With MP3s under attack and major labels designing new standards, three Bay Area firms try to corner the market on online music

At the SXSW Interactive conference in Austin, Texas, last month, co-founder Mark Cuban proclaimed that the free digital music revolution was dead.

It was March 16, the closing day of the conference. Music industry supporter Paula Batson of a2b Music had been shouted down by angry members of the audience for her defense of security measures that would require Internet users to pay for music downloaded off the Internet. Meanwhile, members of the crowd at the last panel of the conference let loose on each other, most ignoring the ongoing panel. All sense of decorum was lost as the hundred or so audience members began screaming back and forth across the room at each other. An Austin DJ stood and declared that all music on the Internet should be free. A tattooed and pierced young woman screamed out that once she downloaded her music, she didn't want any restrictions on what she did with it. The moderator tried in vain to restore order.

Selling digital music on the Internet isn't going to be easy.
Consumers extol the virtues of getting music cheaper -- and quicker -- from the Internet. Artists talk about leveling the playing field and making music more readily available to the fans. The major labels are surely about to die, the argument goes, and anyway, they're no longer necessary in a digital age. In this scenario, prices will plummet as retailers simply become digital storehouses.

The only problem with the theory is that artists and labels share a common goal: making money. So, instead of making music cheaper, the digital age has created a whole new layer of business.

At the core of the issue is the question of who will control digital distribution of music. The record industry wants in: On March 1, 270 companies from around the country met in Los Angeles for the first Secure Digital Music Initiative (SDMI) meeting. Spearheaded by the pirate-hunting arm of the music business, the Recording Industry Association of America, the first goal of the closed-door SDMI meetings is to develop a digital standard for the portable players, ensuring that only secure files would be playable on the new devices.

The portable standard is slated to be completed before Christmas, in time for consumers to buy the next wave of secure, portable music players for the holidays. In the meantime, three Bay Area firms are jockeying for position.

Three years ago, Gerry Kearby was looking to do something different in the music business. He had already created (and later sold) Integrated Media Systems, creating workstations that allowed small bands and labels to create digital music in their basements. Then he approached Robert Flynn and Phil Wiser with an idea. What the three came up with was Liquid Audio, a Redwood City-based firm that secures, stores, and sells digital music files over the Internet.

"We all came from the music industry in some manner and saw that musicians couldn't get their content out to the public, so we decided we were going to try to level the playing field while protecting the artists' rights," says Flynn, Liquid Audio's co-founder and vice president of business operations.

Unlike sites such as, which makes unsecured digital music files available to anyone coming to the site, Liquid Audio is banking on the belief that most music lovers don't want to rip off artists, and that sound quality will become more important to people as technology progresses. "We evaluated every single codex out there, and this company has a lot of people who can hear music really well," says Flynn. "We didn't think that MP3 was really the best sonically to sell and listen to on the Internet."

Instead, Liquid Audio has created the Liquid Track, which uses either Dolby Digital or MPEG AAC to allow bands to encode their songs. The encoded songs can only be played on the Liquid Music Player and are "watermarked," which allows the band to trace the digital files wherever they go.

It's band- and security-friendly, and Kearby and company aren't worried that the hassle of using only the Liquid Player will deter consumers. "Look, if you are a consumer, and you are getting a sonic file [MP3] off the Internet, it's probably not great sonically," Flynn says. "Plus, right now you are probably ripping off the artist. And if you are an artist selling MP3 files, you should know that the first file you sell might be your last."

Liquid Audio stores tracks on its server, which is accessible both through various artists' Web sites and through the 300,000-song Liquid Music Network. And, in an online world in which brand-name recognition seems to be everything, Liquid has struck up partnerships with companies like CDNow, which will also make Liquid Tracks available -- which, Flynn argues, will appeal to music fans. "If I have a choice between hunting down a song by searching through seven links that might lead to a dead end, or going to CDNow to pay a buck for a song, I'll pay the buck," he says.

Unlike its main competitor, New York-based a2b Music, Liquid Audio is willing to work not only with major labels, but also with any band that can pay the $99 the company charges to encode five songs and put them up on its server. And Liquid Audio has also signed deals with Texas Instruments and San Jose-based Diamond Multimedia to ensure that the next generation of portable music players will include Liquid Tracks in their formats.

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