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

by Stephen Witt

  Def Jam in New York; Interscope in Los Angeles; Cash Money in New Orleans—Morris’ market corner on the rap game was paying dividends, and the first 12 months after the merger were fantastic for Universal, exceeding even the rose-colored predictions that the deal prospectus had offered to shareholders. The overall reduction in head count and the consolidation of the companies’ supply chains had brought savings in excess of projections, and the bargaining power of the combined entity pushed the average realized retail price of an album above 14 dollars per disc.

  The strong pricing was aided by collusion. As the U.S. Federal Trade Commission would later reveal, for nearly six years the Big Six—after the PolyGram merger, the Big Five—had quietly worked together to convince large retailers like Musicland and Tower Records to refrain from selling discs at a discount, in exchange for access to pooled advertising funds. Deals of this sort violated federal antitrust law, and since the Big Five collectively controlled close to 90 percent of the U.S. compact disc market, the impact on consumers was substantial. The estimated cost from 1995 to 2000 was half a billion dollars—two bucks from the pocket of every American.

  Everything was working for Morris. The international market presence, the streamlined distribution network, the talent on the roster, the conspiracy against the public—the resulting profits were immense. In 1999, running the biggest music company in the world during the best year the industry would ever see, Morris was not just the most powerful record executive on earth—he was actually the most powerful record executive in history.

  It was a short-lived distinction. In June 1999, an 18-year-old Northeastern University dropout by the name of Shawn Fanning debuted a new piece of software he had developed called Napster. As a teenager, Fanning had fallen in love with computers, and was a participant in the IRC underground. But one thing had always bothered him about the #mp3 ecosystem: there was no easy way to find the files. Now, from his dorm room, he had hit upon an ingenious solution: a “peer-to-peer file-sharing service,” which connected users to a centralized server where they could trade one another mp3s. Music piracy, previously limited to a small sphere of tech-savvy college students, was now available to everyone. Almost overnight, the freely available Napster client became one of the most popular applications in software, and with it came a tsunami of copyright infringement.

  Napster was a natural monopoly whose selection and speed only improved as more people joined. By early 2000 there were almost twenty million users, and by summer over 14,000 songs were being downloaded every minute. Every song ever produced anywhere could be procured in seconds. Download speeds were improving rapidly, even from a home connection, and songs often arrived in less time than they took to listen to. In essence, the song could be streamed. Napster wasn’t just a file-sharing service; it was the infinite digital jukebox. And it was free.

  The RIAA had tracked Napster practically from the moment of its inception, but it took the major labels a few months to understand the severity of the problem. The task of informing them fell to Hilary Rosen, the RIAA’s CEO. Rosen had spent most of her career working for the association and, perhaps more than any other person in the industry, understood the perils and the promise of digital technology. On February 24, 2000, the day after the Grammy Awards, she addressed a group of music business power brokers in the conference room of the Four Seasons Hotel in Beverly Hills. The scene was later described by technology reporter Joseph Menn in his book All the Rave, the definitive account of Napster’s rise and fall:

  Staffers downloaded the software and registered in front of the eyes of a couple dozen label bosses. Then Rosen asked the executives to start naming songs. Not just big hits, but tracks deep into albums, either brand-new or obscure. The record men took turns calling out more than twenty songs. The staffers found them every time, and fast. Soon no one wanted any more convincing that the threat was serious. As the crowd grew increasingly uncomfortable, a Sony executive tried to cut the tension. “Are you sure suing them is enough?” he asked. The capper came when someone suggested a hunt for the ’NSYNC song “Bye Bye Bye.” The cut had been on the radio just three days, and the CD hadn’t been released for sale yet. And there it was.

  Rosen became the public face of the record industry’s opprobrium. This made her an unpopular figure. The message boards and chat rooms were filled with unflattering descriptions of her personality and her appearance, and she received numerous death threats. The irony was that, behind the scenes, she was the industry’s biggest dove. As she publicly denounced the service, she privately pushed for Napster and the major labels to cut a deal.

  This accommodationist approach was shared by several of the other major label heads. Junior was interested, and approached Napster several times to negotiate a stake in the venture. So, too, did his competitor Thomas Middelhoff, the German-born head of Bertelsmann AG, who proved to be a better dealmaker. In late 2000 Middelhoff announced that Bertelsmann would enter a joint venture with Napster to develop paid, legal channels using peer-to-peer tech.

  But Napster was not so attractive an investment as it appeared. Fanning, conciliatory and deferential by temperament, had no business experience. He instead surrounded himself with those he saw as talented, and mostly that meant hiring friends and family. One of his early hires was Sean Parker, whom Fanning knew from an mp3 trading channel. Parker, 19, was glib and handsome, and soon became the public face of Napster. (A similar deal with Facebook would later make him one of the richest people in the world.) But the most important early hire wasn’t Parker; it was Shawn Fanning’s uncle John.

  Shawn was in thrall to John Fanning. Much of what he knew about programming came from his experiences hanging around at John Fanning’s previous business venture, Chess.net. As CEO of that company, John had appeared to be the model of a successful Web entrepreneur, and was a generous benefactor to his nephew. He had spent years paying Shawn for good grades, and while Shawn was still in high school, had bought him a purple BMW.

  But it was all based on credit. John had a habit of not paying his bills, and this made his life a lot of fun. In 1999 alone he lost a judgment over a $17,000 bank debt, lost another judgment over a $26,000 credit agency debt, and his former lawyer filed an affidavit saying John owed him $94,000 in unpaid legal fees. That same year his wife lost a $13,000 judgment over a credit card debt, and she was being sued by her condominium board over nonpayment of fees. Despite appearances, John’s business ventures were struggling—his previous company, Cambridge Automation, had been dissolved, and Chess.net was falling apart, with employees grumbling about not being paid. Worst of all was the felony assault charge John Fanning was facing for beating up the maintenance man of his apartment building. (The charge was dismissed in 2002, after Fanning served six months of pretrial probation.)

  Shortly after Napster’s founding, though, Fanning struck the deal of a lifetime. In May, just before the public debut of the software, John, 35, had convinced Shawn, 18, to sign a piece of paper granting him 70 percent of Napster’s equity in exchange for his services as chairman and CEO. John had quickly abdicated the CEO position, but he remained the chairman of the company, and as majority shareholder, was legally in control.

  He paid little attention to day-to-day business. As Shawn and Sean set up offices in Silicon Valley, John remained on the other side of the country in Hull, Massachusetts, using the salary he drew and private sales of Napster stock to rehab a condemned mansion he had purchased years before. As it became clear that Napster would not survive without industry support, executives at the company implored him to strike a deal with the majors. John responded with recalcitrance: “Fuck the record industry.”

  Morris watched this tortured saga from a distance. He did not share Bronfman’s or Middelhoff’s enthusiasm for Napster, he had not attended the meeting after the Grammys, and he had no personal interest in taking a stake in the Fannings’ revenue-free “business.” Before Napster, he had regarded the mp3 as an annoyance, if he ever thought of it at
all. He was a music guy, not a technology guy, and for a long time he stubbornly refused to acknowledge it might impact his industry. His job was to make hits, and when he looked at the mp3, he didn’t see how it could help him do that.

  But Napster took file-sharing from the underground to the mainstream, and for Morris this was simple thievery, conducted on an unprecedented scale. The Napster user base was criminal, and so, by extension, was the company itself, seeking to profit from an illegal trade in copyrighted material that was the rightful property of Universal Music Group. He had been down this road before with cassette tape trading, and he began to see how this new technology presented an existential threat to the business model of the 14-dollar compact disc.

  The most obvious idea was to create a legal paid alternative. Bronfman was bullish on the future of digital tech and, at Seagram, began directing capital toward a wide variety of ideas. The company’s annual report from 2000 sounded like the mission statement from a venture capital firm: “Our investments include internal infrastructure, which includes hardware and software that will allow the music business to be conducted over the Internet, such as bluematter.com and Jimmy and Doug’s Farm Club, as well as investments in GetMusic, ARTISTdirect, InterTrust Technologies, ReplayTV, eritmo .com and others.”

  It was a list of busts. Within five years, most of the ventures would no longer exist, and the surviving stragglers would have no meaningful impact. Morris—and Bronfman, and dozens of other corporate executives throughout the entertainment industry and beyond—had fallen victim to the promises of the dot-com hucksters.

  Rosen alone could see where the music industry stood. In repeated conversations, Morris doggedly insisted that his tech investments would obsolesce Napster. Rosen tried to disabuse him of this notion—at first patiently, then, as time went on, with an increasing sense of exasperation. She could see that Morris was operating in a world he didn’t really understand, and she felt he wasn’t listening to reason. Just as it was in music, tech was about talent, and Morris, overseeing a confusing panoply of competing, overlapping ventures from an office on the wrong side of the country, didn’t have it.

  The most damning example was his enthusiasm for Pressplay, an online music store that Morris would sink tens of millions of dollars into developing. The venture was a coproduction between Universal and Sony, and the cooperation between these former rivals led Morris to be bullish, despite the store’s complicated licensing structure and limited selection. On several occasions he told Rosen to stop talking to Napster, to stop negotiating with the Fannings, to stop worrying so much, because he had something that would “make it all go away.” In later years, Pressplay would be a reliable starting point for listicles of the “Top All-Time Tech Busts.”

  Rosen was in a tough position. She understood the industry’s future better than any of the CEOs, except perhaps Middelhoff. But ultimately, these men were her bosses, and while on conference calls she privately objected and pushed for accommodation with the Fannings, in public she was forced to act as the music business’s hatchet woman.

  The first stage was to get law enforcement involved. Rosen and her antipiracy team had regular conversations with the Department of Justice, trying to convince them to go after the more brazen profiteers like mp3.com and Napster. This proved difficult. The music industry was not well liked on Capitol Hill. The record execs had stood their ground against Tipper Gore and Bill Bennett, and won decisive battles, but those victories had left the congressmen—and their wives—looking like humorless scolds. Even among liberals, the attitude on Capitol Hill was not favorably predisposed toward the record labels.

  Other sectors of the entertainment industry had much more influence. The movie industry in particular was well represented. This was largely due to the work of Rosen’s movie business counterpart, Jack Valenti, the longtime head of the Motion Picture Association of America. Valenti was a legend on Capitol Hill, at least in part because he had bowed to the demands of the culture police and instituted a self-regulatory rating system for movies. Valenti’s rating system was deeply flawed—at times it was incomprehensible—but it kept the industry in good standing on Capitol Hill, and for Hollywood, at least, the sacrifice of artistic integrity was worth it.

  To its everlasting credit, the recording industry refused to make this compromise. Ratings systems had an undeniable effect on culture, determining what kinds of product got made, and for how much, and what they featured. Executives like Morris recoiled at the idea of a secret council of humorless nincompoops deciding the proper age to first listen to the Beatles—or 2 Live Crew, for that matter. Morris had personally championed the First Amendment rights of his artists with enthusiasm, sometimes at great personal cost. Perhaps it was difficult to disentangle his personal ideology from his economic incentives, but that only made his defense all the more sincere.

  But for his principles he would be made to suffer. Congress had failed to protect the teenager from the moral depredations of the music industry; now it was disinclined to protect the music industry from the file-sharing of the teenager. The elected officials tended to be forthright about their motivations in this regard. In repeated conversations with Morris’ lieutenants, they made clear that their constituencies generally supported file-sharing and generally opposed the aggressive enforcement of copyright law. Like the “blue laws” against sodomy, the guarantees of intellectual property protection were in danger of obsolescence—on the books, but unenforced. Although he was not a lobbyist, Harvey Geller, Universal’s chief litigator, met occasionally with members of Congress and pushed the case for stricter enforcement against the file-sharers. He was told, repeatedly, that such a move would likely cost votes. “Politicians pander to their constituents,” Geller would later say, describing these encounters. “And there were more constituents stealing music than constituents selling it.”

  Other industries did not face this problem. The movie business put the FBI’s antipiracy warning on every videotape they shipped—but they had Valenti. The publishing industry churned out at least as much filth each year as the musicians did—but they also offered big book advances to retiring politicians. The software manufacturers had enjoyed the benefits of numerous Department of Justice antipiracy campaigns—but many of them secretly collaborated with the NSA. The music industry stood alone in its defiant refusal to cooperate, and now it found itself abandoned by the state. If it wanted to enforce its intellectual property rights, it would have to do so on its own.

  So Morris—and, by extension, the rest of the industry—came up with a plan for the mp3. They were going to sue it out of existence. This was a two-pronged strategy. The first salvo was RIAA vs. Diamond Multimedia Systems. Using their trade organization as a front, the major labels sued the device makers themselves. The lawsuit sought to obtain an injunction prohibiting the sale of Diamond’s Rio portable digital audio device, and any others like it, suffocating the nascent mp3 player market in the cradle. The second lawsuit, A&M Records vs. Napster, was filed by 18 record companies, including Universal. The suit alleged that Napster was legally responsible for the copyright infringement occurring over its peer-to-peer network, and that the company was liable for damages.

  The two lawsuits wound through various civil courts and various stages of appeal. Napster peaked at sixty million users, while Diamond’s Rio player was plagued by various design flaws and sold poorly. The lawsuits had a chilling effect on industry R&D. As long as it might be found liable for the copyright infringement of its users, no legitimate software company was going to market a peer-to-peer file-sharing app, and, facing the possibility of a court-ordered injunction removing it from the shelves, no legitimate device maker was going to invest in designing a player for mp3s.

  The most striking thing about this localized investment drought was that it occurred amidst the general dot-com deluge. The world had gone screwy, and the normal laws of capital allocation no longer applied. In January 2000, Morris’ old bosses at Time Warner announced a
startling transaction: they would be selling their company—their whole company—to America Online, the company whose business model was to drown the earth in unsolicited junk mail CDs. In exchange for $164 billion of hyperinflated AOL stock, Time Warner would sell it all—the magazines, the cable stations, the music labels, all of it—to an upstart Internet service provider trading at 200 times earnings that even an unsophisticated technology observer like Morris could see was a total house of cards.

  It was the stupidest transaction in the history of organized capitalism. But for Bronfman it was a model deal, one to be imitated. Having spent the last six years buying, he now felt that the time had come to sell. In June 2000, he announced the dissolution of the Seagram group, marking the end of the Bronfman family’s eighty-year liquor empire. The remaining booze and beverage assets would end up being split among Diageo and Coca-Cola. Universal would be sold to Vivendi, the French media conglomerate.

  Vivendi and Seagram were practically doppelgangers. The company was run by a flamboyant megalomaniac named Jean-Marie Messier, who, like Bronfman, had been seduced by the allure of celebrity, and had transformed a boring French water utility into a technology and entertainment conglomerate. These like-minded business geniuses were theoretically to share joint responsibility for overseeing the Universal entertainment assets. In practice, though, Junior was made “Executive Vice Chairman,” a position about as important as it sounded.

  Morris, by contrast, was a franchise player, and retained control. The merger meant a chance to renegotiate the terms of his employment in the middle of the dot-com boom, bargaining against a free-spending Frenchman who made even Bronfman look cheap. The resulting contract—let’s call it The Contract—went into effect in 2001, and for the next decade Morris was the best-paid man in music.

  Like Junior before them, the suits at Vivendi did not quite seem to understand what they were purchasing. They had acquired telephone companies, tech investments, and media and publishing properties, funding these purchases by borrowing heavily. As so often with deals of this kind, the investment bankers who sold the bonds assured the public that these investments were sound. But servicing this debt required a reliable stream of incoming cash, and, once the contracts were signed, Vivendi began pushing Morris for estimates of future earnings. These he declined to provide. He explained to his new bosses that his sales were subject to shifting whims of culture that he found impossible to understand and that he was powerless to control. If perhaps he was overconfident in his technology investments, then by contrast a lifetime of scouting the order-taker had taught him that there was no such thing as a sure thing. The idea that some big-shot corporate tastemakers dictated their aesthetics to the masses was absurd, and Morris’ entire career was predicated on the belief that the opposite was true. From the Music Explosion onward, he had always paid close attention to what the people wanted, and he tried his best to give it to them, even when it meant overruling his own critical judgment. Morris was agnostic about his own taste—even his own abilities. How was one 63-year-old white guy in a corporate office in Manhattan going to know what the kids wanted?