The first DMX meetings were between Vidich, Gage, Raduchel, and others at Warner Music's parent company, the newly formed AOL Time Warner. At this point, the internet bubble had already popped, and once-promising copyright-protection companies such as Liquid Audio and Reciprocal had their own problems and were in no position to bail out the recording industry. Warner's people didn't want to approach Microsoft, which owned the Windows Media audio format, because executives feared the predatory software giant would rope the major record companies into an unfavorable deal. So they picked a longtime partner, Sony Corp., which had had a huge role in creating the original CD. Vidich, Gage, and Raduchel flew all over the world to meet with Sony employees such as Koichi Tagawa-at the Peninsula Hotel near Warner Music in Beverly Hills, at Sony headquarters in Tokyo, and at Sony Music's US headquarters. One such meeting was w scheduled for September 11, 2001, in New York City, and after the attacks, shell-shocked Japanese reps realized they were stranded, with nothing better to do than talk about the future of digital music. Gage and Raduchel helped them hang on to their hotel rooms for extra nights, since there was absolutely no way for them to fly back to Tokyo that day.
The secret talks heated up. Vidich and Gage enlisted executives from other companies. Larry Kenswil, the digital-strategy expert at Universal Music, the world's biggest record label, agreed to join. Sony reps insisted on inviting Wally Heijnemans, a senior strategy executive from Philips, because Sony and Philips had a history of working together to create high-tech music products. Sony Music's Al Smith was on board, too. Finally, the Warner group approached James Higa, a vice president at Apple Computer who for years had served as chief executive officer Steve Jobs's number two. (Warner enlisted Apple after a recommendation from Sony, which had been working with the computer company on various projects at the time.) The talks went well, as Gage remembers. The group started to lean toward a new digital music format-Advanced Audio Coding, or AAC, a sort of update to MP3 developed by audio engineers including a team from Fraunhofer Institute in Germany. Unlike MP3, this format made room for copy protection. In Kevin Gage's vision, copy-protected AAC files could have been supported in new digital music stores-and portable players-from AOL, Sony, and Apple. Everybody would have won.
But there was a snag. The reps from Sony Corp. opposed AAC. They preferred their own format, ATRAC3,* for which Sony would have received a CD-like royalty payment, of course. There were other problems, too. Apple's Jobs and Sony's Nobuyuki Idei weren't getting along. They had discussed making Sony's television-focused hardware and Apple's new strategy of combining movies, pictures, music, and other entertainment on the same desktop more compatible. But apparently the technology moguls didn't come out of it as friends. "You know Steve, he has his own agenda," Idei later told ex for which Sony would have received a CD-like royalty payment, of course. There were other problems, too. Apple's Jobs and Sony's Nobuyuki Idei weren't getting along. They had discussed making Sony's television-focused hardware and Apple's new strategy of combining movies, pictures, music, and other entertainment on the same desktop more compatible. But apparently the technology moguls didn't come out of it as friends. "You know Steve, he has his own agenda," Idei later told exRed Herring editor Tony Perkins in a website interview. "Although he's a genius, he doesn't share everything with you. This is a difficult person to work with if you are a big company. We started working with them, but it is a nightmare." The Sony-Apple politics trickled down to the DMX group. Al Smith of Sony Music was caught in the middle, wanting to contribute to a new digital music technology but not wanting to alienate his superiors at Sony Corp. The Warner reps who'd started the whole thing, Gage and Vidich, were just frustrated. "There was a certain sense that we have done 99 percent of this work and gotten to this point-and Sony was in a favorable position to hold it up," Gage says. Finally, in early 2002, the talks disintegrated. editor Tony Perkins in a website interview. "Although he's a genius, he doesn't share everything with you. This is a difficult person to work with if you are a big company. We started working with them, but it is a nightmare." The Sony-Apple politics trickled down to the DMX group. Al Smith of Sony Music was caught in the middle, wanting to contribute to a new digital music technology but not wanting to alienate his superiors at Sony Corp. The Warner reps who'd started the whole thing, Gage and Vidich, were just frustrated. "There was a certain sense that we have done 99 percent of this work and gotten to this point-and Sony was in a favorable position to hold it up," Gage says. Finally, in early 2002, the talks disintegrated.
A few months later, Vidich was in his office, on the thirtieth floor of 75 Rockefeller Plaza in New York City, when he received a phone call. It was from his boss, Barry Schuler, then president of AOL. Schuler had been meeting off and on for months with a colleague-Steve Jobs of Apple Computer-sometimes over dinner at Schuler's house in northern Virginia. At first Schuler was trying to get Jobs to include an AOL platform on the Macintosh computer operating system, which didn't work out. But they started talking about digital music. Jobs showed Schuler a new portable music player Apple had put out called the iPod. At one point, Jobs called Schuler at his AOL Time Warner office, and Schuler pinged Vidich, asking him to join the call. Of course, Of course, Vidich said. Jobs rambled animatedly for a while. The Apple CEO told Vidich and Schuler the digital music services of the time, Pressplay and MusicNet, had gotten it all wrong. He wanted to talk about something new. Something digital music fans would find more interesting. Vidich listened carefully. Vidich said. Jobs rambled animatedly for a while. The Apple CEO told Vidich and Schuler the digital music services of the time, Pressplay and MusicNet, had gotten it all wrong. He wanted to talk about something new. Something digital music fans would find more interesting. Vidich listened carefully.
THE MYTHOLOGICAL AURA surrounding Steven Paul Jobs was bright enough to impress even veteran record label executives who were impervious to getting starstruck. His back story rivaled that of Madonna or Bruce Springsteen. Born in 1955, he was adopted as a baby by a South San Francisco couple, Clara and Paul Jobs. His father was a tinkerer who spent weekends fixing and reselling jalopies. He had been a Coast Guard engine room machinist, a handy background for his later work at International Harvester and, when Steve was at elementary school, Spectraphysics. To find work, Paul Jobs moved the family to Mountain View, a quiet town outside Palo Alto where a Hewlett-Packard engineer befriended young Steve and gave him a carbon microphone to play with. surrounding Steven Paul Jobs was bright enough to impress even veteran record label executives who were impervious to getting starstruck. His back story rivaled that of Madonna or Bruce Springsteen. Born in 1955, he was adopted as a baby by a South San Francisco couple, Clara and Paul Jobs. His father was a tinkerer who spent weekends fixing and reselling jalopies. He had been a Coast Guard engine room machinist, a handy background for his later work at International Harvester and, when Steve was at elementary school, Spectraphysics. To find work, Paul Jobs moved the family to Mountain View, a quiet town outside Palo Alto where a Hewlett-Packard engineer befriended young Steve and gave him a carbon microphone to play with.
Like his adopted father, Steve was a straight shooter who easily grasped mechanical concepts. Third grade bored him, so he shifted to other pursuits-dropping off live snakes into classrooms and blowing up small homemade bombs. One fourth-grade teacher, Imogene "Teddy" Hill, saw immediately that Jobs was a gifted child and pushed him to skip fifth grade. But he didn't like his hardscrabble junior high, so he convinced his parents to move to Los Altos, heavy with electrical engineers from Lockheed and other companies specializing in electronics and miniaturization. Jobs attended junior high in nearby Cupertino, a place that would later have even more significance in his life, and met a fellow late-1960s geek named Bill Fernandez.
Jobs and Fernandez, an attorney's son, had no interest in sports, unlike the rest of their classmates. But they were obsessed with electronics, and spent endless hours building stuff in their own garages and the garages of friendly local engineers. One of these mentor types was Jerry Wozniak, who worked for Lockheed, and had a son, Stephen, who had spent his one year at the University of Colorado not achieving much by way of academics. Steve Wozniak had earned the wrong kind of attention from the dean of students after programming computers in the campus data center to spit out piles of paper declaring "FUCK NIXON." "The Woz" left CU and returned to Cupertino. Wozniak befriended Fernandez. Conveniently, Fernandez had a nice workbench in his garage.
Wozniak and Fernandez built what they called a "Flair Pen or Cream Soda Computer," on which lights flashed when users flipped switches. Fernandez invited Jobs over to see it, and he was impressed. No other kid in Cupertino knew more about electronics than he did, or so he thought until he met the Woz, who was five years older. They became friends immediately. Both were loners, and while they shared a passion for electronics and computers, it became obvious that Wozniak was purely into the technology while Jobs had higher ambitions for himself. In the meantime, he was happy to meet the Woz's friend John "Captain Crunch" Draper, who showed the misfit electronics prodigies how to "phreak" AT&T telephone technology using something called a "blue box" and make free long-distance calls whenever they wanted.
As Jobs grew older, he went with the times, smoking his share of pot and hallucinating the sounds of Bach in a wheat field during an LSD trip. He enrolled at Reed College in Portland-where James T. Russell, who filed the first patents for the technology leading to the CD, had received his physics degree almost twenty years earlier-and dropped out at age eighteen. It was 1974, and he was living with his parents when he spotted a classified ad from Atari, makers of the hot new video game Pong Pong. By then a hippie, dressed in rags, Jobs got the job.*After a brief early hiatus from Atari to track down a baba in India, Jobs returned home and rediscovered his friendship with Wozniak, by then a Hewlett-Packard engineer in Silicon Valley. The Woz was addicted to an Atari driving game, Gran Track Gran Track, and showed up at Jobs's office to play all night on the company's production-room floor. In exchange, Wozniak gave Jobs free, valuable engineering advice. During this time, Atari founder Nolan Bushnell approached Jobs with an idea for a video game, and Wozniak ended up designing the classic Break-Out Break-Out in forty-eight hours while Jobs fetched him candy and Coke. Bushnell paid Jobs his fee of $1,000 for the game, but Jobs told Wozniak he'd received $600-and paid the Woz a lowball $300. in forty-eight hours while Jobs fetched him candy and Coke. Bushnell paid Jobs his fee of $1,000 for the game, but Jobs told Wozniak he'd received $600-and paid the Woz a lowball $300.
In general, the Steves had very different interests. Jobs delved into Zen Buddhism, and Wozniak was attending meetings of the Homebrew Computer Club in Menlo Park, where he learned to build printed circuit boards that would ultimately drive color displays. He started bringing Jobs to the meetings, and soon they decided to form a company to sell circuit boards to hobbyists who wanted to build their own crude computers. It fell to Jobs to come up with the name, and he decided on Apple. It wasn't because of his favorite band, the Beatles, who owned a famous record label by the same name in London. It was because he had fond memories of working in an apple orchard as a teenager one summer in Oregon. Against his father's wishes-Jerry Wozniak was wary of his son forming a company with a partner who didn't actually invent products-Steve Wozniak agreed to sign a ten-page document forming Apple Computer on April 1, 1976. To generate a budget, Jobs sold his Volkswagen bus for $500, with the price marked down due to a poorly timed engine explosion, and Wozniak sold his HP calculator for $500. Apple's first customer was a new chain of computer stores, the Byte Shop, whose owner liked Wozniak's circuit boards so much he ordered fifty of them for $25,000. The hardware would soon morph into a bona fide computer, the Apple I. "We didn't build the computer in a garage," Wozniak later told Rolling Stone Rolling Stone. "I built most of it in my apartment and in my office at Hewlett-Packard, where I was working at the time. We just used the garage to assemble the parts toward the end. I don't know where the whole garage thing came from. Maybe it's because Bill Hewlett and David Packard built their machine in a garage, everyone assumed we built ours there, too. But really, very little work was done there." By the end of that year, Apple I sales generated almost $100,000.
Next, the Woz designed the Apple II in his kitchen. Jobs kept hustling up customers, often making sales calls in bare feet and ratty jeans. They recruited employees. Atari's Rod Holt charged $200 a day, which the Steves claimed was no problem even though they had barely any money; Holt came up with a new power supply so Jobs could achieve his Zen Buddhist vision of eliminating the loud fan whirring inside every computer of the era. (Eventually Holt more than made up for his early lost salary, becoming an Apple engineer and taking a 10 percent stake in the company.) Wozniak was busily creating new products. Endowed with equal parts perfectionism and a sense of urgency, Jobs would get a vision in his head of a new product that he knew would excite the personal computer users. Then he would lean incredibly hard on his employees, including Wozniak, to design it quickly and exactly to his specifications. He wanted the casing for the Apple II to look like a popular, boxy dorm stereo called the KLH, for example, and forced his crew to work morning till night improving rejected prototype after rejected prototype. Jobs's relentlessness eventually took its toll on his friendship with Wozniak; within four years, the inventor would leave the company. But in 1977, Apple took more than three hundred orders for Apple IIs. Jobs started to tap into the power of his charisma. His big, slightly goofy nose gave him the look of the gentle electronics geek that was a big part of his personality, while his sharp eyebrows and fierce stare went with the unwavering confidence and bossy precision that sometimes drove his employees crazy.
"You'd work on something all night, he'd look at it in the morning and say, 'That sucks,'" said Steve Capps, a programmer who later quit Apple, then returned to work on the Macintosh team. "He'd want you to defend it. And if you could, then you were doing your job, and Steve respected you. If not, he'd blow you out of the water."
In 1979, Apple Computer sold $7.2 million worth of stock. Jobs was a millionaire at twenty-four. He bought a house in Los Gatos. He combed his hair and occasionally wore suits. In 1980, the week John Lennon was murdered, Apple went public, selling 4.6 million shares in less than an hour, the most successful public offering to date. Jobs was worth $217.5 million. He landed on the cover of Time Time in 1983. A year later, he paid the advertising firm ChiatDay $1.5 million to create one of the most famous television commercials of all time-"1984," in which a runner destroys a video screen of Big Brother, freeing bald drones in space suits. It ran exactly once, during the Super Bowl, introducing the Macintosh on January 24, 1984. This new personal computer would revolutionize Jobs's industry, but it was a few years ahead of its time. It caught on with artists, designers, and college students, but it led to Jobs's biggest business failure. Mac sales fell far under projections by Christmas 1984. Apple's board voted Jobs out of the company. in 1983. A year later, he paid the advertising firm ChiatDay $1.5 million to create one of the most famous television commercials of all time-"1984," in which a runner destroys a video screen of Big Brother, freeing bald drones in space suits. It ran exactly once, during the Super Bowl, introducing the Macintosh on January 24, 1984. This new personal computer would revolutionize Jobs's industry, but it was a few years ahead of its time. It caught on with artists, designers, and college students, but it led to Jobs's biggest business failure. Mac sales fell far under projections by Christmas 1984. Apple's board voted Jobs out of the company.
For the next decade and a half, independently, Jobs and Apple suffered through extreme highs and lows. Thanks to a $20 million stake from future presidential candidate Ross Perot, Jobs's post-Apple startup, NeXT, put out a snazzy computer called the Cube. It was a bust, despite a few sexy new ideas, like an efficient magnetic drive rather than an old-school floppy-disc drive, and a sleek, black-box shape. But Jobs recovered from this elaborate setback, aiming the glare of his considerable charisma toward the movie industry-he bought a special-effects company known as the Graphics Group from Star Wars Star Wars director George Lucas for $5 million, and dumped in $5 million of his own money. This was the beginning of Pixar, the computer-animation firm that would create director George Lucas for $5 million, and dumped in $5 million of his own money. This was the beginning of Pixar, the computer-animation firm that would create Toy Story, Finding Nemo, Toy Story, Finding Nemo, and and Cars Cars and wind up with seven Academy Awards. Meanwhile, Microsoft, which over Jobs's protestations had designed the Windows operating system along the same lines as the Macintosh operating system, eclipsed Apple as the world's largest software company by the early 1990s. In turning his company into a monster, just in time for the internet, Bill Gates left Apple behind. "Apple stopped creating," Jobs told and wind up with seven Academy Awards. Meanwhile, Microsoft, which over Jobs's protestations had designed the Windows operating system along the same lines as the Macintosh operating system, eclipsed Apple as the world's largest software company by the early 1990s. In turning his company into a monster, just in time for the internet, Bill Gates left Apple behind. "Apple stopped creating," Jobs told Rolling Stone Rolling Stone. In the fourth quarter of 1995, Apple lost $68 million and laid off 1,300 employees.
Soon a new Apple CEO, Gil Amelio, started nursing the company back to health, taking tax writeoffs for the unsold inventory, securing key loans, and hiring Jobs as a "special adviser." It wasn't enough. Jobs rode back into Apple's Cupertino headquarters as Amelio's replacement in summer 1997. At first he was Interim CEO and made a big deal to the press about his strikingly low salary-$1 a year. He cut costs. He made rules banning outlandish travel expenses. He hired hotshots like NeXT's Jonathan Rubinstein, who took over the hardware division. He was determined to turn Apple around and became irritably focused on the task, barking at employees he encountered in hallways. By the end of Jobs's first year back-in part thanks to Amelio's earlier work-Apple was profitable again.
Apple would slowly crawl back to its 1980s heights with candy-colored iMacs and their portable iBook cousins. But it took one more ahead-of-its-time vision to make Jobs and Apple more successful and famous than ever. The plan, of course, involved digital music.
THE FIRST PORTABLE digital music player was the MP3Man, created by a South Korean company, Saehan, which was so tiny it never really registered on the Recording Industry Association of America's radar. Not so the Rio PMP300, a black, rectangular device resembling a walkie-talkie that had shrunk in the dryer. Manufactured by the Chats-worth, California, electronics company Diamond Multimedia, the Rio made its debut in September 1998, promising MP3 fans they could transfer twenty-four songs from their computer to the device and listen through twelve hours of battery power. It was ugly and hard to use. "We were a small company," says David Watkins, then president of Diamond's RioPort division. "We didn't have the funding to build the business the way we wanted to." digital music player was the MP3Man, created by a South Korean company, Saehan, which was so tiny it never really registered on the Recording Industry Association of America's radar. Not so the Rio PMP300, a black, rectangular device resembling a walkie-talkie that had shrunk in the dryer. Manufactured by the Chats-worth, California, electronics company Diamond Multimedia, the Rio made its debut in September 1998, promising MP3 fans they could transfer twenty-four songs from their computer to the device and listen through twelve hours of battery power. It was ugly and hard to use. "We were a small company," says David Watkins, then president of Diamond's RioPort division. "We didn't have the funding to build the business the way we wanted to."
Shortly after the Rio PMP300 came out, the RIAA sued Diamond Multimedia, saying the portable player violated the Audio Home Recording Act-which the record industry had lobbied Congress to pass in 1992. But Rio had excellent attorneys. They studied the act and found a gaping loophole. The act required electronics companies-like Sony, for the Digital Audio Tape player-to pay a royalty to record labels every time it made devices that would allow more than one copy of a recording. But it specifically exempted computers. And the only way to transfer an MP3 to a Rio was to rip it onto a computer hard drive.* In October 1999, a US District Court judge denied the RIAA's request for a temporary injunction against the Rio. "They were just shocked when they lost," Watkins says. "They had never lost a case before." Diamond sold 200,000 copies of the Rio PMP300 after that. In October 1999, a US District Court judge denied the RIAA's request for a temporary injunction against the Rio. "They were just shocked when they lost," Watkins says. "They had never lost a case before." Diamond sold 200,000 copies of the Rio PMP300 after that.
Meanwhile, over at rapidly recovering Apple Computer, Steve Jobs's latest idea was the "Digital Hub Strategy"-"where the Mac was the center of your lifestyle," as the company's hardware chief, Jonathan Rubinstein, recalls. Digital Hub integrated a number of hip, entertainment-oriented ideas, like iMovie and iPhoto; one blatantly obvious missing piece was the lack of digital music. Apple's brain trust-Jobs, Rubinstein, marketing gurus Phil Schiller and Stan Ng-began discussing how to fill this void.
It was serendipitous for ex-Apple engineer Bill Kincaid, who was working with a start-up company on new audio software called SoundJam, that he heard a very interesting National Public Radio report as he was driving to a track to do a few laps in his Formula Ford car. The report was about MP3s, which Kincaid had never heard of. It focused on Diamond's Rio player, and the bit that most intrigued Kincaid was its lack of compatibility with Apple's Macintosh system. Kincaid, who had worked for Apple on a Mac operating system in the early 1990s, called Diamond Multimedia the next day about designing hardware to interface between the Rio player and the Macintosh. He needed help with the software, so he contacted Jeff Robbin, one of the best programmers he knew, who had also worked at Apple in the early 1990s. Together they spent months inventing SoundJam, a digital jukebox that made it easy for consumers to organize the MP3s they'd ripped or downloaded to their hard drives and play music over their PC speakers. They started selling it through a small software publisher, Casady & Greene, in 1999. "We got that to pretty much be the premiere MP3 player on the Mac," says Robin Casady, the company's co-owner. "And when Apple started looking around for one, they chose ours, and we sold it to them."
At Apple, SoundJam morphed into iTunes, which had a sleek geometric screen with a brushed-aluminum look and made organizing music files on a computer seem like the hippest thing in the world. Jobs talked it up in his January 2001 Macworld Conference & Expo keynote.
The next step in Apple's plan was to design a player. The brain trust studied the market. In addition to the PMP300, there was Creative Labs' irritatingly heavy Nomad Jukebox, which had utilized Fujitsu's 2.5-inch hard drive but still relied on a super-slow USB connection to shift songs from the computer to the player. Overall, Apple's Rubinstein remembers, the players were "just awful." With Jobs's unique brand of encouragement ringing in his ears, Rubinstein put his hardware team to work. Through a contact, he found thirty-two-year-old engineer Tony Fadell, who was on a Vail ski-slope chairlift when he took the call. Rubinstein offered him a high-pressure, eight-week contract. Fadell was single. He had plenty of time to work his butt off, Apple-style. By the time he made it to the top of the mountain, although Rubinstein refused to tell him what project he'd be working on, Fadell accepted.
First, Rubinstein and Fadell needed the tiniest hard drive ever made, something that would be affordable to reproduce thousands of times. At the time, nothing small enough to serve their purpose existed. "I basically stalled for a while," Rubinstein recalls. "I told Steve, 'I can't do it yet. It's not time.'" Soon, Toshiba came up with a 1.8-inch, 5-gigabyte disc drive that could carry 1,000 songs and wasn't amazingly expensive. Jobs moved quickly to sign an exclusive deal with Toshiba-shutting out Creative Labs, which was on the brink of releasing its own new player, the Zen. "We had a very sexy player," the company's founder and CEO, Sim Wong Hoo, told Business 2.0, Business 2.0, animatedly waving his arms in frustration, "but we couldn't ship it." Next, Apple's engineers had to find a much faster way than USB of transferring a digital song from a Mac to the player. The solution was FireWire, a technology Apple had invented in the early 1990s, although at the time it was mostly used with Japanese-built camcorders, not computers. "Once I saw all those technologies, I went to Steve and said, 'Hey, we know how to do this now. We need some funding,'" Rubinstein recalls. "I started hiring a team and we went and built the thing." animatedly waving his arms in frustration, "but we couldn't ship it." Next, Apple's engineers had to find a much faster way than USB of transferring a digital song from a Mac to the player. The solution was FireWire, a technology Apple had invented in the early 1990s, although at the time it was mostly used with Japanese-built camcorders, not computers. "Once I saw all those technologies, I went to Steve and said, 'Hey, we know how to do this now. We need some funding,'" Rubinstein recalls. "I started hiring a team and we went and built the thing."
The project was a secret. Other than Jobs, Rubinstein, Fadell, and a few other Apple executives, nobody even knew it involved music. The code name was P-68, or, more colloquially, "Dulcimer," which signified nothing more than "an elegant stringed instrument." Working day and night through the course of his contract, Fadell played with cardboard and foam, moving things around in various patterns to show himself what the player might look like. Eventually, he came up with a box the size of a pack of Marlboros with a cell-phone-sized screen at the top and push buttons at the bottom. He weighed down the gadget with fishing weights, to approximate what it might feel like. Then it was time to meet with Jobs. Fadell and Rubinstein knew Jobs liked to get prototypes in groups of three, so they sent up two as "sacrificial lambs," as Steven Levy puts it in his 2006 book The Perfect Thing The Perfect Thing. The third one, they hid under a wooden bowl in the conference room on the fourth floor of Apple's Cupertino offices. It turned out they knew Jobs pretty well. He quickly dismissed the first two, but the third one left him speechless.
At the same meeting, another Apple executive, marketing vice president Phil Schiller, showed his own innovation-the scroll wheel at the center, which would control the gadget in lieu of a keyboard. Jobs turned to Fadell. We can do it, We can do it, Fadell told him. Fadell told him.
Fadell sent feelers out to hardware and software companies about manufacturing the device's internal parts in an affordable way. His contacts were, to put it mildly, somewhat confused. "These suppliers were like, 'Apple is calling, that's great.... What What are they doing, exactly?'" Fadell recalls. "Then they're looking at me, going, 'You're a are they doing, exactly?'" Fadell recalls. "Then they're looking at me, going, 'You're a contractor. contractor. Should I even take this seriously?' And: 'This seems totally foreign to [Apple's] business. Why would they buy this?' It was something non-computer-related." Nonetheless, PortalPlayer, a small company, was thrilled to throw in its lot with Apple Computer, supplying the physical operating system and the external silicon casing. Rubinstein's team then hired Pixo, a software company founded by ex-Apple employee Paul Mercer, to write the programs for running the PortalPlayer chips. "Apple wouldn't even show us what [the final device] looked like," Mercer recalls. "[The working model] had boards and a screen in the corner." Jobs pushed his top lieutenants, who pushed the hardware and software teams, who pushed their subcontractors. The goal was to get the player into stores by Christmas 2001. Should I even take this seriously?' And: 'This seems totally foreign to [Apple's] business. Why would they buy this?' It was something non-computer-related." Nonetheless, PortalPlayer, a small company, was thrilled to throw in its lot with Apple Computer, supplying the physical operating system and the external silicon casing. Rubinstein's team then hired Pixo, a software company founded by ex-Apple employee Paul Mercer, to write the programs for running the PortalPlayer chips. "Apple wouldn't even show us what [the final device] looked like," Mercer recalls. "[The working model] had boards and a screen in the corner." Jobs pushed his top lieutenants, who pushed the hardware and software teams, who pushed their subcontractors. The goal was to get the player into stores by Christmas 2001.
They still needed a name. Jobs was vague when The Perfect Thing The Perfect Thing author Levy asked him who thought it up. "It sort of author Levy asked him who thought it up. "It sort of emerged emerged," Levy concluded, adding his speculation that Jobs was impatient and settled for it just before time ran out. Vinnie Chieco, a freelance copywriter who worked regularly at Apple's Cupertino offices at the time, remembers otherwise. One of Apple's creative directors asked Chieco and a couple of other writers to come up with a number of names. The creative director, with help from Chieco, then narrowed down the list, put each name on a huge piece of paper and presented the top sixty or seventy prospects to Jobs in his office. Jobs whittled them down to three. Jobs had come up with one of them himself (Chieco won't say which one it was). Another, Pod Pod, was on Chieco's list. Jobs didn't immediately say he liked it, but he stopped holding meetings about the name. In passing, he spoke positively of it to Chieco a couple of times. Then he ran it by Lee Clow, the TBWAChiatDay ad executive who would oversee the iPod "Silhouettes" campaign. Clow liked it, too. "Like everything else at Apple, it was [Jobs's] decision," Chieco says. Jobs added the "i"-as in iMac-and the name stuck.
The first iPod came out in stores on October 23, 2001. Over at Texas Instruments headquarters, in Dallas, intrigued engineers immediately brought one back to the lab and took it apart. They were impressed with the PortalPlayer chips-two processors. While TI made similar internal products, Apple had found a smaller, cheaper company to do the same work. The TI engineers liked the integration between iTunes and iPod. They felt it was far superior to what Sony Corp. had done with its clunky Music Clip, the poorly reviewed player that had emerged from the SDMI meetings, and corresponding software a couple of years earlier. And they liked innovations like its scroll wheel and lack of an onoff switch. But Randy Cole, manager of TI's digital audio research and development, was impressed for an even simpler reason. "It just looked processors. While TI made similar internal products, Apple had found a smaller, cheaper company to do the same work. The TI engineers liked the integration between iTunes and iPod. They felt it was far superior to what Sony Corp. had done with its clunky Music Clip, the poorly reviewed player that had emerged from the SDMI meetings, and corresponding software a couple of years earlier. And they liked innovations like its scroll wheel and lack of an onoff switch. But Randy Cole, manager of TI's digital audio research and development, was impressed for an even simpler reason. "It just looked cool cool,"* he says. he says.
All Apple needed after that was music-legal music-to play on it. music-to play on it.
PAUL V VIDICH AND Kevin Gage, new-media vice presidents at Warner Music, survived their false-hijacking episode in Brandon, Manitoba. Less than three months later, in January 2002, they faced a scarier ordeal. They had traveled from New York to Cupertino for an appointment at 1 Infinite Loop. They walked into the huge, fanlike glass structure that was the first building at Apple Computer's headquarters, passing underneath the iconic rainbow-colored logo. They met Steve Jobs and a few other Apple executives in a boardroom. Gage started his PowerPoint presentation. Jobs rocked back and forth in his chair, obviously agitated, trying despite himself to be patient. Four slides into Gage's presentation, Jobs interrupted. "You guys are all nuts," he said. Kevin Gage, new-media vice presidents at Warner Music, survived their false-hijacking episode in Brandon, Manitoba. Less than three months later, in January 2002, they faced a scarier ordeal. They had traveled from New York to Cupertino for an appointment at 1 Infinite Loop. They walked into the huge, fanlike glass structure that was the first building at Apple Computer's headquarters, passing underneath the iconic rainbow-colored logo. They met Steve Jobs and a few other Apple executives in a boardroom. Gage started his PowerPoint presentation. Jobs rocked back and forth in his chair, obviously agitated, trying despite himself to be patient. Four slides into Gage's presentation, Jobs interrupted. "You guys are all nuts," he said.
There were a half dozen executives in the room, including AOL's Raduchel and Apple's Higa. Most were in coats and ties. Jobs, true to his image, wore a black turtleneck, jeans, and sneakers. The room went silent. Jobs turned to Vidich, who had spoken with him by phone from New York and was the senior Warner Music executive in the room. "It was almost as if for the first time he was given an audience with a music executive," Vidich says. "And he vented. He vented at the music industry and the ways in which it didn't get it." The major labels, Jobs told Gage and Vidich bluntly, were trying to suck out all the money from digital music for themselves. His His customers- customers-Apple's customers-deserved better. They needed an easy-to-use online music store. His tirade lasted several minutes. "It was kind of awkward," says Gage, who tried to disappear into the blinds behind him. customers-deserved better. They needed an easy-to-use online music store. His tirade lasted several minutes. "It was kind of awkward," says Gage, who tried to disappear into the blinds behind him.
Finally, Jobs finished skewering Vidich. "Steve," came the response from Warner Music's top technology executive, "that's why we're here. We need some help."
At the time, the iPod was for sale at Apple Stores around the country. Jeff Robbin's iTunes software was available for use on Mac computers. Both were popular, but neither was a smash hit. Consumers were put off by the iPod's initial $399 price-to the extent that critics had given it a new acronym, "Idiots Price Our Devices." An improved version had landed in stores in March 2002, but the market was still limited, as both iTunes and the iPod were still incompatible with Windows-based computers. At the boardroom meeting, there wasn't much to say after Jobs's rant. (Notably, he did not show off the iPod or iTunes to the Warner group at this point.) Neither Jobs nor the Warner people discussed specifics. But it became clear to Vidich that he would have to enlist more powerful officials at their companies to make progress on an Apple deal involving digital music.
Vidich returned to Warner Music's offices in New York. He knew just the executive to contact-Roger Ames, a longtime British record man who'd recently become chairman and chief executive officer. Ames agreed to meet Jobs in Cupertino to move the Apple-Warner digital music talks forward. Vidich and Gage went along, and the technology experts briefed Ames on the plane. So far, the Apple people hadn't mentioned any specifics, so the Warner execs came up with their own agenda. They decided to push the "second session" CDs-the super-secure discs with extra layers of music that had been discussed during the failed DMX sessions.
When they arrived, the Apple CEO turned on the very specific kind of charm he uses to persuade important fellow executives. "Sort of a mogul-to-mogul thing," is how Jonathan Rubinstein describes it. "He never reacted to Roger the same way he reacted to Paul [Vidich] and myself. Put it that way," Gage says. "He ranted on Paul, that first meeting, about the a-holes of the music industry. I got ranted on when I was pushing for digital rights management. But when Roger came into the room, you didn't see any of that. You saw Steve at his brightest and sharpest." Jobs listened patiently to Ames's pitch about super-secure CDs. Then he casually turned around a computer screen to show the Warner executives a new piece of software Apple engineers had been working on for the last few months. It was the iTunes Music Store.
Ames's eyes widened as Jobs demonstrated how the store would work. Like every other digital music fan on the planet, he had been frustrated with half-hearted record industry equivalents like Pressplay and MusicNet. "That's a great piece of software," he told Jobs, sincerely. "It does everything I need-it organizes my music, works very efficiently, it has an efficient mechanism around a credit card. This is exactly what we need." He may as well have simply said, "Sold!"
Vidich and his staff worked out a Warner content-licensing deal with Jobs. The 99-cents-per-song concept came from Warner, Vidich recalls; Jobs had been thinking along similar lines and quickly agreed. "We were looking at a hook, something consumers were going to be interested in," Vidich says. Ames went back to New York and became a sort of unofficial Apple salesman. Not everyone was as sold on Apple as he was. At the time, Jim Caparro headed Warner's powerful distribution company, WEA, and told Ames point-blank that he objected to the pricing structure. Apple would take a 22-cent retailer's cut out of every 99-cent song, leaving just 67 cents for the labels to divide up among artists, publishers, and themselves. Caparro was not naive about technology: He saw that digital was the future and would quit the major labels entirely within a few years. But he felt Apple was giving the labels a terrible deal, just as MTV had done in scoring videos for free more than twenty years earlier. Within Warner, he suggested a temporary licensing deal, but was overruled. "Ultimately, we could have constructed a far different deal than sixty-seven cents," says Caparro, who today runs the Entertainment Distribution Company, whose biggest client is Universal Music. "Look what happened as a result: The value of Apple has skyrocketed. Roger felt the proposal by Apple was a good one. Steve Jobs was his Jedi."
Undeterred by Caparro's opposition, Ames met with an acquaintance in the record industry, Doug Morris of Universal Music. Morris, one of the most outspoken major label opponents of Napster, was skeptical at first but surprisingly receptive overall. "I don't think we're going to make a lot of money, but [Jobs] is going to sell a lot of iPods," he told Ames. "Doug, I agree, but I don't think we have much choice," Ames responded. "We have to put a legal service in the market. None of us have come up with anything." It took a short time, but Morris was sold, too. He in turn met with one of his top technology vice presidents, Albhy Galuten. "Of course, we have to rely on Steve Jobs to do this-we don't have anybody at Universal who knows anything about technology," Morris told Galuten. The remark stung Galuten. "In my group [at Universal], there was a guy with a Caltech PhD, a guy with a master's in computer science at MIT, and a guy who architected the DirecTV satellite systems," he says today. we have to rely on Steve Jobs to do this-we don't have anybody at Universal who knows anything about technology," Morris told Galuten. The remark stung Galuten. "In my group [at Universal], there was a guy with a Caltech PhD, a guy with a master's in computer science at MIT, and a guy who architected the DirecTV satellite systems," he says today.
Nonetheless, Galuten went to Cupertino. Although Jobs had told Gage and Vidich he vehemently opposed digital rights management-which prevents users from making unlimited copies of the music files they download from the internet-he conceded the point. Jobs could see that Sony Music, owned by Sony Corp., was not about to budge on this. Sony had been instrumental in creating the CD and had invented the popular Walkman cassette player in the 1980s. Its executives were not thrilled about ceding their content to a different computer-and-electronics company. So in an effort to make Sony and the other major labels happy, Apple's engineers came up with FairPlay. This encryption prevented users from playing their protected AAC music files, cousins of the MP3, on more than three different computers. The idea was to stop college students from sharing their files all over the dorm rooms by making sure they still had to buy CDs from an old-fashioned record store once in a while.
Otherwise, to Galuten's surprise, the concessions came mostly from Universal. As the biggest major record label by far, whatever Universal did would ultimately dictate terms for its competitors, especially smaller ones like EMI and BMG. Jobs could not launch the iTunes Music Store without U2, Eminem, and Motown songs from the world's largest label. "We had all the leverage in the world," Galuten says. "I don't know why Doug didn't exercise it." Galuten wanted to fight for a number of points. For example, Jobs insisted that a user must be able to transfer music to an unlimited number of iPods. Galuten saw immediately this would allow people to get as much free music as they wanted. But Morris instructed Galuten to give up this point, as well as several others.* "Doug called and said, 'Just close,'" Galuten recalls. "Doug was not interested in technical details." At Universal, though, Jobs sold his idea to others besides just Doug Morris. He also contacted Jimmy Iovine, head of the company's Interscope Records, which at the time had Dr. Dre, No Doubt, U2, and Eminem and was on the cusp of breaking 50 Cent and Gwen Stefani. Iovine had been worrying about his industry's future for some time but hadn't been impressed with high-tech companies' proposed solutions. Also, he liked Jobs. "We just hit it off, what can I say?" he told "Doug called and said, 'Just close,'" Galuten recalls. "Doug was not interested in technical details." At Universal, though, Jobs sold his idea to others besides just Doug Morris. He also contacted Jimmy Iovine, head of the company's Interscope Records, which at the time had Dr. Dre, No Doubt, U2, and Eminem and was on the cusp of breaking 50 Cent and Gwen Stefani. Iovine had been worrying about his industry's future for some time but hadn't been impressed with high-tech companies' proposed solutions. Also, he liked Jobs. "We just hit it off, what can I say?" he told The Perfect Thing The Perfect Thing author Steven Levy. "Every other company was telling us, 'Give us your licenses and we'll build you a system.' He had a complete thought." Iovine also acknowledged that the persistent rumors at the time of a Universal-Apple merger may have swayed top execs. author Steven Levy. "Every other company was telling us, 'Give us your licenses and we'll build you a system.' He had a complete thought." Iovine also acknowledged that the persistent rumors at the time of a Universal-Apple merger may have swayed top execs.
For Sony Music executives, price remained a sticking point. Jobs insisted on 99 cents per song. Some at the record labels, such as Warner's Vidich and Sony's Phil Wiser, who had replaced Al Smith as chief technology officer, agreed with the Apple chief. They'd tried $3.99 singles in other formats and customers didn't have any interest whatsoever. Wiser spent a lot of time as a go-between, persuading Sony executives and haggling on the phone with Eddy Cue, Apple's director of iTunes. Finally, Jobs cut through the bureaucracy and called Andrew Lack, then chief executive officer of Sony Music. The other four labels are in, Jobs told Lack, and the iTunes Music Store launches in two months-with or without Sony. Lack took Wiser and Sony Music's US chief, Sir Howard Stringer, with him on a company jet to Cupertino in order to view the iTunes Store with Jobs. After that, Sony was in. Later, Lack would declare, "I don't think it was more than a fifteen-second decision in my mind [to license music to Apple] once Steve started talking."
In reality, the decision most likely took more than fifteen seconds. Since the Napster debacle, Sony Corp., more than any other company, had been wracked with conflict over the new file-sharing technologies. The company that had been the first to profit off the transistor radio in the 1950s and had invented the Walkman in the 1970s was an active member of the Napster-supporting Consumer Electronics Association. But its record label, Sony Music, was simultaneously a member of the RIAA, which, obviously, opposed file sharing. This was a contradiction, as millions of music fans were filling their iPods and other digital music players with songs they'd downloaded illegally. Sony, which sold 19 million Walkmans in fiscal year 2002, wanted to profit from these customers and compete against the iPod. But the company's record label, Sony Music, accounted for 30 percent of the electronics giant's revenues and most of its profits. Wired Wired magazine termed this internal conflict "The Civil War Inside Sony." Because of it, the company, which had been so instrumental in developing the CD, merely watched as Apple took over the markets for both digital music players and online songs. Keiji Kimura, a Sony senior vice president in charge of portable products, told magazine termed this internal conflict "The Civil War Inside Sony." Because of it, the company, which had been so instrumental in developing the CD, merely watched as Apple took over the markets for both digital music players and online songs. Keiji Kimura, a Sony senior vice president in charge of portable products, told Wired Wired he admired Apple's device but Sony would not try to compete with it. "We do not have any plans for such a product," Kimura said. "But we are studying it." Sony Corp. reps would not comment on these issues. he admired Apple's device but Sony would not try to compete with it. "We do not have any plans for such a product," Kimura said. "But we are studying it." Sony Corp. reps would not comment on these issues.
With all this static in the background, it was easy for unencumbered Apple to seize the digital music market. Eventually, with the other major labels plunging into iTunes, Sony had no choice. The company gritted its teeth and signed on. "Now Sony Music was going and empowering Steve Jobs and his iPod to take over that business," Wiser says. "It was very controversial and a very difficult move-but it was the right move. No one else in the market was doing anything in digital music at that time."
Why did record executives, who'd stonewalled Rob Glaser's MusicNet and the SDMI process, whoosh into deals with Apple? There are several reasons.* One was Jobs's confidence and charm. At NeXT and Pixar, he'd dealt with Hollywood executives all the time, so he didn't find powerful record people like Roger Ames and Doug Morris particularly intimidating. Another was Apple's tiny market share at the time-just 4 percent or 5 percent of computer users owned Macintoshes, and the iPodiTunes system was initially incompatible with Windows. "Our smaller market share turned out to be an asset!" Jobs said in One was Jobs's confidence and charm. At NeXT and Pixar, he'd dealt with Hollywood executives all the time, so he didn't find powerful record people like Roger Ames and Doug Morris particularly intimidating. Another was Apple's tiny market share at the time-just 4 percent or 5 percent of computer users owned Macintoshes, and the iPodiTunes system was initially incompatible with Windows. "Our smaller market share turned out to be an asset!" Jobs said in The Perfect Thing The Perfect Thing. "We only convinced them to let us do it on the Mac at first. We said, 'Well, if, you know, the virus gets out, it's only going to pollute five percent of the garden here.' And that's probably what, in the end, enabled us to get them to come along with us. Doug Morris, who runs Universal, said, when he was arguing with his own team, 'Look, how-I don't understand how Apple could ruin the record business in one year on Mac. Why shouldn't we try this?'" A third reason was that Jobs told Universal's Galuten that Apple's marketing budget was $15 million to $30 million every quarter. every quarter. This was a free artist-publicity machine on par with MTV. Finally, many executives at record labels believed Microsoft was on the brink of releasing a digital music service that would compete fiercely with iTunes. Surely labels could play the two services off each other. But Microsoft stayed out-until November 14, 2006, when it released the Zune digital music player. Why the long wait? "A lot of people at Microsoft did react quickly, but it took roughly a year to convince the full management chain to act on the knowledge of what was going on with Apple," says Hadi Partovi, who in the early 2000s was general manager of MSN's music and entertainment division, and later cofounded the popular iLike music service on Facebook. "Record labels repeatedly asked us what we were going to do to combat Steve Jobs's marketing budget. Our budget was in the This was a free artist-publicity machine on par with MTV. Finally, many executives at record labels believed Microsoft was on the brink of releasing a digital music service that would compete fiercely with iTunes. Surely labels could play the two services off each other. But Microsoft stayed out-until November 14, 2006, when it released the Zune digital music player. Why the long wait? "A lot of people at Microsoft did react quickly, but it took roughly a year to convince the full management chain to act on the knowledge of what was going on with Apple," says Hadi Partovi, who in the early 2000s was general manager of MSN's music and entertainment division, and later cofounded the popular iLike music service on Facebook. "Record labels repeatedly asked us what we were going to do to combat Steve Jobs's marketing budget. Our budget was in the ones ones of millions." of millions."
After signing up the major labels, Jobs broadened his support in the record industry. He called Irving Azoff, powerful manager of the Eagles, the aging country-rock superstars who had blocked the use of their music in all other digital music services, and begged. "I've said 'no' to all of them," Azoff told the Wall Street Journal. Wall Street Journal. "But I don't like their services, and I liked [Apple's] product." Azoff said yes. In much the same way Sony's CD marketers earned support from big-name artists in the early 1980s, Jobs contacted U2's Bono, the Rolling Stones' Mick Jagger, and Sheryl Crow, among others. "The black iPod is something I coveted-this is a beautiful object," Bono said at an October 2004 press conference, announcing a special-edition iPod that contained U2's entire catalog. (Bono added, "People want to sleep with it.") Jobs invited Dr. Dre, multiplatinum gangsta rapper and masterful Interscope talent scout, who had been a fierce Napster enemy and vowed never to release his music to a digital service, to his office in Cupertino. They tinkered with iTunes for hours. "Man," Dre said afterward, "somebody finally got it right." He gave up the rights. "But I don't like their services, and I liked [Apple's] product." Azoff said yes. In much the same way Sony's CD marketers earned support from big-name artists in the early 1980s, Jobs contacted U2's Bono, the Rolling Stones' Mick Jagger, and Sheryl Crow, among others. "The black iPod is something I coveted-this is a beautiful object," Bono said at an October 2004 press conference, announcing a special-edition iPod that contained U2's entire catalog. (Bono added, "People want to sleep with it.") Jobs invited Dr. Dre, multiplatinum gangsta rapper and masterful Interscope talent scout, who had been a fierce Napster enemy and vowed never to release his music to a digital service, to his office in Cupertino. They tinkered with iTunes for hours. "Man," Dre said afterward, "somebody finally got it right." He gave up the rights.
Not every label executive was thrilled about the sudden rush of Apple excitement. Ted Cohen, who had begun his career as a Bay Area concert promoter and had climbed up the label ladder to be EMI's top new-media executive, was not easily swayed by charisma. He loved Apple products-in a fall 2007 phone interview from his home in Los Angeles, he was in viewing distance of eighteen iPods, five Macintosh computers, and two iPhones. But this was the music executive who'd had the guts to travel with the Sex Pistols during their first and last American voyage, through Texas, in 1977. When Sid Vicious swung his bass at a rabble-rousing Texan from the stage of a club, he missed and bashed Cohen in the face instead. Although Warner's Roger Ames had called one of EMI's top executives, David Munns, to sell him on the iTunes Store, Munns did not go personally to Cupertino. He sent Cohen, who showed up with other label reps. He was unimpressed.
At one point, Cohen remembers John Rose, then an EMI vice president, writing demographic sales statistics on a thirty-foot-long whiteboard in an Apple conference room. Afterward, Jobs stood up, walked to the whiteboard, which was entirely empty save for the one square foot where Rose had scribbled, and erased it completely. Rose was undeterred by this blatant power maneuver. "John, God bless him, erased what Steve Jobs wrote and wrote something else over that," Cohen recalls. "They were erasing each other's words for about ten minutes. It was funny to watch, but it was very telling-Steve wants to do it his way and that's it." Cohen saw the whiteboard power struggle as a sign of future battles between Jobs and record executives. Shortly after Apple signed up all five of the major record labels-including EMI-Cohen recalls the computer company subtly wriggling out of certain agreements. For example, Cohen says, Coldplay's 2002 smash A Rush of Blood to the Head A Rush of Blood to the Head was supposed to sell for $13 on iTunes, but an EMI distribution executive alerted Cohen one day that it was going for $11.88. The distribution rep called Apple. "OK," the Apple contact responded, "you want us to take it down?" The distribution rep was stunned. "Welcome to the world of Apple," Cohen told him. "If you don't like it, they'll stop selling your music." Apple refused to make its executives, including Jobs, available for interviews for this book. was supposed to sell for $13 on iTunes, but an EMI distribution executive alerted Cohen one day that it was going for $11.88. The distribution rep called Apple. "OK," the Apple contact responded, "you want us to take it down?" The distribution rep was stunned. "Welcome to the world of Apple," Cohen told him. "If you don't like it, they'll stop selling your music." Apple refused to make its executives, including Jobs, available for interviews for this book.*
THE ITUNES M MUSIC Store opened on April 28, 2003, with a catalog of 200,000 songs available for 99 cents apiece. And those were Store opened on April 28, 2003, with a catalog of 200,000 songs available for 99 cents apiece. And those were good good songs, from all five of the major record labels, not the local-band dross digital music fans used to find on websites like MP3.com. There were some major holdouts-the Beatles, Led Zeppelin, Radiohead-but top artists mostly supported the iTunes Store. Bob Dylan, U2, and Eminem provided exclusive tracks. "This industry has been in such a funk," Sheryl Crow declared, endorsing Apple's system on behalf of rock stars. "It really needs something like this to get it going again." songs, from all five of the major record labels, not the local-band dross digital music fans used to find on websites like MP3.com. There were some major holdouts-the Beatles, Led Zeppelin, Radiohead-but top artists mostly supported the iTunes Store. Bob Dylan, U2, and Eminem provided exclusive tracks. "This industry has been in such a funk," Sheryl Crow declared, endorsing Apple's system on behalf of rock stars. "It really needs something like this to get it going again."
Crow's vision came true-for Apple. Surprising its record label partners, the iTunes Store crossed over to Windows-based computers in October 2003 and became a mass phenomenon, selling 25 million 99-cent songs. It was a huge success-again, for Apple. In 2003, total iTunes sales were the equivalent of one small blockbuster in the record industry. (By contrast, the hundredth album on the RIAA's Top 100 list of best-selling albums, Green Day's American Idiot American Idiot, had sold 5 million CDs at the time of this writing.) That's a lot, but hardly enough to excite big-spending label executives about a new business model.* Plus, labels made just 67 cents on every 99-cent song, a decent percentage, but far, far inferior to taking roughly $10 to $12 on every $18 CD. (Remember, the labels had to share some of the revenue with artists and songwriters.) For Apple, though, the iTunes Store was absolutely brilliant, because it pushed music fans to buy more and more iPods, for $300 to $500 apiece. In the fourth quarter of 2003, iPods generated about 7 percent of Apple's $1.7 billion in revenue-$121 million overall. Plus, labels made just 67 cents on every 99-cent song, a decent percentage, but far, far inferior to taking roughly $10 to $12 on every $18 CD. (Remember, the labels had to share some of the revenue with artists and songwriters.) For Apple, though, the iTunes Store was absolutely brilliant, because it pushed music fans to buy more and more iPods, for $300 to $500 apiece. In the fourth quarter of 2003, iPods generated about 7 percent of Apple's $1.7 billion in revenue-$121 million overall.
"People think we knew the iPod was just going to be a success," Tony Fadell recalls. "That was the farthest thing from the truth." To his surprise, the iPod changed everything-music, fashion, electronics, computers, the internet. Fans of the Beatles' classic Sgt. Pepper's Lonely Hearts Club Band Sgt. Pepper's Lonely Hearts Club Band lamented that the iPod, with its irresistible song-shuffling function, would eliminate the album as an art form. The TBWAChiatDay "Silhouettes" ads made it cool to wander college campuses, board buses and trains, jog, and mow lawns while gently swaying to music coming through white earbuds. Vince Carter, superstar dunker for the Toronto Raptors, criticized the National Basketball Association's decision to disallow players from practicing with their iPods. Celebrities from actor Bruce Willis to CNN anchor Aaron Brown to President Bush and Vice President Cheney owned up to making playlists for their iPods. (Bush likes the Knack's "My Sharona"; Cheney prefers the Carpenters.) Thanks to the iPod, music was as exciting and culturally important as ever. That didn't necessarily mean the sound was an improvement. Over the years, as compressed iTunes files joined MP3s as the standard for online music, and fans started to listen to music on iPods and tinny computer speakers, producers started to compensate in their studios. By 2006, Bob Dylan was complaining to lamented that the iPod, with its irresistible song-shuffling function, would eliminate the album as an art form. The TBWAChiatDay "Silhouettes" ads made it cool to wander college campuses, board buses and trains, jog, and mow lawns while gently swaying to music coming through white earbuds. Vince Carter, superstar dunker for the Toronto Raptors, criticized the National Basketball Association's decision to disallow players from practicing with their iPods. Celebrities from actor Bruce Willis to CNN anchor Aaron Brown to President Bush and Vice President Cheney owned up to making playlists for their iPods. (Bush likes the Knack's "My Sharona"; Cheney prefers the Carpenters.) Thanks to the iPod, music was as exciting and culturally important as ever. That didn't necessarily mean the sound was an improvement. Over the years, as compressed iTunes files joined MP3s as the standard for online music, and fans started to listen to music on iPods and tinny computer speakers, producers started to compensate in their studios. By 2006, Bob Dylan was complaining to Rolling Stone Rolling Stone that modern albums "have sound all over them. There's no definition of nothing, no vocal, no nothing, just like-static." In late 2007, prominent rock producer David Bendeth added: "They make it loud to get [listeners'] attention. I think most everything is mastered a little too loud. The industry decided that it's a volume contest." that modern albums "have sound all over them. There's no definition of nothing, no vocal, no nothing, just like-static." In late 2007, prominent rock producer David Bendeth added: "They make it loud to get [listeners'] attention. I think most everything is mastered a little too loud. The industry decided that it's a volume contest."
The majority of fans, however, didn't care about sound quality. Almost immediately, iTunes emerged as the biggest online retailer, taking more than 70 percent of the market and dwarfing later competitors like Napster (whose assets had been purchased by another company, Roxio, and turned into a legal service) and stores from Microsoft, MTV, Sony Corp., and Wal-Mart. By April 2008, the iTunes Music Store had sold more than 4 billion songs around the world. It ranked No. 1, above Best Buy and Wal-Mart, as the top overall music retailer in the United States, according to a survey-research firm called the NPD Group.
Record executives privately started likening Apple to MTV-major labels agreed to give videos to the channel in the early 1980s, when it seemed like a tiny promotional device, and regretted losing all that video revenue when MTV blew up. But this was even worse. Apple had basically taken over the entire music business. Steve Jobs's agenda was not to make money off 99-cent digital songs, although they were a nice additional source of revenue. He used the songs to profit from expensive iPods. Labels made exactly zero dollars for every iPod sale. Not only that, record execs noted ruefully, there was no chance no chance music fans were filling their 80-gigabyte iPods with 20,000 songs they'd bought for 99 cents apiece or ripped from their CD collections. Surely pirated music had something to do with the booming iPod sales as well. music fans were filling their 80-gigabyte iPods with 20,000 songs they'd bought for 99 cents apiece or ripped from their CD collections. Surely pirated music had something to do with the booming iPod sales as well.
"[Jobs's] stock went from $8 billion to $80 billion," recalls Roger Ames, who left Warner Music in 2004 and is today head of EMI North America. "Ours went in reverse.
"Not his fault," Ames hastens to add-but in the five years since the iTunes Music Store, some of Ames's colleagues began to disagree quite vehemently. In a 2005 speech, Warner CEO Edgar Bronfman Jr., who had taken over from Roger Ames, declared some songs worth more than others and called for "variable pricing." Bronfman wouldn't address the subject in an interview for this book, but other executives have come to blame Jobs. It's unfair, they complained, that Apple fixed its song prices at 99 cents. Jobs responded by calling the labels "greedy." He wanted to keep things simple for the consumer, and besides, 99 cents was just the right price. Label executives also howled about Apple's digital rights management, FairPlay, which limited iTunes-purchased tracks to the iPod rather than worthy competitors like Creative Labs's Zen or Microsoft's Zune. In response to these complaints-as well as pressure from European regulators, who in the late 2000s started to accuse Apple of illegally cornering the digital music market-Jobs turned the tables on the labels. He never wanted copy protection, he said. FairPlay came about due to the labels' insistence. He told labels he'd get rid of it if they would. To date, only the smallest major label, EMI, sells unprotected music files via the iTunes Music Store, although others sell MP3s via Amazon and elsewhre.
Early supporters like Doug Morris of Universal and Jimmy Iovine of Interscope also turned against iTunes. Iovine didn't respond to interview requests, but a source who knows him well says, "He feels they got cheated. And he maintains Steve [Jobs] dealt from the bottom of the deck. He talks about it a lot." In May 2007, Universal decided not to renew its contract with Apple, saying it would pull its content any time label executives decided they wanted to. At the time this book went to press, newer online retailers like Amazon's MP3 Store and MySpace Music had yet to challenge Apple's dominance, so Universal-owned music from U2, Gwen Stefani, Motown, and the rest remains available at the iTunes Store. And Apple continues to sell iPods like crazy.
Did Apple really play an unfair game? Not really. Steve Jobs is a businessman. He saw opportunity and went for it. But nobody forced savvy and experienced deal makers like Doug Morris, Roger Ames, and Andrew Lack to sign those Apple contracts in 2002; they were just running out of good choices. The labels had sent stonewalling executives like Sony Music's Al Smith to SDMI meetings rather than truly trying to create a content deal that worked. They didn't support Bertelsmann's Thomas Middelhoff when he tried to turn Napster into a legal song-downloading service. And their international corporate overseers, such as Sony Corp., didn't exactly throw themselves constructively into the Digital Music X talks spearheaded by Paul Vidich and Kevin Gage. By the time Steve Jobs came around, he was the last resort. He was merely smart enough to know it. He played tough, but not any tougher than any lawyer for a major label who had negotiated an artist contract in recent decades.
The post-iTunes years provided a frustrating paradox for record executives. By February 2006, the store sold its 1 billionth download, and digital single sales overall jumped from 19.2 million in 2003 to 844.2 million in 2007. But it was at least four years too late, and way too little. CDs cost $15 to $18. Digital singles cost 99 cents. Executives added up the numbers and realized Jobs had tossed them into a very bad business model. "Stealing music is not [what's] killing music," says Robert Pittman, cofounder of MTV and former chief operating officer of the ill-fated AOL Time Warner merger. "When I talk to people in the music business, most of them will admit the problem is they're selling songs and not albums. I mean, you do the math."
In 2000, shortly after veteran label executive Steve Greenberg started a new label, S-Curve, his band the Baha Men put out the woof-woofing single "Who Let the Dogs Out?" Although Napster was ascendant at the time, music fans were still accustomed to buying CDs-and they plunked down the $15 to $18 for 4 million copies of the Baha Men's album. By contrast, in 2003, S-Curve pushed the American power-pop band Fountains of Wayne's single "Stacy's Mom" onto MTV and radio stations everywhere. The album containing "Stacy's Mom" sold just 400,000 copies. Greenberg blames online piracy for this decline, and he has a point. Thanks to Kazaa, LimeWire, and other inheritors of Napster's peer-to-peer file-sharing approach, 4.3 million people around the world were trading copyrighted songs at any point during September 2003, according to BigChampagne.com. "Stacy's Mom" also sold 520,000 digital singles, mostly through the iTunes Store. It's impossible to track the number of illegal downloads, but it's clear that more people who liked "Stacy's Mom" cherry-picked the song illegally or via the iTunes Store than bought the full album.
Sales of iTunes singles surged, while old-fashioned album sales-and major label revenues-dropped. While CD sales continue to make up the bulk of major labels' profits, iTunes shifted the balance dramatically and quickly. Although this shift is great for consumers, it's a negative for record companies: At least for now, digital music just isn't as profitable as old-fashioned pieces of plastic. Thus, in the post-iTunes world, labels would lay off thousands of people and cut all but the obvious big-selling acts from their artist rosters. Sony and BMG would team up in a questionable merger born of financial desperation. Warner Music would go public for a much-needed cash infusion. Nonetheless, for months after the iTunes Store opened, labels were optimistic about finally gaining a foothold in the digital music market. Their next step was to obliterate the millions of online pirates who showed no signs of breaking their file-sharing habits.
Big Music's Big Mistakes, Part 7The RIAA LawsuitsIn July 2004, when University of Kansas student Charli Johnson found out the music industry was suing her for illegally trading 592 songs on her campus computer, she did the first thing that came to mind: "I started to cry." Then she called the Recording Industry Association of America and pleaded for a settlement. No problem, its lawyers said. That'll be $3,000.It wasn't a good time. When she received word of the lawsuit, Johnson, twenty, was about to take a semester off anyhow to save money as a full-time, $6.86-an-hour Wal-Mart cashier. She would have had to earn ten straight weekly paychecks to pay off the RIAA debt. She called her mother, who agreed to pay half. She took out a bank loan for the other half. She called her father, a lawyer in California, who said, "Well, isn't this interesting." She pleaded, and he paid off the loan. "It was pretty stressful," says Johnson, who today is a KU graduate and fourth-grade teacher in Arkansas, Kansas. "Asking my dad for $1,500 is no small task. His reaction was, 'I didn't download the music.'" didn't download the music.'"More than 38,000 college students, insurance-company clerks, karaoke DJs, engineers, restaurant owners, flight attendants, and people of all ages, genders, and musical tastes around the US can relate to Johnson's desperation. They've all won the worst lottery in music industry history. Five months after Apple unveiled its iTunes Music Store, allowing major record labels to sell downloaded songs for the first time in a significant way, the Recording Industry Association of America started suing its own consumer base. The first wave involved suits against 261 people. One was Scott Bassett, a Redwood City, California, auto mechanic who had no idea his teenage kids were doing anything wrong. "But I know one thing," he said after he received the lawsuit. "They're not going to be doing it anymore." Another was New York housing-project resident Brianna LaHara, a twelve-year-old in bookish spectacles who made the cover of the New York Post. New York Post. "My stomach is all turning," she declared. "My stomach is all turning," she declared.The RIAA was unrepentant. The world needed to know that illegal file sharing was wrong, period. "We knew that the press would find poster children as a result of this program," president Cary Sherman said after the first 261 lawsuits, filed in September 2003. "But you have to choose between your wish to be loved and your wish to survive. The purpose is to get the message out." Most of the lawsuits were for hundreds of thousands of dollars, but as of 2006 the industry had settled roughly 6,000, averaging $3,000 to $4,000 per suit. (Brianna LaHara's family settled for $2,000.)There were cases of mistaken identity-a grandmother fought back early on, saying she didn't even know how to use a computer, and the RIAA reluctantly dropped its suit. But for the most part, people caught in the act of sharing music files illegally lacked the money or legal firepower to take on the powerful recording industry on legal principles. The association demands $750 per song in copyright-infringement damages, so those accused of sharing 1,500 songs, say, could face $1.125 million in penalties if they take it to court and lose. "These are very nasty one-sided cases, and the people they're suing don't have the resources necessary to fight back," says Ray Beckerman, one of several attorneys who defend RIAA-sued customers and regularly attack the record industry. "There are lots of questions. For us to presume they know what's copyright infringement or not is pretty interesting."In the post-Napster age, though, label executives felt they had no choice. When the lawsuits began, according to the peer-to-peertracking website BigChampagne.com, 4.3 million people around the world were sharing music files illegally at any given time. Also, according to Nielsen SoundScan, CD sales had dropped precipitously, from 943 million in 2000 to 746 million in 2003. Over two or three years, major labels had slipped from their teen pop peak and were laying off hundreds.Suing was an extreme step, but angry and desperate executives began batting around the idea as early as a 2002 RIAA summit in Washington, DC. Universal Music was especially hell-bent on the lawsuits, sources recall, but Roger Ames of Warner Music was fiercely opposed. By Ames's way of thinking-and the association's then-chairman, Hilary Rosen, agreed with him-it was totally unfair to sue customers for downloading free music when they had no legal way to pay for it online. There were a series of meetings, climaxing with thirteen top label executives at Sony Music's New York offices, and Ames and his subordinates made their case. Warner had to threaten to withdraw its membership from the RIAA in order to get everyone else to back down.In April 2003, thanks in part to Ames's behind-the-scenes negotiations, Apple Computer's iTunes Music Store went online as the first major legitimate digital music service. So that barrier fell, and Ames and Warner agreed to join the lawsuits. Then a Los Angeles district court ruled one of Napster's harder-to-prosecute successors, Grokster, wasn't responsible for its users' actions-whether they downloaded free porn or free music. Significantly, the key part of the court opinion suggested the users themselves were to blame for their own illegal activities. (The case would go all the way to the US Supreme Court.) After that, Rosen says, "I think everybody was on board with the lawsuits." Recalls another music business source: "Everyone felt like it was too bad that it had to happen and we didn't want it to be our only plan. We didn't want to be suing, but there weren't a lot of alternatives. It's one thing when you're looking from the outside and saying how stupid this is, but it's another thing when you're seeing half your company laid off."The RIAA's legal and technical teams-actually about twenty lawyers scattered around the US and twenty vendors surfing Kazaa in a Washington, DC, office-picked targets with the most downloading activity. One of those, apparently, was Cindy Lundstrom's sixteen-year-old daughter, Chelsea, a straight-A student and homecoming queen at North Canyon High School near Scottsdale, Arizona. The RIAA sued Cindy Lundstrom in March 2004, accusing her (meaning Chelsea) of downloading 700 hip-hop songs, or total alleged damages of $525,000. The RIAA offered a $3,000 settlement, which Chelsea said she would pay out of her savings from an after-school job at a hair salon, but her mom told her to forget about it. "That is her savings for college," Lundstrom said, shortly after the family settled.The lawsuits continue to this day with numbing regularity-725 here, 210 there, at least one new wave a month. The industry shifted much of its attention to college campuses in early 2007, because students using their schools' free high-speed internet access were a particularly egregious threat. (Only one case has gone to trial so far: Jammie Thomas, a mother of two from Brainerd, Minnesota, who in October 2007 told a Duluth jury that she didn't do it. Major labels had sued her for infringing the copyrights of twenty-four songs. A jury took less than a day to award the labels $222,000 in damages for "willful" infringement. A year later, Thomas received a mistrial.) In March 2007, the RIAA opted against filing actual lawsuits. The industry chose a cheaper, less cumbersome strategy, sending "prelitigation letters" to colleges. The letters included computer IP addresses with which the schools were supposed to identify file-sharing students and pass the letters along. The students could then make a quick settlement without even dealing with the legal system or cumbersome concepts like "innocent until proven guilty" or "right to due process." "It's effective-at trying to bully people," says Jason Schultz, at the time a staff attorney with the Electronic Frontier Foundation, which opposes the lawsuits. "If your goal is to intimidate people and get them to freak out and write checks, then yeah, it's a great strategy."In the end, the lawsuit campaign has had little impact on the amount of copyrighted music that is illegally downloaded. Nine million people in fall 2007 were trading files via peer-to-peer services, according to BigChampagne.com, and 70 percent of that was illegal music. One major label executive believes the suits have been nothing but a costly public-relations debacle. "It seems like the punishment is way disproportionate to the crime," this source says. "Everybody would love it if it knocked piracy down. It doesn't. It costs money. It isn't effective."To Thomas Middelhoff, the former chairman of Bertelsmann, which invested millions of dollars in Napster only to see the recording industry sue it out of existence, this is madness. He envisioned a future in which the major labels sold music online via Napster-a future that came to pass, instead, through iTunes. "The answer would have been so easy," he says ruefully. "But instead of doing the easy thing, they said, 'We have our business model!'-and sued their customers."Of course, RIAA executives say, before the lawsuits, consumers weren't sure whether downloading free music was illegal. Now they know. Certainly Charli Johnson does. The Kansas University graduate and elementary school teacher, who settled with the RIAA for $3,000, has not downloaded a song since receiving her lawsuit. "The lawsuit stopped me from downloading music, but I'm one person," she says. "I can guarantee you my friends still download music. I really cannot see how it's making a huge difference."
Chapter 6.
20032007 Beating Up on Peer-to-Peer Services Like Kazaa and Grokster Fails to Save the Industry, Sales Plunge, and Tommy Mottola Abandons Ship ON THE blazing hot morning of February 6, 2004, a six-person team of forensic computer specialists and attorneys pounded on Phil Morle's door on the outskirts of Sydney, Australia. Phil was at work. His pregnant wife, Kellie, answered, with their two-year-old son at her side. Flashing a court order, these investigators from the Australian record industry commenced raiding the Morles' home. Kellie called Phil. He was unable to return home at the moment because another team was raiding his Sydney office. The investigators stayed at their house all day and into the evening, extricating family hard drives, plugging in laptops to copy the contents, and scouring every room for hidden computers. "They went under the house to my cellar, where I store my old books and bits of junk-hardware after years and years. One of the attorneys called one of the other guys. With glee in their eyes, they figured they found the Holy Grail-the nerve center, the big red button that controls everything," Phil recalls. "It was a truly uncomfortable experience." blazing hot morning of February 6, 2004, a six-person team of forensic computer specialists and attorneys pounded on Phil Morle's door on the outskirts of Sydney, Australia. Phil was at work. His pregnant wife, Kellie, answered, with their two-year-old son at her side. Flashing a court order, these investigators from the Australian record industry commenced raiding the Morles' home. Kellie called Phil. He was unable to return home at the moment because another team was raiding his Sydney office. The investigators stayed at their house all day and into the evening, extricating family hard drives, plugging in laptops to copy the contents, and scouring every room for hidden computers. "They went under the house to my cellar, where I store my old books and bits of junk-hardware after years and years. One of the attorneys called one of the other guys. With glee in their eyes, they figured they found the Holy Grail-the nerve center, the big red button that controls everything," Phil recalls. "It was a truly uncomfortable experience."
At the time, Morle was chief technology officer of Kazaa, the renegade peer-to-peer service that had, along with competitors such as LimeWire and Grokster, taken over the market in illegal music sharing from Napster. In 2002, Kazaa's worldwide user base totaled 60 million, including 22 million in the United States. By the time it paid $100 milion in damages to the recording industry and shut down, three years later, its software had been downloaded some 370 million times via Kazaa.com. Working with the RIAA, the Australian Recording Industry Association (ARIA) went after Kazaa's executives like Law & Order Law & Order prosecutors chasing child molesters. With the help of a smart, ferocious lead investigator, Michael Speck of Music Industry Piracy Investigations, these record-business cops uncovered strange and extravagant private details. (They were able to raid private homes and businesses thanks to an Australian court order known as Anton Piller, which gives copyright holders a lot of power.) Speck's team shadowed owner Kevin Bermeister in the streets of Sydney, using hidden backpack cameras. They discovered he lived in an $8 million mansion with a three-car garage, presumably built with the cash he made from Kazaa's numerous advertisers. In November 2004, nine months after the raids on Morle's home, as well as those of other Kazaa executives, the Kazaa offices in Sydney, and several universities thought to be file-sharing havens, the ARIA finally sued. "It was a tough time," Bermeister says today, as he prepares to put the website back online as a legal service. "The tidal wave of negative publicity was very difficult to defend." prosecutors chasing child molesters. With the help of a smart, ferocious lead investigator, Michael Speck of Music Industry Piracy Investigations, these record-business cops uncovered strange and extravagant private details. (They were able to raid private homes and businesses thanks to an Australian court order known as Anton Piller, which gives copyright holders a lot of power.) Speck's team shadowed owner Kevin Bermeister in the streets of Sydney, using hidden backpack cameras. They discovered he lived in an $8 million mansion with a three-car garage, presumably built with the cash he made from Kazaa's numerous advertisers. In November 2004, nine months after the raids on Morle's home, as well as those of other Kazaa executives, the Kazaa offices in Sydney, and several universities thought to be file-sharing havens, the ARIA finally sued. "It was a tough time," Bermeister says today, as he prepares to put the website back online as a legal service. "The tidal wave of negative publicity was very difficult to defend."
While Napster's executives had been easy to find, ensconced in Silicon Valley offices throughout their copyright-infringement trial, Kazaa's executives were cagier. Kazaa's owner was the mysterious Sharman Networks, based in Vanuatu, a South Pacific island country and tax haven; its servers were in Denmark; its Kazaa.com internet domain was registered by an Australian firm, LEF Interactive (which stands for "liberte, egalite, fraternite," in case anybody was unclear about the company's anti-establishment spirit); and its twenty-person staff, including Morle, worked in Sharman's Sydney offices. When Wired Wired reporter Todd Woody was given a rare glimpse of the company's nerve center, he found a dozen people typing on computers surrounded by whiteboards covered with elaborate technical scrawls. "I hired actors to come in here," Morle joked at the time. reporter Todd Woody was given a rare glimpse of the company's nerve center, he found a dozen people typing on computers surrounded by whiteboards covered with elaborate technical scrawls. "I hired actors to come in here," Morle joked at the time.
The first lawsuit against Kazaa had taken place in October 2001, in US District Court in Los Angeles. A twenty-eight-company coalition of major record labels and Hollywood studios sued Kazaa and fellow peer-to-peer services Grokster and StreamCast, owner of Morpheus. In MGM v. Grokster et al. MGM v. Grokster et al., attorneys referred to the three file-sharing services as a "21st-century piratical bazaar" and argued that "the sheer magnitude of this haven for piracy is overwhelming and unknowable." They demanded $150,000 for each copyrighted song shared over the networks-which would potentially put damages in the billions of dollars. StreamCast and Grokster chose not to hide. They paid lawyers and fought back in court. With the help of the Electronic Frontier Foundation, a group of San Francisco lawyers funded by Grateful Dead lyricist John Perry Barlow, as well as Mark Cuban, high-tech billionaire and Dallas Mavericks owner, they argued an MGM victory in the case would have discouraged high-tech innovation from US entrepreneurs.
Swedish entrepreneur Niklas Zennstrom and his Danish partner, Janus Friis, had introduced Kazaa in 2000. The inventors met at a European telecom, Tele2, and were inspired by Napster's file-sharing model-which they interpreted not as a tool for piracy but as a revolutionary new technology, like radio and the videocassette recorder. In 2001, the founders linked Kazaa to another one of their inventions, the FastTrack protocol. Unlike Napster, which used a central server, Kazaa was able to rely on a series of "supernodes," essentially allowing users to create their own servers. These decentralized nodes had the advantage of making the company difficult to track. But Zennstrom and Friis had no stomach to fight a legal battle against the record industry.
Three months after the entertainment industry filed MGM v. Grokster MGM v. Grokster, Zennstrom disappeared. Kazaa.com went offline (temporarily). Before lawyers could figure out what was going on, Kazaa's code belonged to a new company, Blastoise, which had two locations, one on an island off the British coast, the other in Estonia, a longtime pirate "safe harbor." Then the founders sold their company, Consumer Empowerment, to an even more mysterious outfit known as Sharman Networks. (Zennstrom and Friis would go on to release Skype, the internet free-phone service, in 2003; two years later, they sold it to eBay for a Clive Calderesque $2.5 billion.) The new owner was Kevin Bermeister, a Sydney high-tech entrepreneur who had become a multimillionaire through a series of companies, beginning with the Australian software distributor Ozisoft in the early 1990s. When Kazaa came along, Bermeister was running Brilliant Digital Entertainment, which had made a deal involving 3-D internet ads with another file-sharing service, Morpheus. Through connections with his Brilliant board members and Morpheus employees, he tracked down Zennstrom and Friis and bought their company.
And that's when the major record labels were introduced to Nikki Hemming. Born in England, Hemming had been an employee of former record mogul Richard Branson, establishing Virgin Interactive offices in various European countries before moving to Sydney in the late 1990s. She and Bermeister worked together on an Australian theme park known as Segaworld, which lost some $60 million but nonetheless established a long-term business relationship between the two. In 2002, the forceful and charismatic Hemming, in her late thirties at the time, became the CEO of Sharman Networks. For the public face of a company, though, she was surprisingly inscrutable, emerging from her Sydney offices for press interviews only on rare occasions. She quickly replaced Shawn Fanning and the Napster crew as the international recording industry's most notorious enemy. But her employees were loyal and admiring. "She has done things the hard way," says Morle, who considers Hemming a mentor. "She has just crawled and pushed herself to the level she was at."
To Hemming, Kazaa's peer-to-peer model was not a piracy enabler but a revolutionary new way to distribute music, movies, and video games at low costs. "We are a utility," she told Australia's The Age The Age in March 2003. "We are an effective, efficient utility that can be used to distribute myriad content." Hemming's employees concurred. "I knew the powers of peer-to-peer, I knew it was going to be the way of the future and I was excited to be part of the pioneering team," says Mick Liubinskas, Kazaa's former director of marketing. in March 2003. "We are an effective, efficient utility that can be used to distribute myriad content." Hemming's employees concurred. "I knew the powers of peer-to-peer, I knew it was going to be the way of the future and I was excited to be part of the pioneering team," says Mick Liubinskas, Kazaa's former director of marketing.
Record executives weren't exactly fond of Napster, but they hated hated Kazaa. Around 2003, Eric Garland of BigChampagne.com presented his data on peer-to-peer file-sharing at a Warner Music boardroom. Afterward, a crowd of enthusiastic employees, who saw they could take this data to radio stations to help break new acts, gathered around Garland to ask questions. In a dramatic interruption from the back of the room, Jeff Ayeroff, the label's creative director, asked if there was a way to encode music files with copy protection that would snake through broadband cables, destroy pirates' computers, and melt their iPods. (Of course, Ayeroff knew full well that such a plan was technologically impossible. Out of frustration, and with Kazaa very much on his mind, he was speaking sarcastically. Kazaa. Around 2003, Eric Garland of BigChampagne.com presented his data on peer-to-peer file-sharing at a Warner Music boardroom. Afterward, a crowd of enthusiastic employees, who saw they could take this data to radio stations to help break new acts, gathered around Garland to ask questions. In a dramatic interruption from the back of the room, Jeff Ayeroff, the label's creative director, asked if there was a way to encode music files with copy protection that would snake through broadband cables, destroy pirates' computers, and melt their iPods. (Of course, Ayeroff knew full well that such a plan was technologically impossible. Out of frustration, and with Kazaa very much on his mind, he was speaking sarcastically.*) "Shawn Fanning was genuinely a kid with a great idea," says Cary Sherman, who replaced Hilary Rosen as the public face of the RIAA. "The second generation of peer-to-peer operators were definitely in this for the money and not because they were kids with good ideas." Adds another industry source: "These were pornographers and bad guys who were making millions of dollars of profit. This was almost an underworld business, using the lure of free music for other, darker uses."
Yes, users of Kazaa, LimeWire, and the rest weren't just downloading music and movies. Some were exchanging kiddie porn. (As with Napster, Kazaa operators had no knowledge or control over what users were sharing; that was part of the appeal of the anonymous service.) The US Senate Judiciary Committee took up the case. In a single search using Kazaa's service, one director working for the US General Accounting Office found 543 titles and file names that had to do with child pornography. Capitol Hill held hearings. The National Center for Missing & Exploited Children sent experts to testify. The music industry trotted out executives such as Andrew Lack, Sony Music's chief executive, to tell the New York Times New York Times: "As a guy in the record industry and as a parent, I am shocked that these services are being used to lure children to stuff that is really ugly." "It was one of the big propaganda positions in the public relations battle at the time," responds Kazaa's Morle. "They just kept throwing it up-that it was all about child pornography, just to damage our reputation, rather than being based on fact." In the end, Congress did nothing. There was no evidence that Kazaa or LimeWire distributed any more pornography than the internet at large.
But it's hard to blame a record executive for feeling like a victim in the early 2000s. Peer-to-peer services were popping up like Whack-a-Mole, to use a popular industry metaphor of the time. Grokster may have been fighting for its life in US court, but its owner, a family company in the West Indies, was smart enough to hire an old-school record industry PR man to generate exposure. "Being an old press guy, I knew how to get free advertising. I knew I could sit there and say anything I want. And the more outrageous I was the more coverage I would get," says Wayne Rosso, who started his career cleaning toilets at a United Artists record warehouse in the 1970s. "It would spread every time I was on TV or in print. Our downloads would go up. And that's how we made money. It was all conceived." Audiogalaxy, started in 1998 by a University of Texas computer science student named Michael Merhej, took the quality-over-quantity approach, building a music-geekfriendly interface and becoming what the Austin Chronicle Austin Chronicle called "the best music file-sharing service" in 2003. There were others, big and small, with ever more playful names: LimeWire, eDonkey, Soulseek, Aimster, BearShare, OiNK. called "the best music file-sharing service" in 2003. There were others, big and small, with ever more playful names: LimeWire, eDonkey, Soulseek, Aimster, BearShare, OiNK.
For a while, it looked bad for the record industry. The US Supreme Court had ruled in 1984 that it wasn't Sony's fault that people made copies of movies and TV shows with the company's Betamax technology. Kazaa, Grokster, and Morpheus used the same Napster-style argument: We're just the service. We can't control what people do with it. We're just the service. We can't control what people do with it. They were careful not to create "smoking guns" the way Napster's Sean Parker had-nobody in these companies was inexperienced enough to admit, even in private emails, that their services were marketed to music pirates. A District Court in California originally dismissed the case, citing the Betamax decision, and the Ninth Circuit Court of Appeals agreed. But in 2005, the record industry earned a huge victory in the US Supreme Court. In a unanimous decision, the justices ruled that Grokster, Morpheus, and Kazaa violated copyrights "on a gigantic scale." On the one hand, the court preserved They were careful not to create "smoking guns" the way Napster's Sean Parker had-nobody in these companies was inexperienced enough to admit, even in private emails, that their services were marketed to music pirates. A District Court in California originally dismissed the case, citing the Betamax decision, and the Ninth Circuit Court of Appeals agreed. But in 2005, the record industry earned a huge victory in the US Supreme Court. In a unanimous decision, the justices ruled that Grokster, Morpheus, and Kazaa violated copyrights "on a gigantic scale." On the one hand, the court preserved Universal City Studios v. Betamax, Universal City Studios v. Betamax, reaffirming viewers' rights to tape programs for personal use. On the other, the justices added the concept of "inducement to infringe," punishing companies that encourage copyright violation. In other words, even without evidence that there was knowledge and approval of piracy, like Parker's Napster emails, a business model implicitly based on customers stealing copyrighted material is illegal. reaffirming viewers' rights to tape programs for personal use. On the other, the justices added the concept of "inducement to infringe," punishing companies that encourage copyright violation. In other words, even without evidence that there was knowledge and approval of piracy, like Parker's Napster emails, a business model implicitly based on customers stealing copyrighted material is illegal.
Within months, Grokster, Morpheus, and Kazaa stopped distributing their file-sharing software. But a day after the ruling, exRIAA chairperson Hilary Rosen was reluctant to celebrate. "I've been cautioning people in the industry not to be too euphoric over this-because no matter what the courts ever say, the courts can't keep up with technology," she said at the time. She was right. Immediately after the decision, 5.2 million to 5.4 million people continued to trade illegal music over peer-to-peer networks, according to BigChampagne.com. That number has only increased since then. "Kazaa lost. 'Recording Industry Defeats Kazaa,' went the headlines," recalls Eric Garland of BigChampagne.com. "Then what happened? Nothing. Nothing. That became a really difficult point in the news cycle for the RIAA. They had every journalist pile on: 'Why didn't it solve the problem?' Why didn't iTunes sales go through the roof? Everybody thought the Supremes would rule, Grokster would be found liable, and 'we'll wipe our hands of this.' That was exactly the expectation of Napster and Kazaa. It's always the same: 'Oh, this is going to end the piracy.'" That became a really difficult point in the news cycle for the RIAA. They had every journalist pile on: 'Why didn't it solve the problem?' Why didn't iTunes sales go through the roof? Everybody thought the Supremes would rule, Grokster would be found liable, and 'we'll wipe our hands of this.' That was exactly the expectation of Napster and Kazaa. It's always the same: 'Oh, this is going to end the piracy.'"
With the courts sympathetic but ineffective, the major labels had only a few tools left to fight piracy. One tool was known as spoofing. They spent hundreds of thousands of dollars a year, sources say, on flooding peer-to-peer services from Kazaa to LimeWire with fake or damaged files. By 2007, MediaDefender had become the biggest company to provide this service, charging major labels $4,000 to stave off online-piracy activity for an individual album and $2,000 for a track. The company opened in 2000, immediately landing big-fish clients from Hollywood studios to Universal Music and becoming so prominent that Conde Nast Portfolio Conde Nast Portfolio would later call it "the online guard dog of the entertainment world." From its inception in 2000 to late 2006, MediaDefender had more than doubled its revenue, to $15.8 million, with profit margins of roughly 50 percent. "The hope is, you make the experience so poor, it's not worth [a user's] time anymore. It helps deter it enough where you turn people off to one system and maybe they move to another," says Cory Llewellyn, ex-vice president of digital marketing and promotion for Sony BMGowned Epic Records. "You're looking for a Nirvana track-ten spoofs and 'I'm going to go out and buy it.'" would later call it "the online guard dog of the entertainment world." From its inception in 2000 to late 2006, MediaDefender had more than doubled its revenue, to $15.8 million, with profit margins of roughly 50 percent. "The hope is, you make the experience so poor, it's not worth [a user's] time anymore. It helps deter it enough where you turn people off to one system and maybe they move to another," says Cory Llewellyn, ex-vice president of digital marketing and promotion for Sony BMGowned Epic Records. "You're looking for a Nirvana track-ten spoofs and 'I'm going to go out and buy it.'"
The stakes were especially high at major labels for prerelease piracy. Under this scenario, hot albums "leak" into the public's hands, usually through studio or label underlings or journalists who receive advance copies. This has been a problem since before Napster, with albums by artists from U2 to Lil Wayne leaking before the all-important Tuesday record-store release date. Some artists have turned such breaches into marketing: Radiohead deliberately leaked 2000's Kid A Kid A to fan-operated websites and reaped a word-of-mouth publicity bonanza. Most artists and labels, however, can't stand these breaches; they feel they kill an album's sales potential before it even begins. to fan-operated websites and reaped a word-of-mouth publicity bonanza. Most artists and labels, however, can't stand these breaches; they feel they kill an album's sales potential before it even begins.
Disaster struck MediaDefender in late 2006. A high school hacker-called "Ethan" in a 2008 Conde Nast Portfolio Conde Nast Portfolio article-had taken to staying up all night in his father's Macintosh-strewn home office. Ethan first broke through MediaDefender's website firewall during Christmas break, accessing secret internal files from Time Warner, Universal, News Corp., and other media giants. Over the coming year, Ethan and his hacker friends started to release pages and pages of internal emails from "Monkey Defenders," as they began to call the company, through the Swedish peer-to-peer service the Pirate Bay. "In the beginning, I had no motivation against Monkey Defenders," Ethan told article-had taken to staying up all night in his father's Macintosh-strewn home office. Ethan first broke through MediaDefender's website firewall during Christmas break, accessing secret internal files from Time Warner, Universal, News Corp., and other media giants. Over the coming year, Ethan and his hacker friends started to release pages and pages of internal emails from "Monkey Defenders," as they began to call the company, through the Swedish peer-to-peer service the Pirate Bay. "In the beginning, I had no motivation against Monkey Defenders," Ethan told Conde Nast Portfolio. Conde Nast Portfolio. "It wasn't like, 'I want to hack those bastards.' But then I found something, and the good nature in me said, 'These guys are not right. I'm going to destroy them.'" Taking advantage of a hole in MediaDefender's online security, Ethan reportedly hacked into employee Jay Maris's gmail account, gaining access to thousands of business-related emails, as well as personal email addresses and phone numbers and outlines of company strategy. "It wasn't like, 'I want to hack those bastards.' But then I found something, and the good nature in me said, 'These guys are not right. I'm going to destroy them.'" Taking advantage of a hole in MediaDefender's online security, Ethan reportedly hacked into employee Jay Maris's gmail account, gaining access to thousands of business-related emails, as well as personal email addresses and phone numbers and outlines of company strategy.
Ethan then found someone to help him distribute this material: Peter Sunde, one of three people who run the Pirate Bay. Sunde, himself the target of May 2006 antipiracy raids in his home country, Sweden, was no fan of the major labels. "This is a stupid industry that thinks they're above the law and they're above evolution," he says. Long before he met Ethan, Sunde had figured out how to block MediaDefender's identifying computer IP addresses. He created a program to send a database error every time a MediaDefender employee tried to upload a damaged or corrupted file intended to throw users off the track of a copyrighted song. After Ethan got in touch, Sunde was happy to publicly circulate a 700-megabyte file containing crucial bits of MediaDefender operating procedures. Some were routine, like Universal executives authorizing "decoys" for Sum 41's Underclass Hero Underclass Hero or Timbaland's or Timbaland's Shock Value Shock Value. Others were meatier: MediaDefender employees had been meeting with the US Justice Department to track down child pornographers who used peer-to-peer sites, and the same employees planned to erect their own fake peer-to-peer service, MiiVi, to create a valuable user list. "This is really fucked. Let's pull MiiVi offline," MediaDefender cofounder Randy Saaf, wrote to a company developer on July 3. Saaf was unaware that Ethan was about to intercept even this email and circulate it publicly.
Ethan's attacks came at a bad time for MediaDefender. ArtistDirect had bought the company in 2005 for $42.5 million, turning Saaf and cofounder Octavio Herrera into twenty-nine-year-old millionaires. They received roughly $700,000 a year to keep working for the company. As of this writing, MediaDefender was still operable; its employees did not respond to interview requests.
For many at major record labels, the public MediaDefender debacle was just another blow to company morale. Spoofing was one of their last tools in the war against online music piracy. "Whenever you brought up something like Napster, it was absolutely, 100 percent 'the enemy.' All we really knew about it was, at the time, our product's getting stolen. The only thing we kept thinking was, 'How do we defensively fix this?' And that was spoofing and suing," says Llewellyn, who lost his Epic Records job during a round of Sony BMG layoffs in late 2007 and is now a consultant for the label. "I thought there wasn't really wiggle room to try to figure out a new business."
But many others, working quietly in new-media departments within every major label, had spent years and years trying to figure out the new internet business. The sad fact was employees at major record labels largely downplayed the internet as a marketing tool-even a decade after Napster and a half-decade after iTunes. In part this was due to corporate policy. For example, major labels' new-media marketers and certain artists and managers had pushed for years to give away unprotected MP3s, for free or very cheap, to generate hype and publicity online and regain credibility with young, tech-savvy music fans.
In 2000, the Offspring, a Columbia Records punk band, attempted to release a free album in MP3 form as part of an MTV promotion. But label attorneys threatened a lawsuit, the Offspring threatened one right back, and the artist-vs.-label press coverage made Columbia look petty and out of touch. (In the end, the Offspring and Columbia compromised, agreeing to release just a few songs in MP3 form instead of a full album.) Label lawyers feared authorizing MP3 giveaways would legitimize the Kazaas and LimeWires of the world and damage the industry's prospects for winning their copyright-infringement cases.
Not everybody at labels felt this way. Fiercely competitive Don Ienner at Columbia, for example, followed an old CBS Records mantra, "Whatever it takes." Ienner barely knew how to work a computer, but he knew how to sell records. As quoted in the Los Angeles Times, Los Angeles Times, he once referred to label promotion sessions as "war meetings" and added, "We devise a plan of attack where we figure out...how bloody we expect the battles to be." If that battle was on the internet, and the weapons were MP3 promotions, so be it. But hardly anyone else at the top of a label agreed. What really demoralized the Napster-sympathizing employees of label new-media departments was a corporate culture that valued traditional marketing like video and radio above anything else. he once referred to label promotion sessions as "war meetings" and added, "We devise a plan of attack where we figure out...how bloody we expect the battles to be." If that battle was on the internet, and the weapons were MP3 promotions, so be it. But hardly anyone else at the top of a label agreed. What really demoralized the Napster-sympathizing employees of label new-media departments was a corporate culture that valued traditional marketing like video and radio above anything else.
"Certainly, that was the attitude of majors across the board," recalls Mark Williams, Interscope Records's head of A&R until he accepted a buyout in 2007. "The people that were in the online and new-media areas-it felt like, for a long time, the niche people instead of the leading people. The focus was still on radio and high big-box retail. That was where the bulk of the sales and income was still being driven from day to day. You couldn't look so far in the future that you would lose what you had right in front of you. You had to work within a system that was still there. It was getting broken, but it hadn't broken at that point."
Some new-media executives refused to succumb to this attitude. If ever there was a person in the record business equipped to take advantage of the internet, it was Robin Bechtel. She was from Texas, and everyone knew it. She wore cowboy boots, spoke in an excitable drawl, favored folksy expressions like "well-behaved women rarely make history," and had a knack for experimenting with radical ideas without going through channels first to get permission. Like a select few employees of major labels who had computers and knew how to use them in the 1990s, she discovered the internet early on and immediately thought, New marketing tool! New marketing tool! As an employee at Capitol Records, she set up one of the first artist websites in 1994, for metal band Megadeth. Drawing from her background working for a greeting card shop in Austin, she came up with a community concept for the site: "Megadeth, Arizona," a reference to the band's home state. It included a chat room called the MegaDiner, where singer Dave Mustaine showed up from time to time. The website also contained a radio station called K-Deth 101. The band couldn't believe how much attention its website was getting. CNN covered it, as did numerous magazines, and before long Bechtel had established herself as a one-woman new-media department at Capitol. As an employee at Capitol Records, she set up one of the first artist websites in 1994, for metal band Megadeth. Drawing from her background working for a greeting card shop in Austin, she came up with a community concept for the site: "Megadeth, Arizona," a reference to the band's home state. It included a chat room called the MegaDiner, where singer Dave Mustaine showed up from time to time. The website also contained a radio station called K-Deth 101. The band couldn't believe how much attention its website was getting. CNN covered it, as did numerous magazines, and before long Bechtel had established herself as a one-woman new-media department at Capitol.
It wasn't easy for Bechtel or the numerous kindred new-media spirits at major labels-Erin Yasgar at Universal, Mark Ghuneim at Columbia, Ty Braswell at Capitol-who formed a sort of fraternity as the Napster era began. Even after iTunes went online in 2003, using peer-to-peer services as marketing tools was strictly forbidden, and God help a label marketer who proposed releasing a free MP3 as a promotional device. As a new-media executive for the independent label Wind-Up Records, Syd Schwartz had the leeway to build a successful internet marketing campaign for the rock band Creed in 1997-the band released a free online single via several retailer and radio websites. "I basically built Creed's online fan base one fan at a time," Schwartz says. Word spread, radio picked up on the internet buzz, and the band would go on to sell 24 million albums. But when Schwartz moved up in the world, taking a similar job at EMI, he quickly realized corporate policy prevented him from doing anything remotely close to the Creed campaign. "I remember, one of my first days of work, being sat down by a senior executive who shall remain nameless and being told that MP3s are the tool of the pirate. 'We don't do that here,'" Schwartz recalls.
Through their own determination, many of these new-media executives persevered, using the internet to sell records no matter what their bosses said. Bechtel, who switched to Warner Music in 2001, was among the best at navigating corporate culture in this manner. "Show her a brick wall, and she'll find a way to build a ladder, smash through it, levitate over it-she's going to find a way to get around that wall," says Ty Braswell, a vice president for new media at Virgin Records from 1999 to 2003. "If there's a lawyer or business-affairs person that's locked in a time warp, she's going to figure out a way with the leadership so people can grow from it."
Bechtel was prepared when YouTube and MySpace came along. The former, founded by three ex-PayPal employees in early 2005, gave online-video enthusiasts an easy, central hub to watch and post clips. It didn't catch on until after Christmas that year, when fans of NBC's Saturday Night Live Saturday Night Live posted a previously aired hip-hop spoof video called "Lazy Sunday," which quickly went viral. Fans watched it more than 5 million times through February 2006. Some of the music videos that popped up in YouTube's early days were extraordinary finds, like the original black-and-white Motown audition clip starring a tiny Michael Jackson fronting the Jackson 5, or John Lennon and Bob Dylan speaking incomprehensible hipster-ese in the back of a limousine in the late 1960s. Some owners of this copyrighted content reacted in much the same way they did to Napster: After the "Lazy Sunday" exposure died down, NBC Universal lawyers asked YouTube's founders to pull down the clip, which they did. (Like Napster, YouTube was free, but its employees pulled materials off the website if the copyright owners complained.) But Warner's Bechtel was among the first in the music business to see a marketing opportunity. "When YouTube came up, it was illegal," she recalls. "It was putting up a bunch of illegal clips. But our company was like, 'This is a huge consumer habit. This site is going to be huge.'" It was exactly the reaction marketers at major labels should have had when Napster popped up some eight years earlier. posted a previously aired hip-hop spoof video called "Lazy Sunday," which quickly went viral. Fans watched it more than 5 million times through February 2006. Some of the music videos that popped up in YouTube's early days were extraordinary finds, like the original black-and-white Motown audition clip starring a tiny Michael Jackson fronting the Jackson 5, or John Lennon and Bob Dylan speaking incomprehensible hipster-ese in the back of a limousine in the late 1960s. Some owners of this copyrighted content reacted in much the same way they did to Napster: After the "Lazy Sunday" exposure died down, NBC Universal lawyers asked YouTube's founders to pull down the clip, which they did. (Like Napster, YouTube was free, but its employees pulled materials off the website if the copyright owners complained.) But Warner's Bechtel was among the first in the music business to see a marketing opportunity. "When YouTube came up, it was illegal," she recalls. "It was putting up a bunch of illegal clips. But our company was like, 'This is a huge consumer habit. This site is going to be huge.'" It was exactly the reaction marketers at major labels should have had when Napster popped up some eight years earlier.
YouTube turned out to be an extraordinarily efficient place to break new singles and acts. In fall 2005, the Chicago rock quartet OK Go spent $4.99 on its goofy-dancing "A Million Ways" video and posted it on YouTube. Fans would ultimately download it 9 million times, transforming the band from journeymen to superstars and leading to lucrative gigs in Moscow and South America. "The funny part is we don't get paid anything for it-that's the thing for our record company [EMI] that's sort of baffling," the band's manager, Jamie Kitman, said at the time. "It resulted in a lot of income for the band, yet it's all indirect. It's really a perfect example of the unfolding new music economy, wherein you don't make your money from selling records, particularly." Rather than suing YouTube, acts from Panic! at the Disco to Justin Timberlake figured out how to use it as a sort of self-critique, gauging fans' reactions to recent live concert footage. In September 2006, Bechtel's company, Warner Music, made a deal to distribute its large music video catalog on YouTube in exchange for a portion of the company's advertising revenues. A month later, Google Inc. bought YouTube for $1.65 billion in Google stock. Universal, too, would find gold in YouTube exposure, making a deal with the company and taking in $20 million in annual online-video revenues over the past few years.