Thanks to the Internet, you no longer have to rely on local radio stations to listen to music you like, and you don’t have to worry about albums being out of stock at the local record store. You have access to a much wider selection of music, and you can listen to radio stations that are programmed according to your tastes.

Besides benefiting consumers, the Digital Music Revolution also gives musicians more control over their music. Thanks to MP3 and the Internet, bands that don’t have contracts with a record company now have access to a worldwide distribution channel that offers them a much higher profit potential. With Internet distribution, much of the overhead disappears. In fact, Internet record labels typically offer royalties of 50%, compared to the 12%-15% typically offered by the major labels.

The economics of Internet music distribution are so compelling that even major artists are choosing to distribute their music through the Internet. Some bands are going a step further and setting up Web sites to sell music and merchandise directly to their fans. Even if only a small percentage of their fans are online, this approach can generate much greater profits because the costs are so low.

A key factor early in this revolution was the development of Winamp, a popular program for playing digital audio on PCs. Winamp was the first full-featured program for playing music in MP3 format. Winamp was developed by Justin Frankel in April 1997, shortly after he dropped out of the University of Utah. Winamp quickly surpassed other players in popularity because of its advanced features like equalizer presets and support for third party plug-ins and skins. In June 1999, Justin’s company, Nullsoft, was acquired by America Online (AOL) for approximately $80 million in stock—not bad for a 20-year-old.

The spark that made the revolution front-page news was the lawsuit filed by the RIAA (Recording Industry Association of America) and the AARC (Alliance of Artists and Recording Companies) to prevent Diamond Multimedia from selling its Rio portable MP3 player. Before the Rio, MP3 users were limited to listening to MP3 files on their computers. But the Rio provided a way to make MP3 portable and, therefore, more appealing to mainstream consumers. Suddenly, MP3 was a serious threat to the recording industry, which had previously not paid much attention to it.

The RIAA is concerned about MP3 because its small file size and lack of security measures make it easy for people to illegally reproduce and distribute copyrighted music. College students with fast Internet connections quickly found out that with MP3 they could download hundreds of songs in less time than it would take to make a trip to the local record store. This kind of piracy is difficult to prevent because the music is just digital bits, and not physical media like tapes and CDs. On the Internet, a single copy of a file can grow to thousands of copies in minutes.

The RIAA argued that the Rio was a digital recording device covered by the Audio Home Recording Act of 1992. A provision of this law requires consumer digital recording devices to incorporate the Serial Copy Management System (SCMS), to prevent the proliferation of multiple generations of digital copies. The RIAA also maintained that the Rio was used primarily to play pirated music downloaded from the Internet.

In June 1999, the U.S. Court of Appeals ruled unanimously in favor of Diamond Multimedia, accepting its argument that the Rio was a computer peripheral and not subject to the SCMS requirement. The court also ruled that the Doctrine of Fair Use (see Chapter 5) allows consumers to “space-shift” music by copying it to another device, similar to their right to “time-shift” video recordings. The right to time-shift was established in the case of Sony versus Universal City Studios in 1984 (464 U.S. 417), which concerned the sale of videocassette recorders in the United States.

Diamond Multimedia not only won the lawsuit; they also received massive amounts of free publicity, which helped increase the demand for the Rio to the point where they were producing more than 10,000 of them per week. The ruling in favor of Diamond Multimedia was also a victory for consumers and consumer electronics manufacturers. But the battle over consumer’s fair use rights is far from over, and will likely require further legislation.

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