by Stephen Witt
And then there was AOL Time Warner. Morris’ old bosses were presiding over a titanic disaster; in April 2002 the company had announced a 54-billion-dollar loss, the largest in American history. Technically the loss had been a “goodwill impairment charge.” That was an accountant’s way of saying they’d paid too much for something—in this case, the absurdly overvalued America Online, purchased at the height of the dot-com boom. Time magazine itself had explained the loss as “a bunch of drunken sailors nursing a hangover.” Warner Music Group was just a barnacle on that sinking ship.
Not that the situation at Vivendi was much better. In July 2002, the ratings agencies cut the company’s bonds to junk after a decade of ill-advised tech investments had led it, too, to write off massive goodwill losses against shareholder capital. The corporation was losing money, and Jean-Marie Messier, the man who had orchestrated the Seagram acquisition, was bounced by the company’s board. Soon, Vice Chairman Edgar Bronfman, Jr., was out as well. The brain trust was replaced by Jean-Bernard Lévy, a respected, sober-minded businessman tasked with stopping the bleeding. Needing an immediate influx of cash, Lévy organized the sale of Vivendi’s water utility and environmental engineering assets, and began looking for other things of value to sell.
Word got around. In 2003, Apple CEO Steve Jobs made an unsolicited bid to take Universal off of Vivendi’s hands. He wanted their back catalog. He wanted his own music label. Most of all he wanted Morris. Morris was interested, but the decision wasn’t his to make. Vivendi rebuffed the offer. Even with their creditors demanding liquidity, and even with music industry revenues beginning to decline sharply, they saw UMG and Morris as key, irreplaceable assets.
Jobs himself was a lifelong music buff who occasionally compared his company to the Beatles, and the attempted acquisition of Universal was part of a broader vision. Since 2002, he had been calling Morris incessantly, trying to get him to sign off on his new iTunes Store idea, which would sell songs for 99 cents through its iTunes application. These songs would be distributed onto the new iPod devices, which suddenly seemed to be everywhere. Since its introduction in late 2001, the success of the iPod had caught everyone by surprise, even the Apple executives who’d designed it. They had underestimated the sheer volume of pirated mp3s being brought into existence, and how valuable they became once they were portable.
Jobs, like Morris, was in the middle of his second act. In 1985, he’d been forced out from the business he’d founded, only to return in conquering glory in the mid-1990s. He excelled at design, marketing, and management, and if perhaps he was not the best-liked person in the world, his vision for the future of technology was certainly compelling. Most important of all, he understood that, in an economy of abundance, people tended to invest great personal meaning in their purchasing decisions. He encouraged precisely the sort of “sentimentality” that engineers like Karlheinz Brandenburg rejected, and ultimately this made him the iconic businessman of his time.
Jobs did everything in his power to encourage paid, legitimate downloading. Like Brandenburg, like Morris, he had made his fortune on the back of intellectual property assets. (Although not always his own.) His iPod was intended as a complementary asset to the iTunes Store, and he had pushed for a format switch to AAC to diminish the portability and overall value of the existing base of pirated mp3s. Despite all this, Apple’s rise to market dominance in the 2000s relied, at least initially, on acting almost like a money launderer for the spoils of Napster. If music piracy was the ’90s equivalent of experimentation with illegal drugs, then Apple had invented the vaporizer.
That was why, in 2003, the balance of power still favored the major labels. Jobs needed Morris. He needed legitimacy. Most of all he needed rap—he couldn’t possibly have a music store without Eminem and Fifty. But did Morris need Jobs? For a long time he wasn’t sure. Morris couldn’t help but notice that the iPod had up to 40 gigabytes of storage, enough to hold over 10,000 songs. Did that mean people were going to pay $9,900 to fill them up? Unlikely. Instead, the device rewarded digital piracy by making mp3s easier and more convenient to use. If the iPod became ubiquitous—and it certainly seemed like it was going to—then the mp3 would no longer be an inferior good to the compact disc.
The two engaged in a long, sometimes acrimonious flirtation. They were a study in opposites. Morris believed in the power of market research, and was willing to let consumers tell him what to sell. Jobs was skeptical of market research, and had once told a reporter for BusinessWeek that “people don’t know what they want until you show it to them.” Morris went out of his way to make sure people liked him and had positive things to say about him. Jobs was a notoriously difficult personality who routinely hurt the feelings of even his closest friends. Morris was the consummate East Coast dealmaker; Jobs the archetypal West Coast visionary. But somehow the two found rapport, and in any event, Morris’ hand was forced. RIAA vs. Diamond was decided, and the iPod was here to stay, whatever the repercussions. In a meeting in his office at Universal in late 2002, Jobs showed Morris for the first time the prototype for a seamless Web sales experience that could bring legal music to the masses, succeeding where Pressplay, Blue Matter, and Seagram’s laundry list of dumb investments had failed. Jobs promised him seventy cents on the dollar for every mp3, and that was as good a deal as Morris was ever likely to get. In early 2003 he finally signed on. The website went live in late April and, for the first time, all of Universal’s music was widely available for paid legal download.
The iTunes Store was an immediate hit. It sold over seventy million songs in its first year. But that contributed to only 1 percent of Universal’s total revenue, and the broader problem of digital piracy remained. Napster might have disappeared, but the peer-to-peer movement was here to stay, and there was a new generation of kids who had never paid for a CD, who viewed file-sharing as their prerogative, and who saw spending money on music as an antique form of patronage. This was the future of music, and it was an existential threat to Morris’ business.
This was compounded by the continuing problem of prerelease leaks. Anyone who had ever worked in a record store knew that Tuesdays were the busiest day, when the new releases hit the shelves. New music Tuesdays were the barometer for the industry, the equivalent of opening night at the box office, and the typical album would move over half its total sales in the first four weeks of its release. In the past the damage from an album leak had always been localized, but with peer-to-peer technology an early leak could now spread across the globe in a matter of hours.
Following the old business model, iTunes also released most of the new music on Tuesdays. But often this music had already been available in mp3 format on the peer-to-peer sites for weeks. That cost sales, obviously, and, for some reason Morris couldn’t quite figure out, Universal seemed especially susceptible to these leaks. In 2002 there had even been suspicion that someone was leaking from the tightly controlled North Carolina plant; Scarface’s album The Fix had definitely come from inside. But there were just so many potential holes in the supply chain: music stores, DJs, warehouse employees, music critics, even truckers. You couldn’t watch them all.
How badly did peer-to-peer file-sharing and prerelease leaking really hurt CD sales? There was no consensus answer, and some mavericks even wondered whether the leaks really hurt at all. Yes, the music industry was suffering, but in the aftermath of the dot-com bubble and 9/11 so was every other business. For every industry-funded study that purported to show how bad the problem was, there seemed to be another contrary study that showed that piracy and leaking had no effect, or even promoted sales. But Morris wouldn’t deign to argue the point. He didn’t need a PhD in economics to know that if something was widely available for free, people were less likely to pay for it. And, whatever the economists said, there was one point that was beyond dispute: leaking music and sharing files were illegal.
With the Vivendi contract in place, Morris would never again have to worry about money, but he still wanted t
o take care of his artists. The online pirates were engaged in a conspiracy against their livelihood—a conspiracy to commit copyright infringement on a historic scale. Sharing and leaking music weren’t lifestyle choices; they were crimes. Morris’ policy was to prosecute. The first round of lawsuits had failed to neutralize the problem. Perhaps a second was called for. Morris and the other music executives were now discussing the nuclear option: going beyond the corporations and suing the file-sharers directly.
Morris’ legal team spurred him to adopt this approach. Zach Horowitz, Universal’s COO, had a background in entertainment law, and was a driving force at Universal for the lawsuits. Harvey Geller, Universal’s chief litigator, was also an advocate, and saw a group of cases he knew he could win. The two were unapologetic copyright hawks for whom the lawsuits represented a chance to reconsecrate the sacred nature of intellectual property while pulling in a little cash on the side. They knew the approach was likely to generate a fair amount of bad press, but they saw this as a necessary trade-off with limited long-term consequences. Morris trusted Horowitz and Geller, and listened to these arguments. The most important thing, they all believed, was to establish a precedent that the seemingly innocent act of file-sharing could potentially have severe consequences. For capitalism to work in the digital age, sharing had to be penalized.
In internal discussions among the label executives, the lawsuits were referred to as Project Hubcap. Universal was the largest of the labels by revenue, and so contributed the most to the RIAA’s annual operating budget. In pushing for the lawsuits, the company was joined by three of the Big Five music labels—BMG, EMI, and Sony. Dissenting was Roger Ames, the head of Warner Music Group, who argued that suing one’s own potential customers was unlikely to result in long-term profitability. Many of the smaller, dues-paying independent labels objected as well. But the most vocal opposition came from a surprising source: the head of the RIAA herself. Hilary Rosen thought suing the file-sharers was a disastrous policy, guaranteed to alienate fans and leave a stain on the industry’s reputation that could last for decades. In a series of heated discussions with the label reps in late 2002 and 2003, she argued her case and made it known that she would not, under any circumstances, be the face of Project Hubcap.
She was overruled. On September 7, 2003, after 16 years with the organization, Rosen stepped down from the leadership of the RIAA. The head of their own trade organization resigning in protest was a telling sign of things to come, but the major labels weren’t paying attention. Project Hubcap had momentum, and the next day the first batch of lawsuits was filed. Two hundred sixty-one individuals were targeted, with the RIAA requesting damages of up to $150,000 a song. Although the association’s public service announcements had attempted to draw a moral equivalency between pirating a song and stealing a CD, the legal reality proved to be a hundred thousand times worse—a million-dollar fine for shoplifting.
The RIAA’s antipiracy division targeted defendants by the number of files they had uploaded, setting a threshold minimum of 1,000 songs shared. The idea was to go after only the worst offenders, but, due to technical factors, it didn’t quite work out that way. Napster and its clones tended to make one’s library uploadable by default. Savvy users often disabled this function, meaning many of the so-called “worst offenders” turned out to be clueless noobs. So to the outside world, Project Hubcap looked arbitrary and vicious. The RIAA seemed to be choosing the defendants at random, picking up IP addresses from peer-to-peer servers like Kazaa and LimeWire and subpoenaing the responsible Internet service providers for customer details. But even with these subpoenas the RIAA never quite seemed to know who it was suing. It targeted single mothers and families without computers. It targeted senior citizens and children. It targeted the unemployed and people who’d been dead for months. In one high-profile case, the RIAA targeted Brianna LaHara, a 12-year-old girl who lived in a New York City housing project and who had downloaded, among other things, the theme song from the TV sitcom Family Matters. Rather than doing the sensible thing—dropping their civil lawsuit against a child—the RIAA instead offered to settle with little Brianna, provided her parents wrote them a check for 2,000 dollars.
Project Hubcap was not popular. The lawsuits asked a few people singled out at random to pay for the collective actions of millions. The RIAA’s website was hacked and repeatedly bombarded with denial-of-service attacks. Dozens of musical artists, including many signed to Universal, disavowed the suits, siding with their fans. Technology commentators called the lawsuits “absurd,” and pointed out that, in the era of unsecured wireless hotspots, an IP address was hardly proof of legal culpability. Legal experts referred to the lawsuits as “shakedowns,” pointing out that many of the accused had neither the time nor the expertise nor the money to properly defend themselves in a court of law. The ACLU filed its own countersuit, contending that the ISP subpoenas were themselves illegal, and called the RIAA’s actions “vindictive.”
The RIAA had its own descriptive term for the Project Hubcap lawsuits. They were “educational.”
In later years, long after the dust had settled, Doug Morris would seek to play down his role in this disastrous policy. He would claim that he had had little personal involvement in Project Hubcap’s design and execution, and that he’d relied primarily on Horowitz and Geller’s advice. Perhaps that was true. But it was also true that Morris was Horowitz and Geller’s boss. It was only with his explicit endorsement that the lawsuits could have been filed. If Morris—who controlled almost 30 percent of the RIAA’s annual operating budget—had opposed Project Hubcap, it never could have happened.
It was widely conceded, even by the RIAA’s own lawyers, that the peer-to-peer file-sharers were not deliberate lawbreakers but just kids who wanted music. Their actions were selfish, perhaps, but they weren’t trying to hurt anyone. That was a far cry from the Scene participants, who from the labels’ perspective seemed like vandals intent on destroying the music business out of spite. During the flap over Project Hubcap, the Scene remained well hidden. Even within the music industry, even among specialists in intellectual property protection and copyright law, even among most pirates, very few were aware it existed.
But the RIAA knew. For years their secretive antipiracy group had been surveilling the Scene. They hung around in the chat rooms and learned the language of the subculture. They tried, as best they could, to track the shifting allegiances of the pirates and the protean relationships of the dozen or so named groups dedicated to music leaking at any given time. They built a large internal database that tracked the groups’ activities, and using this they were able to construct something that looked almost like an epidemiology map of both the origins of the leaked material and its dissemination throughout the Internet. By the end of 2003, their research kept pointing to one increasingly powerful crew: RNS.
In January 2004, the RIAA appointed Brad Buckles, the former director of the Bureau of Alcohol, Tobacco and Firearms, as its new executive vice president of antipiracy. Buckles would be paid nearly half a million dollars a year for his investigative talents and his connections to law enforcement. After his appointment, the RIAA’s antipiracy squad began to meet regularly with members of the FBI, to share evidence and intelligence, and to convince the Bureau to allocate agents to the case. It was around this time that the FBI opened its dedicated case file on RNS. Termed Operation Fastlink, the investigation grew out of intelligence collected from Operation Buccaneer, the successful prosecution against software crackers from a few years before.
The lead case agent was Peter Vu, who had joined the Bureau in 1997 and had spent his career fighting computer crime. The child of Vietnamese immigrants, Vu was a stern if melancholy presence who brought considerable intelligence and dedication to his job. In his time with the Bureau he had worked online blackmail and credit card fraud and harrowing cases of child exploitation. He was professionally obligated to look under the nastiest rocks of the Internet, and few people understood as we
ll as he did how dark the so-called “darknets” could really get.
Thus for Vu working the Scene was almost like a vacation. The targets of Operations Buccaneer and Fastlink tended not to have prior criminal convictions, and in many cases were even surprised to learn that their actions were illegal. Compared with the sort of depraved criminals and serial perverts Vu normally went after, games-cracking crews and music leakers were marshmallows—bright young kids who were terrified of prison and who, once caught, tended to plead guilty immediately and then provide almost obsequious cooperation. As a result, most of those convicted got probation, and even the worst offenders never spent more than a year or two behind bars.
Nevertheless, the economic damage they caused was real, and Vu was determined to put an end to it. His agents began meeting regularly with the antipiracy division at the RIAA to exchange information and intelligence, and to discuss the progress of the case—what little there was. RNS’ chat channels were closed off, and its recruiting strategy was to pull connected players who were already long-standing members of other groups, making infiltration difficult. RNS’ leader, whoever he was, had an excellent understanding of operational security, cultivating high-placed moles in other organizations while preventing his own from being compromised. Vu worked the case for years, and for a long time he got nowhere.
CHAPTER 13
By 2001 Brandenburg and Grill had parted ways. The compression ratios of the latest generation of psychoacoustic products were approaching theoretical limits, and the outstanding problems in the field were considered solved. The two sought other challenges. Grill, in Erlangen, went into satellite radio; Brandenburg, from his new lab in Ilmenau, into surround sound.