How Music Got Free: The End of an Industry, the Turn of the Century, and the Patient Zero of Piracy

by Stephen Witt

  He had an excellent track record of breaking new acts, but that had no predictive power. The number of orange juice cartons you sold one year was an excellent guide to the number you were going to sell the next. The number of Limp Bizkit albums was not. Every year, Morris had to reinvent his entire product line from scratch. Mostly, that meant failing. The typical CD had a shorter shelf life than yogurt, and every year Morris ordered millions of them dumped into landfills. Despite forty years in the music business, he still never knew for certain which of his acts would succeed, and the Hollywood dictum that “Nobody knows anything” held equally true for every other type of show business. Every year hundreds of movies played to empty theaters; dozens of TV shows were commissioned and then killed after a few episodes; thousands of freshly printed books were remaindered and pulped. Perhaps the saying even held true for the corporate world at large, and those who embraced this uncomfortable state of Socratic ignorance were those who tended to survive.

  To a limited extent, Morris could rely on Universal’s back catalog: the number of Led Zeppelin albums sold each year actually was a pretty good indicator of the number that would be sold in the next. But Universal’s back catalog contributed to only about 30 percent of the company’s overall revenue stream. And, although inevitably some of the disposable pop hits of today would grow in stature to become the timeless classics of yesteryear, determining which songs this would actually happen to was impossible as well.

  It was a well-known problem in corporate America—performance targets were too often tied to short-term results. It wasn’t supposed to be this way. In theory, publicly traded stock was an asset with infinite duration, and managers were supposed to invest in projects that built value for shareholders over the very long term. In practice, though, corporate consolidation in the industry meant an increased emphasis on the near-term bottom line. Morris was aware of this problem, and he tried his best to maintain stability on his labels’ rosters and inside the executive suite. He encouraged his label heads to focus on long-term profitability, and he always looked to sign Universal’s most important acts to multi-album deals. But still, he was paid his bonus annually, and much of the value of that bonus came from disposable pop trash. If that meant passing on Radiohead to sign Hanson, so be it. He was incentivized to make hits now.

  He did so. Even as digital piracy spread from college dormitories to the public at large, 2000 was still a banner year for the industry. Customers bought more music that year than ever before or since, with the average American spending over $70 a year on CDs alone. Universal led the way, cleaning up with three rap “sequel” albums: Dr. Dre’s Chronic 2001, Eminem’s The Marshall Mathers LP, and Jay-Z’s Vol. 3 … Life and Times of S. Carter. “The Next Episode,” “Stan,” and “Big Pimpin’” were among the most pirated files on Napster, but this seemed to translate directly into increased album sales. Some industry observers began to wonder if digital piracy really hurt the music industry. Some even wondered if it was possible that piracy actually helped.

  The argument was nonsensical. If something was available for free, and could be freely and infinitely reproduced for free, with no degradation in quality, why would anyone pay to own it for a second time, when they already had it, for free? The moral compulsion to compensate artists certainly wouldn’t be enough. Nevertheless, the Napster boom coincided with the two best years the recording industry ever saw, and even Morris would later concede that, for a while, Napster’s pirate trade in mp3s fueled the CD boom. What was the explanation?

  Simple: without a critical mass of portable music players, mp3s were still an inferior good. You couldn’t bring them anywhere. You couldn’t listen to them in your car. You couldn’t listen to them when you went for a run. You couldn’t listen to them on a plane. You couldn’t DJ a party with them, not without lugging a ten-pound computer everywhere. Yes, you could burn mp3s to a compact disc—hundreds of them, actually—but a lot of CD players weren’t equipped to play the files, and even for those that were, navigating through a menu of hundreds of files on a compact disc player was cumbersome and unwieldy. So, yes, mp3 piracy was driving album sales … for a time.

  But if you had a reliable mp3 player, things would be different. You could throw your CDs in the garbage and port everything to a pocket-sized hard drive. You’d never have to buy a compact disc again. It all depended on how RIAA vs. Diamond played out.

  After successive rounds of appeals and counterappeals, the lawsuits came to an end. It was a split decision, with a victory against Napster but a loss against Diamond. Peer-to-peer networks were driven underground, but the mp3 players remained on store shelves. Napster’s servers went offline in July 2001, and, following a mad rush of eleventh-hour downloading, the public had hundreds of millions of mp3 files stranded on their home computers, and no easy way to get them off. The stage was set for a remarkable upheaval, one that would permanently obsolesce the compact disc and catalyze the transformation of a niche technology player into the largest company on earth.

  The music industry had won the wrong lawsuit.

  CHAPTER 10

  After five years of neglect, Thomson figured out its stake in the mp3 was worth something. In April 1999 the company relocated Henri Linde to California during the height of the dot-com boom, and opened a dedicated office for him with a staff of six. Business was merely brisk at first, but turned electric after the favorable result in RIAA vs. Diamond. Big Gadget finally moved, with Japanese money displacing Korean.

  Any device that could play an mp3 had to pay. Linde signed deals with dot-coms, software vendors, chip manufacturers, game designers, car stereo vendors, and hundreds of start-up ventures. In the first four years he’d worked as licensing manager he’d signed less than twenty deals. In the next four he signed more than 600. The only holdout was Sony. Inside the company a civil war had broken out between its consumer electronics arm and the music labels it owned.

  Somehow, still, Brandenburg managed to keep a low profile. In two separate magazine articles about the mp3 published around this time, American journalists misidentified MPEG founder Leonardo Chiariglione as the technology’s inventor. Charles C. Mann, writing for The Atlantic, claimed Chiariglione “led the development of a standard means for converting recorded sound into digital form, which is now called MP3,” and Mark Boal, writing for Brill’s Content, called Chiariglione “the father of the mp3.” In fact, Chiariglione only chaired the MPEG competition—he didn’t participate in it. The journalists had confused the referee for one of the players, and neither of their stories mentioned Brandenburg’s name.

  The errors were understandable, perhaps. The complicated tale of MUSICAM’s politicking against Fraunhofer was not the stuff of long-form glory. Still, it wasn’t the kind of thing that happened to Napster’s Shawn Fanning, or even Winamp’s Justin Frankel. The narrative of the college freshman starting a revolution from his dorm room was more seductive than the narrative of the middle-aged audio engineer spending a dozen years in a listening lab, and even large corporations tended to fall for it.

  In June 1999, AOL announced it was purchasing Nullsoft, the company Frankel had founded to distribute the Winamp player. Bernhard Grill, 38, had spent the last 12 years of his life developing and shepherding basic research to the consumer marketplace. He was the real innovator, and it was he who had coded the first mp3 player. Frankel, 19, had made a Xerox copy of this software and added a function that let you edit playlists. After the AOL transaction he was worth 59 million dollars.

  Only the German press managed to identify the true psychoacoustic pioneers. That was thanks to Fraunhofer, whose PR department promoted the mp3’s success as a triumphant outcome for the taxpayer. They even put Brandenburg on the cover of their annual report. Of course, their story wasn’t accurate either: it described the mp3’s victory as a historic inevitability, relying as it did on superior German technology. The official Fraunhofer timeline didn’t mention Napster, the mp2, the cracked shareware demos, or the Scene. It
didn’t even mention the word “piracy.” There was instead a single line that referred to “widespread adoption of the standard on the Internet.”

  Buried in the financial information of that same report was a clue to the magnitude of the windfall: Fraunhofer was pulling in more than 100 million dollars annually in licensing money, and would continue to do so for the next ten years. Brandenburg would never reveal his exact stake, but it was a percentage later described by Henri Linde as “nice.”

  Linde had leverage and began to apply it. Microsoft had been one of the earliest Fraunhofer licensees, but that had been on an experimental basis. In 1999 it decided to bundle Windows Media Player with the rest of the operating system. Linde, now in California, worked out a long-term deal. A few months later an administrative assistant in Fraunhofer’s operations department was opening the mail when she came across a check. This wasn’t the first time this had happened. While most companies paid electronically, Microsoft was still stuck in the era of paper money. The company had been a licensee for a long time, and this check looked just like dozens of others she had processed—save, that is, for the rather unusual number of zeroes tacked on the end of the field marked “Amount.”

  Suspecting a misprint, she called Peter Dittrich, Fraunhofer’s director of operations. After examining the check, Dittrich too suspected a clerical error. He called the audio research department to see if Brandenburg knew what was up.

  Herr Professor Brandenburg, said Dittrich, we have a check here for you.

  Yes, said Brandenburg.

  It’s from Microsoft, said Dittrich.

  Yes, said Brandenburg.

  The thing about this check, said Dittrich, is that it’s rather, um, large.

  Yes, said Brandenburg.

  He then explained that Linde’s licensing agreement with Microsoft’s was on a per-unit basis—meaning that, from now on, whenever anyone in the world bought a computer with Microsoft Windows installed on it, Fraunhofer got paid.

  Certain risks remained. Microsoft had not become the largest company on earth by mailing large licensing checks to obscure German research institutions, and even as it paid for the mp3 it was seeking to replace it. For years, Microsoft had been developing its own psychoacoustic coding standard at its research campus in Redmond. In August 1999 it introduced Windows Media Audio, a proprietary format that tended to beat the mp3 in audio quality tests. Of all the threats to his success, this was the one Brandenburg feared most. He had seen Microsoft use its operating system dominance to drive competitors like Netscape and WordPerfect off the desktop, and he felt that they could do it again to him.

  Grill was less worried. He believed Microsoft was too late. Fraunhofer’s first-mover advantage was insurmountable, and after Napster, there were hundreds of millions of mp3 files in existence—probably even billions. He knew this war had been won a long time ago, not at some engineering roundtable or inside some corporate meeting room, but on an escalator in a mall in Los Angeles.

  Harald Popp, too, felt that the mp3, whatever its technical deficiencies, would not soon be displaced. There was an email being forwarded around Fraunhofer detailing the results of the latest catchall survey for English-language search terms: “mp3” had become the Internet’s most-searched-for word, surpassing even “sex.” When Popp saw it, he laughed, and, after 12 years of tension, finally relaxed. The format war was over. They had won.

  Of course, the people searching “mp3” weren’t looking for technical details about audio compression any more than the people searching “sex” were looking for scientific information about the human reproductive system. They were looking for free, pirated music, a concept for which the term “mp3” was now synecdoche. Before Napster, pirating music had been just hard enough to limit the number of participants: figuring out how to use Internet Relay Chat or finding a quality FTP site required a certain investment of time and an elementary level of technical acumen. But after Napster, any idiot could type the word “mp3” into Yahoo! and have a hard drive full of pirated albums in minutes.

  This put Brandenburg in a difficult position. He believed what Napster was doing was morally wrong. In the debate over digital ownership, Brandenburg had staked out the most conservative position imaginable. To him, the file-sharing revolution was a collectivized form of theft, nothing more. He didn’t pirate music himself and he was committed to compensating artists for the music they created. The music labels too—whatever their flaws, whatever their shortsightedness, Brandenburg believed they were entitled to their share. Whenever he gave an interview now, he finished with a stern, Teutonic directive: “Do not steal music.”

  He delivered this line well, with emphasis and feeling, and yet the performance was cut with a certain Brechtian alienation. No person alive, not even Shawn Fanning, had benefited more than Brandenburg from Napster’s success. Only by a global, collectivized betrayal of the rights of copyright holders could he make the money that he did. This irony was something that went undiscussed at Fraunhofer, where a “see no evil” attitude prevailed. It extended to the other Fraunhofer researchers as well, and was particularly acute for Bernhard Grill. Through the years, he had continued to expand his physical archive of esoteric music, even as much of the material he sought was becoming freely available online. As Grill earned millions at the expense of the recording industry, he repaid a small portion in tribute by spending thousands of dollars on compact discs.

  There began among the engineering community a celebratory laying on of hands. Brandenburg became one of the most sought-after technical experts in the world. Over the next two years he was nominated to serve on 12 separate standards committees. He was invited to present at universities and give keynote lectures at conferences. In 2000, along with Harald Popp and Bernhard Grill, he was awarded the German Future Prize, the country’s most prestigious scientific citation. The three split a purse of 250,000 euros. Afterward the group threw an enormous party, with music, beer, and dancing.

  Brandenburg started to flirt with the idea of leaving research entirely. He talked of moving to San Francisco, to start a dot-com, or perhaps a venture capital firm. Fraunhofer scrambled to keep him. They needed to promote him, clearly, and the most obvious slot was the directorship of Fraunhofer’s Erlangen campus, where he’d done his pioneering work. But that position had already been given to Heinz Gerhäuser, the early leader of the institute’s audio research group. After some discussion, Brandenburg was instead offered the directorship of a new facility, one Fraunhofer was building from scratch in Ilmenau, a small city in Thuringia, two hours north of Erlangen. He relented, and stayed. A short time later, from Ilmenau, he incorporated Brandenburg Ventures, an early-stage venture capital firm.

  There were two final challenges to total domination—hiccups, really, but worthy of mention. One competitor to the mp3, the psychoacoustic compression scheme known as Ogg Vorbis, arrived late to a crowded marketplace, but it had some distinct advantages. Ogg was an open-source project, meaning that anyone could implement it and pay no royalties. It also scored better on listening tests than any other format. In a world designed by an engineer, perhaps it might have replaced the mp3, and Fraunhofer’s licensing revenue would have disappeared entirely.

  Brandenburg and Grill both admired the open-source philosophy, but they also knew that Ogg had never conducted the sort of long-term audio research an independent format required. They both felt Ogg was piggybacking on their encoding algorithms—algorithms that had taken the better part of a decade’s worth of listening tests to perfect. Although the group behind Ogg denied infringing on Brandenburg’s patents, with a few careful words Fraunhofer made their feelings known to the device manufacturers, and the format sunk into obscurity.

  The second was Apple. Like Brandenburg, Steve Jobs disapproved of file-sharing, and was seeking to create a legal paid alternative. He was building a music application called iTunes, whose calm, white interface and slick, expensive iconography promised to cleanse the world of sin. The design fla
ws of Winamp would be swept away, the file-sharers of Napster would be given moral instruction in the virtues of paid distribution, and—Apple’s representatives were insistent on this point—the mp3 format would be abandoned.

  Jobs wanted everyone to use AAC. In discussions, he correctly made the point that AAC was a second-generation technology, one designed by Brandenburg himself to replace a format that was inefficient, compromised, and obsolete. In fact, Apple pushed so aggressively for AAC that many users wrongly came to believe that the company had invented it, a misconception that would persist for years. Brandenburg, in collaboration with Henri Linde, pushed back with equal force. The mp3 was too established now, he said. The switching costs were far too high. (He tended not to mention his own economic incentives.)