By 2002, megastar artists such as Alanis Morissette could successfully promote and pre-sell a new release using e-mail to achieve gold record status before physical CDs even appear in stores, predicts Forrester Research in its "Virtual Music Rocks" report.
Already, college students using Napster software can bend the Internet to its knees by downloading MP3 music files, having slowed the Web to a crawl one day last month.
HITTING THE CHARTS
Some independent recording artists are now hitting popularity charts thanks to music download Web sites such as MP3.com, LiquidAudio.com and Myplay.com, which are hitting nearly $10 million in sales, according to Forrester.
The band Kittie rests at No. 5 on Billboard's "Top Independent Albums" chart, as of March 11, primarily due to a launch on Myplay.com, says Michael Krumper, exec VP of Artemis Records.
"We started [Kittie] with MyPlay in October, and our record came out in January," he says. "We didn't break Kittie solely off the Internet, [but] we used the Internet as part of an integrated strategy."
For a band like Kittie, a group of 15-year-olds who hadn't recorded before, Mr. Krumper says, "It was invaluable."
Nearly 2 million online consumers currently convert songs into computer music files; by 2003, digitally downloaded music will add $1.1 billion to the U.S. music industry, according to Forrester.
This growing market will boost the popularity of not only independent recording artists, but also of Grammy-winning, established acts.
Recently, a preview of the Eagles rehearsing "Tequila Sunrise" was available for download at MP3.com, and the band TLC created a track exclusively for the Web site's users. By 2001, predicts Forrester, more than 3 million households will be downloading an entire album instead of one track here and there.
Tori Amos' and Ms. Morisette's management companies worked out a deal where MP3.com sponsored their tours, making portions available for download; in exchange, the singers received stock options in the Internet company valued at $540,000 and $15.8 million, respectively.
ARTISTS LIKE FORMAT
In a survey of recording artists, Forrester found that despite record label fears of piracy, artists are eager to distribute their music in a digital MP3 shareware format, believing it eventually will create opportunity for artist self-representation and generate higher royalties.
"Net-centric [record] labels will provide a profitable career for musicians' content to sell a few thousand songs or album downloads for 30% to 50% of gross sales," says Forrester analyst Mark Hardie.
Sean Marra, co-founder of ad agency Big Gross, Largo, Fla., is also president of Stainless Management, which has promoted the rock group Gunburner using MP3.com.
"We started dealing with MP3.com in April 1999. By July of that year, we had over 6,000 downloads. We were able to sell CDs to Switzerland," says Mr. Marra.
"[MP3.com] gave us Web tools, technology and distribution to hit 19% of the 15 million rock fans and do viral marketing," he says. "We were able to penetrate that market, learn how to change covers and tracks, repackage and create three separate packages for different charts."
However, a legal tussle between the recording industry and MP3.com may confuse how the Internet has already changed music marketing.
The Recording Industry Association of America sued MP3.com in January, alleging its My.MP3.com service is an unfair business practice that violates copyrights.
To create its service, MP3.com digitally copied or "ripped" a database of 45,000 CDs. When users verify ownership of particular albums by inserting their own disks into CD-ROM drives while linked to the site, they can then access the music files or download them for use in a portable player.
The site itself isn't a problem, says attorney Steve Metalitz, a lecturer at George Washington University in Washington and the former chief counsel of the U.S. Senate subcommittee that approved the Digital Millennium Copyright Act in 1998.
The problem, he says, is MP3.com didn't get permission from record companies before loading the music. The companies, he says, "want to maintain control over their material and want to be paid for these uses."
In the past, record company control included a gatekeeper function that determined which artists got a chance to reach the market. Regardless of how the suit goes, that control may already be gone.
Myplay.com, which offers a service that rivals My.MP3.com, hasn't drawn the industry's ire. Myplay.com co-founder David Pakman says the difference is his users have to upload their files to Myplay.
"Copyright allows individuals to make copies of music for their own use, similar to making a tape. We operate under that principle," he says.
Once a file is copied to Myplay it can be sent as a "stream" via e-mail, but the streamed copy can't be saved on another machine, Mr. Pakman adds.
"Play lists are streamed to your friend, but we pay royalties to the publishers," he says. These are blanket rights provided by performing rights organizations Broadcast Music Inc. and American Society of Composers Authors and Publishers, allowing Webcasting, or broadcasting using the Web.
SITES LICENSE MUSIC
About 1,500 Web sites have licensed music from ASCAP for either 1.6% of their revenue or traffic, whichever is higher, says Marc Morgenstern, exec VP for ASCAP's new media division.
"The minimum payment is $264 [for an annual site license], and we try to keep it low so small sites can afford to have our full repertory of 4 million works." The largest sites pay up to $200,000 for their licenses, which support music authors.
MP3.com CEO Michael Robertson insists that My.MP3.com is just a tool for listening to music people already own and predicts he'll prevail in court. "We've had an ASCAP license since last June," he adds.
MP3.com doesn't require an RIAA license, Mr. Robertson says, because "you put the CD into a CD-ROM drive before you can listen to the songs, or you buy the CD from one of our retail partners."
Still, MP3.com's ripping of music into its database is still a rip-off, says Ron Stone, president of Gold Mountain Management, which represents Bonnie Raitt, Ziggy Marley, Los Lobos and other musical acts.
"MP3.com is taking what does not belong to them and making money at our expense," he says. "This is the equivalent of copying The Wall Street Journal, then putting it on a Web site free."