How Music Got Free (9 page)

Proximity to celebrity could cloud one’s judgment—it was more fun to sell music than industrial lubricants, regardless of the outcome for shareholders. Reporters had never been kind to Junior in the first place, but with the failure of the movie studio they smelled blood. He became a whipping boy for Wall Street and
a piñata for the press. His period as CEO had coincided with some of the best equity market returns in American history, but Seagram’s stock had flatlined, even as the stake he had sold in DuPont doubled in value.

Universal Music Group was the bright spot in a dismal landscape, as even Bronfman’s fiercest critics had to concede. Junior wanted to leverage its strengths, so in May 1998 he announced a new transaction. Seagram would sell its Tropicana division to Pepsi, to fund the purchase of PolyGram Records from Philips. The orange juice business was everything Junior hated: boring, stable, and highly profitable. The music business was everything he loved: exciting, glamorous, and brimming with unforeseeable risks. After the deal’s completion, the majority of Seagram’s revenues would come from entertainment and Morris would once again be one of the most powerful music executives in the world.

Seagram’s stock sunk on the announcement of the transaction. PolyGram was not the recording label of the future. Its bestselling act in 1997 had been the boy band Hanson, led by their hit single “MMMBop.” Mostly, PolyGram’s roster represented the commercially successful recording artists of yesteryear: Elton John, Bryan Adams, Bon Jovi, Boyz II Men. But its position in foreign markets was strong, and that, along with the distribution rights to the back catalog, made it expensive.

The price tag was ten billion dollars, and executives at Seagram worked out the prospectus for the deal. This was a legally required
public document that presented shareholders with the economic rationale for the transaction. The prospectus made aggressive estimates for future growth, targets that would have to be hit for the price tag to make sense. As tended to happen in corporate America, the executives had looked at the last three years of revenues, then extrapolated from those a trend line that extended off to infinity.

As required by law, the prospectus also contained an exhaustive examination of the potential risks. Chief among these was piracy, which had plagued the recording industry since its inception. (In fact, piracy had plagued the creative industries since the invention of movable type, and in the context of copyright infringement,
the term “pirate” was more than 300 years old.) Piracy was something every recording executive took seriously, and already, as a result of the physical bootlegging of compact discs, PolyGram had been forced to exit certain markets in Asia and Latin America entirely. Bootlegging in those countries was more a product of organized crime syndicates than individual actors, but there was a risk that, with the rise of the home CD burner, the problem could spread to Europe and the United States.

Something like this had happened before, in the early 1980s, with the home audio cassette, after the introduction of the dual-head tape deck. The investment bankers considered this a relevant case study. They had dusted off a 16-year-old analysis of the adverse effects of the home-taping craze, conducted by the economist Alan Greenspan, who was now the chairman of the Federal Reserve. Drafted during a severe sales slump in 1982, Greenspan’s paper had taken an independent look at the industry. His analysis blamed tape bootlegging for declining revenues, then considered various pricing strategies the industry might employ to counteract this trend. But, using advanced econometric techniques, he found that neither raising nor lowering album prices was likely to work. Instead, Greenspan figured, the only way to reverse the sales slump was through an aggressive campaign of law enforcement against the bootleggers. In other words, the success
of capitalism required vigorous intervention from the state. (Greenspan himself would not fully understand the importance of this insight for some years to come.)

Doug Morris thought throwing the bootleggers in jail was an outstanding idea. He had, however, learned an entirely different lesson from the tape-trading era. You didn’t solve the problem of piracy by calling the cops. You solved it by putting out
Thriller
. In Morris’ view, it was Michael Jackson’s 1982 blockbuster that had really rescued the slumping industry—what had been missing wasn’t law enforcement but simply hits. The music industry had been out of touch with the needs of its fans, but
Thriller
reversed this, spurring a pop music renaissance. Morris had not been involved in its production, but, like all music executives, he held
Thriller
in a special place of acclaim. The album was the signature achievement of corporate cultural production, an immortal work of art that remained the bestselling album in history.

So when Morris read the deal prospectus and its warnings of a coming wave of CD bootlegging, he was not especially worried. It was something to watch out for, certainly, but unlikely to materially affect his bottom line. Morris believed consumers would continue to buy legitimate discs, just as long as he kept cranking out hits. Plus, post-merger, the company’s margins on those discs would be better than ever. PolyGram owned several large-scale CD manufacturing plants throughout America, including the big one, the Kings Mountain plant where
All Eyez on Me
had been pressed. Once Universal folded these plants into its own manufacturing and distribution network, overhead costs were projected to fall by nearly $300 million a year. (As ever, there were no plans to pass these savings along to the consumer.)

The deal prospectus listed other risks as well. There was the risk that consumers’ tastes would change—the risk that, in some apocalyptic scenario, people would stop buying so many Hanson albums. There was the risk that Universal would be outbid for artists—the risk that they wouldn’t sign Cash Money next time, or that Bon Jovi would
defect to Sony. There was the risk of economic recession—a risk that the industry had historically weathered well, but one over which it had no control. And, more dangerous still, there was “key man” risk—the risk that Doug Morris might suffer a stroke or be hit by a falling piece of space debris.

But the biggest risk wasn’t mentioned at all. When the deal prospectus was made available to the public in November 1998, the buzz surrounding the Internet had become impossible to ignore. But somehow the executives of Seagram did not think the technology was worth analyzing at all. The prospectus for the PolyGram purchase did not mention the Internet, nor the nascent consumer broadband market. It did not mention the personal computer, nor recent advances in audio compression technology. It did not mention the possibility of streaming services, nor the potential for widespread file-sharing. And it did not mention the
mp3.

B
y 1996, following its early adoption of the mp3, Telos Systems controlled 70 percent of the North American market for digital sports broadcasting. Its primary competitor had opted for mp2 encoding, and Telos had routed them. There were now Zephyr boxes in nearly every major North American stadium, and many large-market radio and television stations as well. Voice-over artists began using Zephyrs to set up digital home recording booths, eliminating the need for expensive studio visits. The word “zephyr” had even become a verb, meaning “to stream digitally,” as in, “Can you zephyr me that interview with Pavel Bure?”

The head-to-head success of the device in the open marketplace revived interest in a format that the world had left for dead. The standards committees had hated the mp3, but the customers sure loved it. This success brought attention, and soon Fraunhofer was cutting other deals. Macromedia licensed the mp3 for use with its multimedia Flash codec; Microsoft licensed it for an early version of Windows Media Player; a start-up satellite radio provider named WorldSpace licensed it for broadcasting to the Southern Hemisphere. The overall revenue from these deals was modest—enough to justify the technology’s continued existence, but not enough to justify the thousands of man-hours and millions of dollars Fraunhofer had spent in development.

And so, toward the end of 1996, Fraunhofer was preparing to retire the mp3. Its development was complete, and there was no longer
anyone actively working on it. The plan was to shift the technology’s limited customer base to the second-generation Advanced Audio Coding, which was now nearing completion. AAC had delivered on its promise. It was 30 percent faster than the mp3 and employed a variety of new techniques that allowed it to compress files with perfect transparency even beyond the 12-to-1 goal. After 14 years, Seitzer’s vision was real, and when Fraunhofer submitted the AAC technology for standardization in late 1996, the event formally marked the mp3’s obsolescence.

What happened next was like an episode of
Star Trek
. A mysterious case of amnesia struck every member of the crew. Brandenburg, Grill, and Popp; Gerhäuser, Eberlein and Herre; even Seitzer was afflicted. The Fraunhofer team generally had excellent memories, and could often recall events more than twenty years past with great clarity and precision. They were good record keepers too, and the stories they told of the early days could almost always be corroborated with photographs and documentation. But when it came to the mysterious period of late 1996 to early 1997, every one of them drew a blank. No one—not one—could remember the first time they’d heard the word “piracy.”

The Fraunhofer team were no strangers to the Internet, but the Internet
they
knew was a collaborative tool for research and commerce, not some grimy subculture of anonymous teenage hackers. In their naiveté, they had not seen what was coming. Somewhere in the underworld, L3Enc, the DOS-based shareware encoder Grill had programmed several years back, was being used to create thousands upon thousands of pirated files. Meanwhile, somewhere else in the underworld, the commercial WinPlay3 player that supposedly self-destructed after twenty uses had been cracked, enabling full functionality. Together, the two were now being distributed in chat rooms and websites as
a bundled package.

That wasn’t all. Some of the Warez Scene groups were also
providing
direct links to Fraunhofer’s FTP server, along with stolen serial numbers for L3Enc and WinPlay3. By the middle of 1996, Fraunhofer’s database administrators would have seen a spike in the FTP traffic for mp3 software. By late 1996 the surge in downloads of L3Enc and WinPlay3 would have been impossible to ignore. After years of neglect, there was finally interest in mp3 software—but, amazingly, none of the Fraunhofer researchers could recall the details of this remarkable turnaround.

The official Fraunhofer narrative only resumed on May 27, 1997, when Brandenburg, in America for a conference, was handed a copy of
USA Today
. There, buried on page eight of the newspaper’s “Life” section, in an article by the music journalist Bruce Haring, was the first ever mention of the mp3 in the mainstream press. “Sound Advances Open Doors to Bootleggers,” read the headline. “Albums on Web Sites Proliferate.” Included in the article was a short interview with an 18-year-old Stanford University freshman named David Weekly.

In late March of this year, Weekly put 110 music files—including cuts from the Beastie Boys, R.E.M., Cypress Hill and Natalie Merchant—on his personal Web server, run through the university system. Soon, more than 2,000 people a day were visiting, representing more than 80% of Stanford’s outgoing network traffic.

Brandenburg recognized the importance of this development. He knew he needed to remember this moment, and he knew he needed to bring it to the attention of his colleagues back at Fraunhofer as well. So he cut the article out of the newspaper with a pair of scissors.

Brandenburg disapproved of piracy. Everyone at Fraunhofer did. These men were inventors who made a living by selling their intellectual property, and they deeply believed in both the letter and the spirit of copyright law. They were not participants in the file-sharing subculture, and they never pirated music files themselves. Upon
Brandenburg’s return to Germany, they prepared a course of corrective action. They reported some of the more brazen hackers to the authorities, and they scheduled a meeting with the Recording Industry Association of America, the music industry’s lobbying and trade group, at their headquarters in Washington, D.C., to warn them of what was occurring.

Brandenburg arrived at the RIAA meeting that summer with an enhanced piece of tech: the copy-protectable mp3. Although his recent experience had showed how this protection could be disabled by technical experts, Brandenburg believed that the majority of casual downloaders would never make it past this hurdle. At the meeting, he demonstrated the use of the file, then urged the RIAA to adopt this technology at once. The best way to get ahead of mp3 piracy, he believed, was to provide a legal substitute.

He was informed, diplomatically, that the music industry did not believe in electronic music distribution. To him this was an absurd argument. The music industry was
already
engaged in electronic distribution. To the recording executives those racks of CDs at the mall might look like inventory, but to an engineer they were just an array of inefficiently stored data. Brandenburg explained his position again, but his patient, methodical style of scientific argumentation failed to ring the appropriate alarm bells. So he got on a plane and went home.

Why didn’t they listen?
The RIAA would later offer various explanations:

The first explanation was that Brandenburg’s argument was self-serving. To sell mp3s legally, the industry would have had to license them from Fraunhofer, and that would have been expensive. Given the number of pirated files being hosted online, Brandenburg’s proposal might even have looked like blackmail, although this was certainly not his intention.

The second explanation was that the RIAA was not actually in charge of the music industry. The opposite was true: it was just a
lobbying arm that took its orders from the Big Six. RIAA employees were Beltway insiders who talked to the legislators about copyright policy, or private detectives who worked with law enforcement to hunt down bootleggers, or accountants who certified gold and platinum records. They weren’t capital allocators, and they didn’t have the authority to make large-scale investments in digital distribution technology. Brandenburg had scheduled a meeting with the wrong people.

Still, if they’d really cared, the RIAA could at least have referred Brandenburg to a major label. But they didn’t do that either. And that was for a third reason, the best explanation of all: their technical people told them not to. The studio engineers hated the mp3. These were the knob-twiddling soundboard jockeys who actually mixed the albums. Responsibility for the sound quality of recorded albums fell to them, and, in their consensus opinion, the mp3 sounded like shit.

This guildlike resistance to the technology proved to be the biggest hurdle to early adoption. In one regard, the studio engineers had a point. The cracked version of L3Enc floating around on the Internet did not produce high-quality audio, and even a casual listener could easily distinguish between a compact disc and the early pirated files. But it went beyond that—the studio engineers were irredeemable audiophiles who regarded even high-quality mp3s with disdain. For them, capturing the subtle acoustic qualities of recorded music was a professional obligation that bordered on obsession. Now Brandenburg was proposing to irretrievably delete 90 percent of their life’s work.

Brandenburg had heard this argument before. In rebuttal, he pointed to Eberhard Zwicker’s theoretical work, which showed that the deleted information was actually inaudible, and to the double-blind tests that empirically confirmed that this was the case.
Transparency had always been Brandenburg’s goal, and by 1997 he felt he could achieve it in 99 percent of all cases. But the studio engineers weren’t having it. They remained convinced they could perceive vast
differences between CD audio and mp3 audio at
any
level of quality, and, furthermore, they resented having their professional judgment called into question.

Many prominent artists agreed with this assessment. Some, like
Neil Young, would go on to spend years fighting a losing battle to preserve audio quality standards. But this wasn’t a technical disagreement—it was a culture clash. Although they notionally worked in the same field, the studio engineers were a separate breed from the Fraunhofer guys. They tended to have associate degrees in music management, not PhDs in electrical engineering. Many were themselves musicians or songwriters, while others ended up as high-paid record producers. (Jimmy Iovine had started out as one.) In other words, they were artists, and they tended not to see the world in scientific terms. For the studio guys, sound was an aesthetic quality that you described in terms of “tone” and “warmth.” For the researchers, sound was a physical property of the universe that you described in logarithmic units of air displacement. When an acoustic researcher argued with a record producer, the debate wasn’t really conducted in the same language.

And in the end, all the data in the world wouldn’t have conclusively proved Brandenburg’s point. The ear was an anatomical organ, one as distinct as the fingerprint, and each person’s acoustic reality was different. While it seemed unlikely that a studio engineer might hear something that hundreds of trained professionals had missed, it was certainly not impossible. For a while, at least, this argument carried the day.

The RIAA snub was a minor setback for Brandenburg. For the music business, it was a terrible, unforced error. Even if you granted the soundboard jocks the point about audio quality, it wasn’t relevant to sales. Not long ago the home audio experience had meant scratched-up vinyl on a cheap turntable, and the mobile experience had meant an AM transistor radio at the beach. The mp3 certainly sounded better than either of those. Most listeners didn’t care about
quality, and the obsession with perfect sound forever was an early indicator that the music industry didn’t understand its customers.

Other industries were smarter. Where the major labels saw degradation, the consumer electronics players saw dollar signs. Around the time of the first RIAA meeting, Diamond Multimedia and Saehan International, both Korean companies, independently approached Fraunhofer with the idea of making the world’s first portable mp3 player. (They were unaware that Harald Popp had commissioned a functioning prototype two years before.) While neither company presented an especially impressive design concept, Henri Linde negotiated the deals quickly, believing that the Japanese consumer electronics majors like Sony and Toshiba would soon follow.

They didn’t come. Once scrappy upstarts, the Japanese majors were now established multinationals who had lost their early appetite for risk. And the mp3 was dangerous: most of the files on the Web were illegal, and hosting them was an invitation to be sued. The electronics industry and the music majors had always had an uneasy relationship, and the introduction of the cassette tape deck in the 1980s had provoked a flurry of lawsuits. Now more cautious, Sony, Toshiba, and the rest of the Japanese leaders watched carefully from the shoreline as the Korean B-team players waded into shark-infested waters.

But one industry loved controversy: the press. After the
USA Today
article, Fraunhofer’s public relations arm was swamped with interview requests, and the Erlangen campus was overrun by camera crews. Naturally, the journalists wanted to know who was responsible for this technology, and they focused their attention on Brandenburg. He carefully directed it away. Over the next few years, even as the mp3 was widely touted as the audio technology of the future, its inventor preserved a surprising degree of anonymity.

He did this by underplaying his own role. In every interview he gave, Brandenburg denied that the mp3 even
had
a single inventor, instead stressing the importance of the collaborative effort of his team. (This was usually the first thing out of his mouth.) From there
he would start crediting other stakeholders in the project, like Thomson, and AT&T, and, in later years, even MPEG itself. Sometimes he even credited MUSICAM, since it held the patent on the filter bank that Fraunhofer was still forced to license. Meaning that, as the mp3 money began to roll in, even Philips got a tiny cut.

The picture Brandenburg presented to the public was of a large-scale consortium involving a complex thicket of patents and licensing cash flows, a project with a dozen stakeholders and no single driving force. But Henri Linde knew different. As licensing manager, he was one of the few people qualified to actually interpret this mess, and he could see that Brandenburg was obfuscating. It was a phenomenon he termed “escaping to the team.”

It was certainly true that Bernhard Grill, Harald Popp, and the rest of the original six were indispensible, and that Brandenburg had been fortunate to fall in with such a talented crew. It was also true that Thomson had provided critical support, especially in the form of Linde himself. And it was true that the project had many stakeholders—the
twenty different patents that covered the full suite of mp3 technology provided revenues to more than two dozen inventors, and that was after the attached institutions took their cut. You had to dive deep into the licensing agreements to learn the secret: Brandenburg earned a far, far larger share of the mp3’s licensing revenue than anybody else. Of all the names that appeared on the patents, Brandenburg’s appeared most often, and, on the first and most important one, filed in 1986, Brandenburg’s name appeared alone.