, Kali was the gatekeeper to the distributed archive of secret “topsite” servers that formed the backbone of the Scene. These ultra-fast servers contained terabytes of pirated media of every form. Movies, games, TV shows, books, pornography, software, fonts—pretty much anything with a copyright was there for download. The encrypted Scene servers were well hidden, access was password protected, and logons were permitted only from a whitelist
of preapproved Internet addresses. All logging software on them was disabled so as not to leave a trail. The Scene controlled its own inventory as well as Universal did—maybe better.

Access to this topsite “darknet” was granted exclusively on a quid pro quo basis. To get in, you had to contribute pirated material of your own. And not just some old Shania Twain CD you found lying in your sock drawer; it had to be something new, something in high demand. The lure of the darknet—the promise of the digital library—was enough to corrupt. Somewhere out there were Glover’s counterparts: guys in the movie business, guys who worked for game companies, guys who worked in software design. (
They were almost all guys.) Somewhere out there were software testers, DVD screeners, and warehouse workers. Somewhere out there, in every supply chain, someone like Glover was leaking too. The media on the topsite servers was available weeks before it could be found in stores, or even elsewhere on the Internet. The spread of files from these servers was carefully monitored and controlled; leaking
to
the Scene was rewarded, but leaking
from
the Scene was taboo. The files took a long time to migrate to the chat channels and the Web. Sometimes they never left the closed economy of the Scene at all.

If Glover was willing to upload smuggled CDs from the plant to Kali, he’d never have to pay for media again. He could get free copies of AutoCAD software that retailed for thousands of dollars. He could hear the new Outkast album weeks before anyone else. He could play
Madden Football
on his PlayStation a month before it was available in stores. And he could get the same access to prerelease movies that had allowed Dockery to beat him as a bootlegger. How did that sound?

Glover decided that sounded pretty good. So Dockery arranged a chat room session between Glover and Kali, and the two exchanged cell phone numbers.

Their first call was awkward. Glover, never much for conversation to begin with, mostly just listened. Kali spoke quickly and animatedly, in a strange patois of geek-speak, California mellow, and borrowed
slang from West Coast rap:
“Could you, like, FXP me the file, dogg?” Kali loved computers, but he also loved hip-hop. He knew its history and culture and could rhyme along with his favorite rappers. He knew all the beefs, all the disses, and all the details of the internecine label feuds. And he also knew that, in the aftermath of the murders of Biggie and Tupac, those feuds were dying down and the labels were consolidating. Death Row, Bad Boy, Cash Money, and Aftermath were all going corporate. In his relentless quest for zero-day leaks, Kali tracked these pressing and distribution deals carefully, and his research kept bringing him back to Universal. But without consistent access inside that company, rival release crews had been beating him. Glover was his ticket in.

The two hashed out the details of their partnership. Kali would track release dates of upcoming albums online and alert Glover to the material he was interested in. Glover, through his associates, would arrange for the CDs to be smuggled out of the plant. From his home computer, Glover would then rip the leaked CDs to mp3 format and transmit them via encrypted channels to Kali’s personal server. Kali would then package the mp3 files and release them according to the Scene’s exacting technical standards. In return for all this, Kali would send Glover invites to the secret topsites.

Glover had tried to clean up his act. He had given up on the guns and the bikes and the ferocious dogs. He had worked hard at several jobs, and tried to be a family man, even. But then he joined the Scene, and left one outlaw subculture for
another.

A
fter Universal consumed PolyGram, the combined entity supplanted Warner as the dominant player in music. In the 12 months following the merger Universal Music Group pulled in more than six billion dollars in revenue, the bulk of this from the sale of compact discs. The merger brought international presence. The key markets were North America and Europe. China was potentially huge, as were Russia, India, and Brazil, but, even though representatives from those countries had pledged to respect U.S. copyright law, enforcement on the street was effectively nil. As Alan Greenspan had correctly observed, selling intellectual property meant suppressing unauthorized products with the same vigor that you created legitimate goods. Where the political will to do this did not exist, neither could a legitimate market. Still, the overall picture was fantastic. Universal was the largest music company in the world, controlling one quarter of the global market.

Morris, at the top, had a billion-dollar budget to sign and develop acts, and more than 10,000 employees under his command. He also inherited a disorderly roster of two dozen separate labels that the successive waves of mergers had picked up over the years. From the moment the deal with PolyGram closed, he set about reorganizing the chain of command. Corporate organization was viewed by all who worked for him as one of Morris’ key strengths. He knew how to motivate people, and he knew how to get the most out of them. He relied on standard business techniques like stretch revenue targets and incentivized contracts, and he also knew how to build and retain
a successful management team. But there was another aspect he relied on, one that his friend Jimmy Iovine understood was
a key driver for successful artists and businesspeople alike: fear.

Iovine had worked with some of the most talented musicians of his era, and he’d noticed that even established acts tended to create their best work while suffering under the weight of crippling artistic insecurity. This was doubly true for the rappers, whose external brashness and machismo often masked deep-seated vulnerabilities and sometimes even great personal shyness. Those insecurities the artists felt in the studio were mirrored by the insecurities the label heads felt in the boardroom. Music executives spent their lives looking over their shoulders, fending off the advances of opportunistic rivals plotting to poach their big acts.

Morris encouraged this fear. He had a Darwinian approach to business and he wanted his lieutenants to compete against one another directly. Although the labels under the Universal umbrella were not permitted to openly engage in bidding wars for artists, conspiratorial dealings flourished, and there was a sense within the organization that no one was safe, not even favorites like Iovine. Bolted onto the PolyGram acquisition that year had come a stake in Def Jam Recordings. The pioneering rap label had looked moribund just a few years earlier, but had been revived under the leadership of Lyor Cohen, a frothy, hard-charging scalphunter whose approach to dealmaking made even Doug and Jimmy look civilized. Cohen and Iovine immediately started feuding cross-country, cutting backroom deals to steal each other’s acts.
Iovine went after Sisqo; Cohen went after Limp Bizkit. (As ever, sales were more important than artistic durability.) The rivalry between Def Jam and Interscope looked real—it
was
real—but the spoils of victory all went to the same place, and when you looked up from the arena to the skybox, you saw Morris applauding.

The Def Jam stake brought someone else, too. His real name was Shawn Corey Carter, but he was better known by his rap handle, Jay-Z.
Even before the merger, Carter had been the label’s biggest act, but Universal’s marketing investments helped turn him into an international superstar. In early 2000 they’d scored a massive crossover hit with “
Big Pimpin’,” a terrific summer jam Carter had developed with the producer Timbaland and the Texas rap duo UGK. The song represented both the best and the worst the genre had to offer. The production was superb, but the song’s hook had been lifted from a film score by Egyptian composer Baligh Hamdi, whose family would in later years allege that the sample had never been cleared. The flow was incredible, but the lyrics celebrated in plain language the forcing of women into sexual slavery. The song was addictive, sure, but intensely misogynistic, and in later years a kinder, gentler Carter would himself disown it. Then again, as Doug Morris understood better than anyone, it was exactly these transgressions that made “Big Pimpin’” irresistible.

Morris really liked Carter. He had swagger, and star presence, and his nimble delivery made other rappers sound clumsy. Like Morris, Carter had an ear for hits, but also a mind for business, cultivated by his past participation in the criminal narcotics trade. He was the CEO of his own music label and spent as much time developing and promoting other acts as he did his own. He saw himself not just as a rapper but ultimately as the head of a diversified business empire. And, like Alan Greenspan, Carter understood the importance of suppressing the bootleggers. Late in 1999, when he suspected a rival record producer of leaking his new album to the street a month before it was due in stores, Carter had
confronted him on the floor of a nightclub and stabbed him.

Def Jam in New York; Interscope in Los Angeles; Cash Money in New Orleans—Morris’ market corner on the rap game was paying dividends, and the first 12 months after the merger were fantastic for Universal, exceeding even the rose-colored predictions that the deal prospectus had offered to shareholders. The overall reduction in head count and the consolidation of the companies’ supply chains had
brought savings in excess of projections, and the bargaining power of the combined entity pushed the average realized retail price of an album above 14 dollars per disc.

The strong pricing was aided by collusion. As the U.S. Federal Trade Commission would later reveal, for nearly six years the Big Six—after the PolyGram merger, the Big Five—had quietly worked together to convince large retailers like Musicland and Tower Records to refrain from selling discs at a discount, in exchange for access to pooled advertising funds. Deals of this sort violated federal antitrust law, and since the Big Five collectively controlled close to 90 percent of the U.S. compact disc market, the impact on consumers was substantial.
The estimated cost from 1995 to 2000 was half a billion dollars—two bucks from the pocket of every American.

Everything was working for Morris. The international market presence, the streamlined distribution network, the talent on the roster, the conspiracy against the public—the resulting profits were immense. In 1999, running the biggest music company in the world during the best year the industry would ever see, Morris was not just the most powerful record executive on earth—he was actually the most powerful record executive in history.

It was a short-lived distinction. In June 1999, an 18-year-old Northeastern University dropout by the name of Shawn Fanning debuted a new piece of software he had developed called Napster. As a teenager, Fanning had fallen in love with computers, and was a participant in the IRC underground. But one thing had always bothered him about the #mp3 ecosystem: there was no easy way to find the files. Now, from his dorm room, he had hit upon an ingenious solution: a “peer-to-peer file-sharing service,” which connected users to a centralized server where they could trade one another mp3s. Music piracy, previously limited to a small sphere of tech-savvy college students, was now available to everyone. Almost overnight, the freely available Napster client became one of the most popular applications in software, and with it came a tsunami of copyright infringement.

Napster was a natural monopoly whose selection and speed only improved as more people joined. By early 2000 there were almost twenty million users, and by summer over 14,000 songs were being downloaded every minute. Every song ever produced anywhere could be procured in seconds. Download speeds were improving rapidly, even from a home connection, and songs often arrived in less time than they took to listen to. In essence, the song could be streamed. Napster wasn’t just a file-sharing service; it was the infinite digital jukebox. And it was free.

The RIAA had tracked Napster practically from the moment of its inception, but it took the major labels a few months to understand the severity of the problem. The task of informing them fell to Hilary Rosen, the RIAA’s CEO. Rosen had spent most of her career working for the association and, perhaps more than any other person in the industry, understood the perils and the promise of digital technology. On February 24, 2000, the day after the Grammy Awards, she addressed a group of music business power brokers in the conference room of the Four Seasons Hotel in Beverly Hills. The scene was later described by technology reporter Joseph Menn in his book
All the Rave
, the definitive account of Napster’s rise and fall:

Staffers downloaded the software and registered in front of the eyes of a couple dozen label bosses. Then Rosen asked the executives to start naming songs. Not just big hits, but tracks deep into albums, either brand-new or obscure. The record men took turns calling out more than twenty songs. The staffers found them every time, and fast. Soon no one wanted any more convincing that the threat was serious. As the crowd grew increasingly uncomfortable, a Sony executive tried to cut the tension. “Are you sure suing them is enough?” he asked. The capper came when someone suggested a hunt for the ’NSYNC song “Bye Bye Bye.” The cut had been on the radio just three days, and the CD hadn’t been released for sale yet. And there it was.

Rosen became the public face of the record industry’s opprobrium. This made her an unpopular figure. The message boards and chat rooms were filled with unflattering descriptions of her personality and her appearance, and she received numerous death threats. The irony was that, behind the scenes, she was the industry’s biggest dove. As she publicly denounced the service, she privately pushed for Napster and the major labels to cut a deal.

This accommodationist approach was shared by several of the other major label heads. Junior was interested, and approached Napster several times to negotiate a stake in the venture. So, too, did his competitor Thomas Middelhoff, the German-born head of Bertelsmann AG, who proved to be a better dealmaker. In late 2000 Middelhoff announced that Bertelsmann would enter a joint venture with Napster to develop paid, legal channels using peer-to-peer tech.

But Napster was not so attractive an investment as it appeared. Fanning, conciliatory and deferential by temperament, had no business experience. He instead surrounded himself with those he saw as talented, and mostly that meant hiring friends and family. One of his early hires was Sean Parker, whom Fanning knew from an mp3 trading channel. Parker, 19, was glib and handsome, and soon became the public face of Napster. (A similar deal with Facebook would later make him one of the richest people in the world.) But the most important early hire wasn’t Parker; it was Shawn Fanning’s uncle John.

Shawn was in thrall to John Fanning. Much of what he knew about programming came from his experiences hanging around at John Fanning’s previous business venture, Chess.net. As CEO of that company, John had appeared to be the model of a successful Web entrepreneur, and was a generous benefactor to his nephew. He had spent years paying Shawn for good grades, and while Shawn was still in high school, had bought him a purple BMW.

But it was all based on credit. John had a habit of not paying his bills, and this made his life a lot of fun. In 1999 alone he lost a judgment over a $17,000 bank debt, lost another judgment over a $26,000
credit agency debt, and his former lawyer filed an affidavit saying John owed him $94,000 in unpaid legal fees. That same year his wife lost a $13,000 judgment over a credit card debt, and she was being sued by her condominium board over nonpayment of fees. Despite appearances, John’s business ventures were struggling—his previous company, Cambridge Automation, had been dissolved, and Chess.net was falling apart, with employees grumbling about not being paid. Worst of all was the felony assault charge John Fanning was facing for beating up the maintenance man of his apartment building. (The charge was dismissed in 2002, after Fanning served six months of pretrial probation.)

Shortly after Napster’s founding, though, Fanning struck the deal of a lifetime. In May, just before the public debut of the software, John, 35, had convinced Shawn, 18, to sign a piece of paper granting him 70 percent of Napster’s equity in exchange for his services as chairman and CEO. John had quickly abdicated the CEO position, but he remained the chairman of the company, and as majority shareholder, was legally in control.

He paid little attention to day-to-day business. As Shawn and Sean set up offices in Silicon Valley, John remained on the other side of the country in Hull, Massachusetts, using the salary he drew and private sales of Napster stock to rehab a condemned mansion he had purchased years before. As it became clear that Napster would not survive without industry support, executives at the company implored him to strike a deal with the majors. John responded with recalcitrance: “
Fuck the record industry.”

Morris watched this tortured saga from a distance. He did not share Bronfman’s or Middelhoff’s enthusiasm for Napster, he had not attended the meeting after the Grammys, and he had no personal interest in taking a stake in the Fannings’ revenue-free “business.” Before Napster, he had regarded the mp3 as an annoyance, if he ever thought of it at all. He was a music guy, not a technology guy, and for a long time he stubbornly refused to acknowledge it might impact his
industry. His job was to make hits, and when he looked at the mp3, he didn’t see how it could help him do that.

But Napster took file-sharing from the underground to the mainstream, and for Morris this was simple thievery, conducted on an unprecedented scale. The Napster user base was criminal, and so, by extension, was the company itself, seeking to profit from an illegal trade in copyrighted material that was the rightful property of Universal Music Group. He had been down this road before with cassette tape trading, and he began to see how this new technology presented an existential threat to the business model of the 14-dollar compact disc.