MP3 2001 in Review: The Winners

By Richard Menta- 12/31/01

The second of a two part year in review, we run through the Winners of 2001. It has been a very mercurial year with many casualties, the end result being that the future of digital music has become more clouded than ever. Below is our top eight in the win category. Feel free to drop us a note if you feel we left anything out, a case can certainly be made to extend this list.

The jury is still out on many such worthy contenders as Fair Use, copy-protected CDs, Ogg Vorbis, Aimster, and others. Whether they will be winners or losers we can't say. What we can say is that 2002 will be a crossroads year for them, making them leading candidates for next year's lists.

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1. The Legal Industry

When the motto for the year 2001 is "Innovation Followed by Litigation" you know who the biggest winners are - the lawyers. The MP3 trial alone brought over $130 million for the major music labels. Meanwhile, tens-of-millions have already been plowed into the Napster case on both sides and we haven't even started the actual trial yet. The best news? Not only will some of these cases be tied up in the courts for years pending appeals, but the music and movie industries have just turned their sights on the Napster clones, which means more bill-able hours.

2. Napster Clones

With the closing of Napster what did millions of Net music fans do? Why they went elsewhere to trade music and turned several Napster clones into the most downloaded programs of 2001. The biggest winners are Morpheus and KaZaa, both which tap into the fine Dutch Fastrack network to facilitate trades and presently average 1.3 million downloads per week on Download.com. KaZaa is even profitable. Of course, the music and movie industries are now turning their legal teams on them and recently had success in the KaZaa case, where the courts ordered the service closed. KaZaa is presently ignoring the court-ordered shutdown that could put it on next year's loser list, hoping to use its large audience to negotiate its way out.

3. Apple iPod

Less than half the size and weight of the Nomad Jukebox plus a firewire connection that can fill the player's 5GB hard drive in only 10 minutes. When so many Windows and Linux users desire a Mac-only device, you know they have done something right.

4. MP3 product manufacturers

Do you know who are not listening to the threats of the powerful record industry? The even more powerful electronics manufacturing industry. The CD player market is a seasoned one and the cassette player market is riding on aging technology. Both are flat growth items as most families already have several of them in the house.

The MP3 format, on the other hand, offers plently of growth. Not only with sales of MP3 portable players, but MP3 enabled CD players that have prodded consumers to consider a new CD player without waiting for the old one to break. And let's not forget those who make CD burners and car stereo equipment. The technology is getting smaller too, meaning digital music may find its way embedded in other products beyond the PDAs and cell phones already adding MP3 capability.

5. SonicBlue

Despite all the large electronic manufacturers entering the MP3 market in full force, SonicBlue's Rio line has managed to remain the dominant player in the digital music portable arena. That's no easy trick, even if they did create this market. If they can continue to hold onto their significant market share, look for one of the electronic giants like Matsushita or Toshiba to make a bid for the company.

6. Vivendi Universal

They won $53 million in the MP3.com case - almost triple what the other labels got - then used the money to buy both that weakened company and EMusic for a song (no pun intended as songs sold by the music industry are far too expensive) This gave them the two most valuable and viable digital music properties on the Net. Alone, Vivendi Universal now controls 40% of the traditional record industry as well, making them the General Motors of the American music market.

Of course, it was not an up year all around for the largest of the five major labels. Farmclub.com failed and the recently released Sony/Universal service PressPlay found mostly consumer disinterest, showing Vivendi Universal still has a way to go to find success in the online music market.

7. Artists and Web Royalties

When the Recording Industry Association of America (RIAA) proposed SoundExchange, a new agency they set up to collect royalty fees for digital broadcasts under the Digital Millennium Copyright Act (DMCA), artists were up in arms. They had good reason, as the original plan had the artist's record label as the conduit to disperse funds.

Traditional record industry practices combined with creative accounting would almost guarantee that none of the generated funds would find their way to artists.That's because most artists have a running tab of ever growing recording and promotional expenses that come out of their profits. If they earn a $4,000 check in web fees, but owe $100,000 on their tab, the labels would simply apply the 4K to the tab and the bill drops to $96,000. The tabs rarely, if ever, drop to $0.

Musicians and artists fought back and won the right to be paid directly for broadcasts of their work on cable, satellite and Web broadcasts. They also won half control of SoundExchange. As SoundExchange will probably be the collecting agency should Congress impose compulsory licensing on Net music, partial control of the agency could be a powerful tool for artists.

8. The Record Industry Association of America (RIAA)

How can the RIAA be both on both the Winner and a Loser list for 2001? Lets see:

They succeeded in shutting down Napster in the courts, a win. Shutting down Napster only drove users to dozens of Napster clones making music trading more popular than ever, a loss.
Their successful lawsuit against MP3.com alone brought in $130 million for the major record labels, a big win. Their threatening letters to VCs in the dot com bust successfully shut off all capital to Net music firms. With capital cut off, lesser competition strangled to death while stronger companies like MP3.com and EMusic became cheap acquisition targets for the industry, another win.
The aggressive actions by the RIAA spurred press stories on the music business that exposed the more dubious practices of an industry the Department of Justice has labeled a cartel. This has created a PR debacle for the industry as now aware - and even angry - consumers view the industry as nothing more than a ripoff, overcharging for the music while stealing from the artists they love. What did the industry do? They raised prices again and began removing the ability of CDs to play on PCs. Sinking public opinion and a growing consumer attitude that CDs are overpriced will hurt sales more than the trading of free MP3 files, a big loss.
Fair or not, RIAA president Hillary Rosen and Osama Bin Laden are interchangeable in the eyes of many Net savvy consumers. When your industry spokesperson is suffering as severe an image problem as she is it reflects back on you. The failed "License to Virus" rider on the anti-terrorism bill only further demonized the RIAA, despite their protests to the contrary in an open letter to Billboard. A loss.

MP3 2001 in Review: The Winners

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