How Music Got Free (16 page)

The next day, in Kings Mountain, management called a plant-wide meeting. Attendance was mandatory. Standing in front of hundreds of assembled employees, the Danish boss cut straight to the point: a complete copy of Scarface’s album
The Fix
has been found on a server at Duke University. How did it get there? It rolled off the packaging line only yesterday, and it hasn’t left the warehouse yet. One of you must have leaked it. Tell us who it was. You can do so anonymously if you like, no questions asked.

Kali had screwed up. In his quest to dominate the piracy league tables, he’d leaked too early, too aggressively, and Universal had been
able to narrow down the source of the breach. Glover experienced a sinking feeling, akin to panic. He and Dockery made nervous, surreptitious eye contact across the manufacturing floor. Perhaps only his naturally laconic manner saved him from being caught outright.

In conversations afterward, the belt buckle posse assured him they wouldn’t snitch. They didn’t want to lose their jobs either. But they weren’t Glover’s only worry. Around the plant, he was starting to hear questions about where, exactly, all these pirated movies were coming from. He even suspected the plant brass might have gotten their hands on some of his knockoff DVDs. He should have known better than to sell the movies to his supervisor. He decided against confronting or warning any of his customers, and they in turn seemed to avoid him. If he was lucky, some sort of implied omertà might save him.

Five days after this meeting one of Glover’s key suppliers was busted. Van Buren’s security regime had nabbed a temporary shift worker named Chaney Sims after the wand picked up on a prerelease compact disc he’d stuffed into his shirt. He was arrested on the spot and
charged with felony embezzlement.

Glover was in trouble. His sideline was now decidedly unsafe. Sims had been part of his crew, and if he cooperated with the police, the whole operation would be outed. If the cops approached, Glover’s only option would be to stonewall, and pray he only lost his job. Even if he didn’t, he was known to be close to Sims and was certain to be a person of interest in the Scarface leak. His best hope for now was for the investigators to focus on the Duke lead. That was a red herring: neither Glover nor RNS had any connection to the school. Glover had no idea how
The Fix
had ended up on a campus server, and he didn’t care. All he knew now was that he had to shut it down.

After work, Glover called Kali and broke the bad news. They had crossed the line. They had leaked too early and the pressure was on. In their conversation, Glover put the blame entirely on Kali, avoiding mention of the movie racket. Their exchange became heated. Glover announced he was quitting RNS forever, then hung up. When Kali
called him back, he didn’t answer. He drove home and packed all his contraband DVDs into the trunk of his car. There were two spindles full of merchandise, over 600 movies, worth nearly 3,000 dollars retail. In the dead of night, he drove to the Shelby city limits, and threw them in the town
dump.

B
y 2003 rap had gone mainstream. Rap songs dominated the Top 40, playing at dance clubs and at frat parties. The previous year
The Eminem Show
had been the bestselling album in America, the first time a rapper had ever held the title. Rap had eclipsed rock as the most vital and important music of its time, and Eminem would go on to become the bestselling rapper ever. And, under Morris’ leadership, Universal had taken control of it all.

The nice thing about the rappers was that they were obsessed with money. They talked about it, thought about it, wrote songs about it, and even threw it in the air. Contract negotiations were a bitch, but once you got them signed, the rappers were relentless grinders who put out albums like clockwork. And once they hit it big, they doubled up and started acting as A&R men themselves. Signing one hit rapper could spark a chain reaction that led to a dozen more. The hottest new acts on Morris’ roster all traced their lineage to signings he had made years before: the Interscope acquisition in 1996 had netted him Dre, who had led him to Eminem in 1998, who in 2002 had led him to 50 Cent, whose monster hit “In Da Club” would propel
Get Rich or Die Tryin’
to succeed
The Eminem Show
as the next year’s bestselling release.

There was more in the works. At Def Jam in New York City, Jay-Z’s protégé Kanye West was putting the finishing touches on his debut album,
The College Dropout
. At Def Jam South in Atlanta, Ludacris, with
Chicken-N-Beer,
was proving himself to be the industry’s most consistently entertaining voice. And there was still New Orleans,
where Mannie Fresh was producing Lil Wayne’s comeback album,
Tha Carter
.

He might have been a 64-year-old white guy, but Doug Morris was running this rap shit. He had just scored back-to-back victories from the Interscope imprint he’d spent more than a decade championing. Universal Music hadn’t existed eight years earlier. Now it commanded over a quarter of the global market share and was the largest music company on earth. Morris should have been a legend in his own time, like his mentor Ahmet Ertegun. He should have been famous, with a flattering profile in
The
New Yorker.
He should have been, as he would have put it, in his ineradicable Long Island accent, “
yooge
.”

But it wasn’t to be. The rap game was expanding, but the music game was shrinking even faster. Piracy was killing sales, and since peaking in 2000, compact disc sales had fallen 30 percent. Despite the impressive growth in its market share, it was all Universal could do to keep its sales numbers flat. Everywhere else there was carnage. Tower Records was hurtling toward bankruptcy. Sony’s Columbia imprint was still fighting a civil war against its own consumer electronics division. EMI was buried in debt. Bertelsmann was offering its music assets up for sale.

And then there was AOL Time Warner. Morris’ old bosses were presiding over a titanic disaster; in April 2002 the company had announced a 54-billion-dollar loss, the largest in American history. Technically the loss had been a “goodwill impairment charge.” That was an accountant’s way of saying they’d paid too much for something—in this case, the absurdly overvalued America Online, purchased at the height of the dot-com boom.
Time
magazine itself had explained the loss as “
a bunch of drunken sailors nursing a hangover.” Warner Music Group was just a barnacle on that sinking ship.

Not that the situation at Vivendi was much better. In July 2002, the ratings agencies cut the company’s bonds to junk after a decade of ill-advised tech investments had led it, too, to write off massive goodwill
losses against shareholder capital. The corporation was losing money, and Jean-Marie Messier, the man who had orchestrated the Seagram acquisition, was bounced by the company’s board. Soon, Vice Chairman Edgar Bronfman, Jr., was out as well. The brain trust was replaced by Jean-Bernard Lévy, a respected, sober-minded businessman tasked with stopping the bleeding. Needing an immediate influx of cash, Lévy organized the sale of Vivendi’s water utility and environmental engineering assets, and began looking for other things of value to sell.

Word got around. In 2003, Apple CEO Steve Jobs made an unsolicited bid to take Universal off of Vivendi’s hands. He wanted their back catalog. He wanted his own music label. Most of all he wanted Morris. Morris was interested, but the decision wasn’t his to make. Vivendi rebuffed the offer. Even with their creditors demanding liquidity, and even with music industry revenues beginning to decline sharply, they saw UMG and Morris as key, irreplaceable assets.

Jobs himself was a lifelong music buff who occasionally compared his company to the Beatles, and the attempted acquisition of Universal was part of a broader vision. Since 2002, he had been calling Morris incessantly, trying to get him to sign off on his new iTunes Store idea, which would sell songs for 99 cents through its iTunes application. These songs would be distributed onto the new iPod devices, which suddenly seemed to be everywhere. Since its introduction in late 2001, the success of the iPod had caught everyone by surprise, even the Apple executives who’d designed it. They had underestimated the sheer volume of pirated mp3s being brought into existence, and how valuable they became once they were portable.

Jobs, like Morris, was in the middle of his second act. In 1985, he’d been forced out from the business he’d founded, only to return in conquering glory in the mid-1990s. He excelled at design, marketing, and management, and if perhaps he was not the best-liked person in the world, his vision for the future of technology was certainly compelling. Most important of all, he understood that, in an economy of
abundance, people tended to invest great personal meaning in their purchasing decisions. He encouraged precisely the sort of “sentimentality” that engineers like Karlheinz Brandenburg rejected, and ultimately this made him the iconic businessman of his time.

Jobs did everything in his power to encourage paid, legitimate downloading. Like Brandenburg, like Morris, he had made his fortune on the back of intellectual property assets. (Although not always his own.) His iPod was intended as a complementary asset to the iTunes Store, and he had pushed for a format switch to AAC to diminish the portability and overall value of the existing base of pirated mp3s. Despite all this, Apple’s rise to market dominance in the 2000s relied, at least initially, on acting almost like a money launderer for the spoils of Napster. If music piracy was the ’90s equivalent of experimentation with illegal drugs, then Apple had invented the vaporizer.

That was why, in 2003, the balance of power still favored the major labels. Jobs needed Morris. He needed legitimacy. Most of all he needed rap—he couldn’t possibly have a music store without Eminem and Fifty. But did Morris need Jobs? For a long time he wasn’t sure. Morris couldn’t help but notice that the iPod had
up to 40 gigabytes of storage, enough to hold over 10,000 songs. Did that mean people were going to pay $9,900 to fill them up? Unlikely. Instead, the device rewarded digital piracy by making mp3s easier and more convenient to use. If the iPod became ubiquitous—and it certainly seemed like it was going to—then the mp3 would no longer be an inferior good to the compact disc.

The two engaged in a long, sometimes acrimonious flirtation. They were a study in opposites. Morris believed in the power of market research, and was willing to let consumers tell him what to sell. Jobs was skeptical of market research, and had once told a reporter for
BusinessWeek
that “
people don’t know what they want until you show it to them.” Morris went out of his way to make sure people liked him and had positive things to say about him. Jobs was a notoriously difficult personality who routinely hurt the feelings of even his
closest friends. Morris was the consummate East Coast dealmaker; Jobs the archetypal West Coast visionary. But somehow the two found rapport, and in any event, Morris’ hand was forced.
RIAA vs. Diamond
was decided, and the iPod was here to stay, whatever the repercussions. In a meeting in his office at Universal in late 2002, Jobs showed Morris for the first time the prototype for a seamless Web sales experience that could bring legal music to the masses, succeeding where Pressplay, Blue Matter, and Seagram’s laundry list of dumb investments had failed. Jobs promised him seventy cents on the dollar for every mp3, and that was as good a deal as Morris was ever likely to get. In early 2003 he finally signed on. The website went live in late April and, for the first time, all of Universal’s music was widely available for paid legal download.

The iTunes Store was an immediate hit. It sold over seventy million songs in its first year. But that contributed to only 1 percent of Universal’s total revenue, and the broader problem of digital piracy remained. Napster might have disappeared, but the peer-to-peer movement was here to stay, and there was a new generation of kids who had never paid for a CD, who viewed file-sharing as their prerogative, and who saw spending money on music as an antique form of patronage. This was the future of music, and it was an existential threat to Morris’ business.

This was compounded by the continuing problem of prerelease leaks. Anyone who had ever worked in a record store knew that Tuesdays were the busiest day, when the new releases hit the shelves. New music Tuesdays were the barometer for the industry, the equivalent of opening night at the box office, and the typical album would move over half its total sales in the first four weeks of its release. In the past the damage from an album leak had always been localized, but with peer-to-peer technology an early leak could now spread across the globe in a matter of hours.

Following the old business model, iTunes also released most of the new music on Tuesdays. But often this music had already been
available in mp3 format on the peer-to-peer sites for weeks. That cost sales, obviously, and, for some reason Morris couldn’t quite figure out, Universal seemed especially susceptible to these leaks. In 2002 there had even been suspicion that someone was leaking from the tightly controlled North Carolina plant; Scarface’s album
The Fix
had definitely come from inside. But there were just so many potential holes in the supply chain: music stores, DJs, warehouse employees, music critics, even truckers. You couldn’t watch them all.

How badly did peer-to-peer file-sharing and prerelease leaking really hurt CD sales? There was no consensus answer, and some mavericks even wondered whether the leaks really hurt at all. Yes, the music industry was suffering, but in the aftermath of the dot-com bubble and 9/11 so was every other business. For every industry-funded study that purported to show how bad the problem was, there seemed to be another contrary study that showed that piracy and leaking had no effect, or even promoted sales. But Morris wouldn’t deign to argue the point. He didn’t need a PhD in economics to know that if something was widely available for free, people were less likely to pay for it. And, whatever the economists said, there was one point that was beyond dispute: leaking music and sharing files were illegal.

With the Vivendi contract in place, Morris would never again have to worry about money, but he still wanted to take care of his artists. The online pirates were engaged in a conspiracy against their livelihood—a conspiracy to commit copyright infringement on a historic scale. Sharing and leaking music weren’t lifestyle choices; they were crimes. Morris’ policy was to prosecute. The first round of lawsuits had failed to neutralize the problem. Perhaps a second was called for. Morris and the other music executives were now discussing the nuclear option: going beyond the corporations and suing the file-sharers directly.

Morris’ legal team spurred him to adopt this approach. Zach Horowitz, Universal’s COO, had a background in entertainment law, and was a driving force at Universal for the lawsuits. Harvey Geller,
Universal’s chief litigator, was also an advocate, and saw a group of cases he knew he could win. The two were unapologetic copyright hawks for whom the lawsuits represented a chance to reconsecrate the sacred nature of intellectual property while pulling in a little cash on the side. They knew the approach was likely to generate a fair amount of bad press, but they saw this as a necessary trade-off with limited long-term consequences. Morris trusted Horowitz and Geller, and listened to these arguments. The most important thing, they all believed, was to establish a precedent that the seemingly innocent act of file-sharing could potentially have severe consequences. For capitalism to work in the digital age, sharing had to be penalized.

In internal discussions among the label executives, the lawsuits were referred to as Project Hubcap. Universal was the largest of the labels by revenue, and so contributed the most to the RIAA’s annual operating budget. In pushing for the lawsuits, the company was joined by three of the Big Five music labels—BMG, EMI, and Sony. Dissenting was Roger Ames, the head of Warner Music Group, who argued that suing one’s own potential customers was unlikely to result in long-term profitability. Many of the smaller, dues-paying independent labels objected as well. But the most vocal opposition came from a surprising source: the head of the RIAA herself. Hilary Rosen thought suing the file-sharers was a disastrous policy, guaranteed to alienate fans and leave a stain on the industry’s reputation that could last for decades. In a series of heated discussions with the label reps in late 2002 and 2003, she argued her case and made it known that she would not, under any circumstances, be the face of Project Hubcap.

She was overruled. On September 7, 2003, after 16 years with the organization, Rosen stepped down from the leadership of the RIAA. The head of their own trade organization resigning in protest was a telling sign of things to come, but the major labels weren’t paying attention. Project Hubcap had momentum, and the next day the first batch of lawsuits was filed. Two hundred sixty-one individuals were targeted, with the RIAA requesting damages of up to $150,000 a song.
Although the association’s public service announcements had attempted to draw a moral equivalency between pirating a song and stealing a CD, the legal reality proved to be a hundred thousand times worse—a million-dollar fine for shoplifting.