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Net Profits

The Internet is a capitalist's dream come true: Slap up a virtual storefront, talk someone into giving you a product to sell, then sit back, relax and watch the dollars roll in. Everyone's getting involved -- "dot-com" is almost as ubiquitous as "the" these days -- but only a handful last longer than the time it takes to download their products. In the digital age, companies are a blue-chip stock one minute, an error message the next.

Online music distributors (OMDs) are among the few start-up companies that do manage to stay up -- and all too often, they do it by balancing on the backs of musicians who don't know how much their product is worth. Using a potent mix of techno-speak and marketing hype, OMDs like MP3.com, Tunes.com and Yahoo Broadcast Services (formerly known as Broadcast.com), along with a bevy of look-alikes, are gobbling up free music (er, content) in staggering quantities.

OMDs have been enormously successful at painting a full-color media picture of themselves as virtual Davids out to slay the mighty recording-industry Goliath. By promoting themselves as cool, underground, anti-establishment sites fighting the good fight on behalf of poor, downtrodden musicians everywhere, OMDs have convinced thousands of musicians (a whopping 28,000 in the case of MP3.com alone, according to that company's CEO, Michael Robertson) to hand over their tunes, no questions asked.

People like Robertson want consumers to believe that the Internet puts the reins of power back into the hands of the artists. But what he and other OMDs really mean, of course, is that the Internet puts the reins of power into their hands.

It's a mighty attractive business model: scot-free use of inventory with minimal accountability to the owners of that inventory, which generates revenue from music fans, from advertisers, from the artists themselves -- even, according to one industry insider, from the recording industry. But why on earth would artists want to give up all rights to their singles -- historically, the very cuts that have generated the most revenue -- and, for the most part, to a start-up company at that?

"No one's paying independent artists right now," says Brandon Barber, product manager of digital music for Tunes.com, a music hub that controls RollingStone.com, TheSource.com, and DownBeatJazz.com and offers professional music reviews and Webcasts in addition to downloadable music. According to Barber, Tunes.com is considering paying artists in the future but is "trying to be as agnostic as possible until a standard emerges."

A standard does exist, of course, and has for years -- it's just being ignored by OMDs. It's called copyright, and it ensures that artists get paid when companies make money off their music. Basically, there are two types of music copyrights. One is the right of songwriters to get paid every time someone performs one of their songs. The other is the right of the performer to get paid every time his performance of a song is reproduced or broadcast. It's simple, really. Furniture makers own the furniture they make; songwriters and performers own the art they create.

But because songs and performances are harder to track (and easier to steal) than, say, a sofa, copyright owners have the option of registering their work with performance organizations (ASCAP/ BMI/SESAC) and reproduction licensing organizations (the National Music Publishers' Associations' Harry Fox Agency). These organizations exist to track the use of copyrighted songs and pay royalties back to the rightful owners. Specifically, the performance licensing fees that radio and television stations, film companies, live venues and even jukebox owners pay to ASCAP/BMI get kicked back to performers; the reproduction licensing fees that recording companies pay to the Harry Fox Agency get kicked back to songwriters.

Contrary to popular opinion, which still views the Web as a kind of anything-goes frontier, United States copyright law already addresses music distributed over the Web. So do performance and reproduction licensing organizations. Whether they admit it or not, OMDs follow the radio model when they allow visitors to stream song files, and the record-pressing (distribution) model when they allow site visitors to download MP3 tunes. So why aren't they coughing up licensing fees like everybody else?

"This is all still in the infancy stage," says Steven Phenix, director of publicity for WorldNet Box Office Inc., a company that Webcasts and archives live music performances at ClubCastLive.com. "We plan to renegotiate the contracts artists sign with us in the future so that eventually they will make money."

Phenix and many other OMD operators seem to operate under a premise that no one knows just what will happen with online music -- or who will eventually benefit from its electronic distribution.

History begs to differ.

According to the National Music Publishers' Association, every new advancement in music reproduction and distribution technology has spawned the same tired argument. First it was TV and radio broadcasters who claimed they should be able to use music for free, arguing that broadcast exposure helps sell records. Then it was film and television producers; then restaurant and club owners. In all of these cases, organizations representing musicians -- from established record-industry alliances to unions -- finally forced companies to follow the law and pony up for the value they were receiving.

Technically, OMDs aren't stealing music; they're talking independent musicians into giving it away. Some would argue that this is a subtle difference (comparable to the difference between mugging a fat lady and selling her Fen-Phen, since the result is the same) but it does exist.

How do they do it? By requiring indie artists to sign outrageously one-sided contracts for the privilege of -- get this -- being on the Web.

The American Federation of Musicians (AFM), a union whose membership includes professional musicians across the country, has a problem with this.

"MP3 and similar types of formats and means of online music distribution are marvelous for the small up-and-coming artist, but there's not much accounting for what happens to that music," says Pete Vriesenga, president of AFM Denver local 20-623. "The danger is so big. Musicians are such pushovers, they just want to get their product out there, have some exposure. But when you just put it out there, you find yourself wondering, 'Why am I not getting any money back?' It could be because you're using an online distributor who doesn't track anything or make those numbers available."

According to Vriesenga, the days of slack accountability are numbered. "There is a wonderful end to this story," he says, citing the recent enactment of the Secure Digital Medium Initiative, a voluntary procedure whereby online operators agree to work with certain software, like Liquid Audio, to tally the number of digital radio broadcasts, as well as downloads and sales of music. Those tallies are then provided to ASCAP/BMI. The key to protecting one's musical product, he contends, is to go with OMDs who have these systems in place.

"We're planning to set up a distribution mechanism through our Web site (www.dmamusic. org/) where we create our own mini Amazon. com. We'll give consumers -- and artists -- a licensable, trackable distribution service. We might have some free samples, but everything will be licensed. The reasoning behind a lot of the free samples -- people are now giving away whole cuts rather than, say, twenty-second samples -- is that then when you use software like Liquid Audio to play what you've downloaded, you're presented with all kinds of information that's encoded in the download: liner notes, where to buy it -- click a button and you're there. That is good exposure."

To be fair, not all OMDs require artists to give away all rights in all circumstances. Cage Free Records, the Nederland-based company headed by Patrick Latella, has taken pains to ensure that everything it does is as artist-friendly as possible. Latella currently distributes music from local acts like Wendy Woo, Sally Taylor, Cabaret Diosa and Opie Gone Bad. On the front page of its Web site (www.cagefreerecords.com), Cage Free has posted a disclaimer, just in case you might get the wrong impression. "You can feel good knowing the money you are spending for a CD is going directly to the artist," it reads, "and you will experience why independent CDs are 'better': because of their unique, pure heart. Cage Free Records puts the musicians and the music lovers in direct touch with each other. This is the Cage Free Records Philosophy."

Latella backs up that claim with a fairly cut-and-dried usage agreement. In exchange for building a Web site for each band, or equipping the band's own site with linked, e-commerce software, the fifty-plus artists who distribute music through the site pay him $10 per month, and they keep 92 percent of all sales revenue. Tracking is handled personally by Latella, who receives and processes all orders and sends quarterly statements to Cage Free-affiliated artists. "The CDs I sell are under complete control of the artist," Latella says. "I basically just hold inventory and ship orders." As for the question of unaccounted-for MP3 downloads, Latella instead provides RealAudio streams, a format that "doesn't really allow for downloading and storage. It really just allows you to listen to a song, but not to duplicate it."

Yet companies like Cage Free are essentially the mom-and-pop shops of the Internet, the kinder, gentler exception to the money-hungry rule.

While MP3.com, like many OMDs, doesn't compensate musicians for individual tunes downloaded or sold as part of a sampler (multiple-artist compilation) CD, it does offer to share the revenues it gets from selling artists' full-length CDs. According to MP3.com, the 50 percent they offer artists in these cases is far above the "10 percent most traditional record labels offer."

But comparing an OMD to a traditional record label is not only far-fetched, it's purposefully misleading. Record labels earn their (admittedly) high percentage by forking out for all of the production costs involved in making a recording. They're the ones who pay for a CD to be recorded, mixed, mastered and pressed. They're also the ones who develop the artwork and promote the finished recording through established radio and print channels.

By contrast, MP3.com offers none of these services. What does it offer? A description of the CD that the artist has already paid to produce, plus the promise to stuff a copy in the mail if a customer requests one. That's it -- and for that, they demand fully half of an artist's gross sales dollars.

Without exception, OMDs assert that they are, in fact, giving musicians something of value in exchange for the music they receive: exposure.

Sounds good on the surface -- as long as somewhere, at some point, exposure turns into dollars (or landlords and grocery stores suddenly start accepting "exposure checks"). And there's no reason why it shouldn't: Exposure has been recognized as a quantifiable, profitable marketing concept for years. Radio and television stations, for example, earn ad revenue based on exposure -- specifically, on how many pairs of eyes and ears they calculate are being reached. Of course, in broadcast and even print media, marketers have to make educated guesses; no one knows for sure how many people are tuning into a particular Hee-Haw rerun at any point in time.

They do on the Web. Webmasters can track who visits a Web site, how long they stay, who's downloading which MP3 files -- virtually every exposure detail in the book. Automatically, with no guessing required. Web software gives artists the unprecedented ability to track and quantify their exposure so they can turn it into something tangible, like CD sales or bodies at their next gig.

What artist wouldn't want to know that 90 percent of his fans are concentrated in Broomfield, for example? What artist wouldn't want to be able to send a message to all of the fans who've downloaded his MP3s, letting them know where he's playing and that he's got a new project in the works? Or show up at a label exec's office waving proof that 50,000 people loved his last self-produced single? That's putting exposure to work, and that would be something of value to independent artists.

Unfortunately, for all their self-conscious breast-beating about being on the side of independent musicians, OMDs seem to feel that details about how artists' own work is being promoted is too valuable a commodity to share with the musicians themselves. "Tunes.com provides that information (comprehensive download details) for the labels we work with, but not for the individual artists," admits Barber. He declined to give a reason for this.

Andy Atherton, director of business development for the Internet Underground Music Archive (IUMA), wasn't so gracious when asked whether IUMA (now a subsidiary of EMusic. com) shared pertinent marketing data, stating only that the topic wasn't up for public discussion and that, to his knowledge, "no artists have requested details on our financials to support their decision [to sign with us]." (Surprisingly uncooperative for a company whose Web site boasts that "IUMA is the one place to post your music where actual musicians are watching out for you -- not weasels watching the numbers." Apparently the term "weasels" refers to musicians interested in understanding who is benefiting financially from the use of their music.)

So how do artists -- who have the most at stake in the free-for-all the Web has become -- feel about all of this free exposure? While most of the artists interviewed for this article admitted to not understanding the issues well enough to comment, others understand all too well, having seen the downside of downloads. And some are actually optimistic.

"I'm still getting royalties from a song I wrote over twenty years ago," says longtime professional musician Sue Collins, who also happens to be a contract administrator for the Los Angeles office of the American Federation of Musicians. "I wouldn't be if I'd given my rights away. You never know what's going to happen in this business. Your tune can get recorded by somebody else, picked up in a movie and then slapped on a soundtrack or a commercial. If you've kept control over your work, you get royalties every time someone else uses it, period -- whether it's on the Web or somewhere else."

Collins believes musicians who are serious about their music tend to have a different attitude than so-called garage bands. "If you really believe in what you're doing, that it has value, then you should get paid for it. That's really what it all boils down to."

Everyone agrees that the Web offers an unprecedented opportunity to promote and distribute music. The disagreement, as so often happens, boils down to who should have the ability to control this new channel. Record labels? OMDs? Here's a wild and crazy idea: Why not the musicians themselves?

OMDs aren't privy to any special Web technology or marketing savvy: everything they can do, musicians (or their business managers) can do for themselves. This is the real revolution, the one nobody talks about: For the first time in history, artists can promote, sell, and physically distribute their own music from somewhere other than the stage without having to beg crumbs from a corporate middleman.

With the free tools and access available from just about any $20-a-month Internet service provider, a musician can whip up a Web site with performance calendars, e-mail and gig-announcement lists. Encode his own tunes in whatever audio format he chooses -- a streaming format like RealAudio that lets fans listen to the music but not own a copy, or a downloadable format like MP3. Sell his own CDs. (Third-party companies like CDNow will take care of credit-card processing of individual CD orders for a mere 9 percent off the top -- far, far less than MP3.com's 50 percent.) With a little effort, a musician can even promote himself on the Web as effectively as an OMD can.

Still, despite the feverish claims of the online music industry, there's little chance the Web will force the major recording companies into bankruptcy. After all, it's not as though the Web is some deep, dark secret that label executives haven't heard about. The fact is, the traditional recording industry is already using its bucks and business savvy to promote signed artists on the Web. If the past is any indication, the smart OMDs will join forces with the established players, and the not-so-smart ones will fade away. And that extends to musicians, as well.