CD COPY PROTECTION TAKES CENTER STAGE AT IRMA SEMINAR

Keynoter Strauss Zelnick, chmn. of Nippon Columbia and former BMG executive, said recording industry needed 4-pronged strategy for fighting piracy: (1) Copyright legislation. He said industry had been good at initiating piracy legislation throughout world. (2) Copyright law enforcement. Zelnick said industry had been “bad” enforcer and should consider prosecuting “casual” pirates on assumption that would mitigate broader problem. He said he disagreed with those who argued prosecutions would be “a bad PR move.” Unauthorized digital downloads amount to “stealing music,” Zelnick said. “It’s like stealing a T- shirt.” (3) CD encryption. “Once you encrypt, you dissuade casual pirates.” (4) Creation of “a legitimate alternative” to free unauthorized music downloads.

Zelnick dismissed industry “moaning” that piracy alone was reason why recorded music sales were slumping. He said he wasn’t arguing that “we shouldn’t try putting the pirates out of business.” But he said recording industry’s “real problem is the lack of hit records.” There’s common adage at record labels that “hits cure all ills,” including bad management. “We manage to co-exist with pirates” because consumers like packaged goods, Zelnick said. He said rock group Creed had sold 900,000 CDs “directly to a market that burns” CD copies.

Responding to audience questioner whether he believed home copying stimulated sales of packaged music, as CE industry has argued for years, Zelnick said he supported contention that “fair use may encourage consumption of legitimate product.” Public’s affinity for packaged media makes him skeptical of success of satellite radio services Sirius and XM because he doubts consumers will be willing to pay minimum $10 monthly subscription fee to give up CD playback in car, Zelnick said. As result, he predicted Sirius and XM faced “huge problem” in “eating the lunch” of packaged music business.

Sami Valkonen, who soon is leaving BMG Distribution as senior vp-new media & business development to become private consultant, told IRMA that fact that CD unit shipments in U.S. were down 9% in first half couldn’t be attributed only to lack of hit titles and bad economy. CD copying and Internet piracy “are significant contributors,” Valkonen said. Booming sales of blank CD-Rs may well be good news for media manufacturers that constitute IRMA membership, he said, but “a viable music industry is in the best long-term interest of all related industries and consumers.”

“Old-school” copy protection methods such as “lockout” encryption or manipulated sound degradation would only alienate consumers further, Valkonen said. Playability problems are biggest flaw of current old-school solutions, he said. Industry is “shooting itself in the foot” by introducing “premature solutions.”

Comments came week after Universal Music announced first copy-protected title despite backlash over playback problems encountered with BMG’s recent Natalie Imbruglia release, White Lilies Island. Customers who purchased Imbruglia CD in Europe have reported playback incompatibility and malfunctions in variety of CD, DVD and PC hardware. BMG used Cactus Data Shield (CDS) copy protection from Tel Aviv-based Midbar Tech for that album -- whose packaging didn’t disclose that CD had copy protection and might not play in some equipment. When retailers made BMG aware of problems, label agreed to replace CD and set up hotline for claims. CD purchasers are receiving package with prepaid Jiffy Bag return mailer for balky disc. Mailer and postage cost BMG about $1.50 and cost will be same to send customers replacement CD. But flap over Imbruglia CD will be even more expensive for label. Besides pressing new CDs, title had to be completely remastered without copy protection and new stampers from remastering had to be made for replication.

Full extent of Imbruglia CD’s incompatibility with hardware isn’t known. BMG called CD’s incompatibility “significant problem.” But spokesman said that of 35,000 sold to date number of returns wasn’t large -- “in the tens, not hundreds.” Label isn’t recalling copy-protected discs in stores or replacing ones where customer has problem.

In his IRMA presentation, Valkonen sidestepped any specific reference to BMG flap. In interview later, he declined comment when asked his opinion of BMG actions and their backlash, saying he preferred to let his remarks on old-school methods and their affect on alienating consumers speak for themselves. Valkonen said his preference was to accentuate as better alternative systems of CD copy management that focused on “consumer benefits.” As example, he cited allowing consumers to have “drag-and-drop” secure digital files on their PCs, which avert need for “cumbersome” CD ripping. Disc authentication methods are another example, he said -- having links to artist sites accessible only to those who have authorized original CD in PC’s drive. Valkonen said he also favored easing transferability of music files to portable devices and facilitating secure burning of digital access files so consumers still could make compilations.

DVD boom and its impact on long-term viability of VHS was another IRMA theme. Robert Hurley, Sony Disc Mfg. senior vp- sales & mktg., said huge installed VHS base would support that format’s viability for years, despite year-to-year declines in demand for blank tapes and VCRs. Nevertheless, Hurley said Sony projected DVD household penetration would reach 24% in U.S. by end of 2001, growing to 86% by year-end 2005 -- same level as VHS penetration this year. Earlier, IRMA Pres. Charles Van Horn also defended market viability of VHS, saying public had $350 billion investment in format worldwide and that installed base of 451 million VCR households globally represented 52% penetration. Although U.S. consumer demand for VHS blank tapes is expected to decline year to year, Van Horn said, respectable 330 million units are projected to be sold in 2002.

Also defending VHS market’s viability, Pat Wyatt, pres. of Fox Consumer Products, said her company believed VHS households in U.S. would continue to vastly outnumber DVD households in 2005. “To those who say the VHS market is dead, I say phooey to them,” Wyatt said. She said Fox’s VHS catalog business was up by double digits compared with flat growth for rest of industry. She said studio had tried to “lobby against” trend to de- emphasize VHS and give more shelf space to DVD. At same time, Wyatt said, Fox pulled out stops in promoting DVD release of Planet of the Apes as title to be owned. As lure, she said studio packed 13 hours of footage into title and trumpeted its value-added packaging. She took specific jab at Warren Lieberfarb, saying she differed significantly in her philosophy from Warner Home Video pres., who she said “puts very little into the packaging” of DVD and tries to sell it at lowest price possible.