How Music Got Free (19 page)

Werde’s source inside Eminem’s camp was wrong. The CD hadn’t come from the distributor; it had come from the pressing plant itself. Glover had leaked
Encore
and, just three days later, U2’s
How to Dismantle an Atomic Bomb
. (
Destiny Fulfilled
had come from the Italians.) But the press was getting closer to two of RNS’ best assets, and it was the kind of attention Kali didn’t need. Already spooked by the Operation Fastlink raids, he began a focused campaign of counterintelligence.

First he stripped the group’s NFO files of any potentially damaging information. These files were RNS’ release notes, and they had once acted almost like newspaper mastheads, listing the group’s command structure and the person credited with the source of the leak. Now they didn’t even list the name of the group. Stripped of the weed leaf and the smoke trails, they became cryptic valentines to the recording industry that featured just two lines of information: the date the album was leaked and the date it was due in stores.

Kali pruned the group of deadweight, kicking out marginal contributors and hangers-on. He directed all communication through the encrypted chat channel, and banned insecure methods like AOL Instant Messenger and email. He issued a blanket prohibition on all interactions with members of rival groups, particularly anyone known to have been a member of APC—he suspected the Feds would try to flip someone in that group to get to his. He reiterated the command that no logs were to be kept of any of the group’s chats, under any circumstances, ever.

Most important, he reasserted the prohibition against physical
bootlegging. This was a headache the group didn’t need. Once an album was uploaded, the compact disc it was sourced from was to be destroyed immediately, and any local copies of the files deleted. No Scene material of any kind was to ever be encoded as physical media, and for-profit sales were forbidden absolutely. The prohibitions had teeth, and in late 2004 a member named “Omen” was booted from the group after he confessed to bootlegging. This attitude was encouraged by the constituent members of the “other RIAA,” and was spelled out explicitly in one of their internal documents: “If you like the release then please go out and buy it.
We are not here to line the pockets of bootleggers.”

Yeah, right. Dell Glover was not trading in these moral ambiguities. He thought Kali was paranoid—a natural response to persecution perhaps, but one compounded by the aftereffects of his medical marijuana prescription. The two talked on the phone three or four times a week now, but they weren’t exactly friends. Their relationship was icy and uncertain, and, from his position of social isolation in the group, it was Glover alone who best knew Kali’s wrath, frustrations, ambitions, and desires. Most of all, Glover knew that while Kali might eject some small-time bootleggers for show, there was no way he was touching “ADEG.” Kali needed him desperately, and, like a jealous lover, feared losing him to some other group. Operator status notwithstanding, Glover had the upper hand.

So he didn’t follow the Scene rules. He used AOL IM when he felt like it. He kept a duffel bag full of leaked CDs in his closet. He didn’t buy albums anymore, and he wasn’t interested in earning brownie points from some Internet nerd cabal. He only cared about topsites. The more he could join, the more leaked movies he could get. The more leaked movies he could get, the more DVDs he could sell.

The movie man was back. In addition to Shelby and Kings Mountain, he branched out into Charlotte. He moved 300 discs in a good week. That was 1,500 dollars cash, no taxes. The price of DVD
spindles was dropping rapidly, his supply of movies came for free, and his margins were swelling as fast as his pockets.

Demand was intense, and he was unable to meet it on his own. He began to move discs on consignment through local barbershops. At the beginning of each week, he would drop off 400 discs a piece to three trusted barbers. Those barbers would usually move the discs by the end of the week, and he’d return to collect his share of the profits—$450 a spindle, or roughly $900 a week per shop. His best salesman made more selling bootleg movies than he did cutting hair.

Word got around and competition began to appear. Dockery stayed off his turf, per the terms of their agreement, but other bootleggers moved in. Like Glover, they were Net-savvy middlemen arbitraging their understanding of Internet file-sharing into cash sales to less sophisticated purchasers. Glover knew these guys well. One of them was a friend whom he’d assisted in building a DVD-burning tower, only to watch a new competitor enter the market.

Glover retained the edge. His competitors sourced from public file-sharing sites like LimeWire or the Pirate Bay and didn’t have access to the advance leaks from topsites. Still, by the mid-2000s even this advantage was being eroded. Despite their best efforts, Scene leaks no longer stayed inside the topsite ecosystem for long, and leaking
from
the Scene was becoming as popular as leaking
to
it.

Glover’s own experience showed it. In 2005, RNS ran the table, leaking four out of the top five bestselling albums in America, and seven of the top ten. The number one and two slots were occupied by Mariah Carey’s
The Emancipation of Mimi
and 50 Cent’s
The Massacre
, and Glover had leaked them both. The high demand for Scene material meant that RNS leaks made their way onto public file-sharing networks quickly, and within 48 hours, copies of Glover’s smuggled prerelease music could be found on iPods across the globe.

For now, though, even a narrow time advantage would do. The DVD business was almost entirely driven by new releases, even more
so than music. Glover was facing the same demand curve that led video rental stores to carry one copy of
City Lights
and a hundred copies of
Shrek
. A two- to three-day head start was all he needed to maintain a reputation as the best bootlegger in the state. For he had learned that the bootlegging business was governed by the same economic principle as drugs, real estate, or any other criminal enterprise: it was all about supply.

Supply came from a variety of sources, as the Scene’s infiltration of the music business was mirrored in other forms of media. Movie-releasing groups had pushed hard into the home DVD market, leaking from video rental stores and other vendors. They tracked the dissemination of Oscar screeners to the Academy and unfailingly managed to score DVD rips of the leading contenders long before their official home release dates. Advancing technology was also revolutionizing the process of “camming”—bootlegging movies from within the theater by capturing them with digital camcorders. Camming operations could get sophisticated, synchronizing a video feed from one theater with a higher-quality audio feed from another. And the cammers, aware of the risks, had grown clever: when Canadian authorities later arrested one of Glover’s suppliers at a Pixar movie he was attending with his infant daughter, they discovered a secret camcorder rig inside her diaper bag.

Television was an emerging medium as well, and the growing popularity of prestige dramas on the cable networks was providing Glover with more material to sell. Practically anything that aired was captured on DVR, edited for commercials, compressed to a manageable size, and distributed to Scene topsites within minutes. Often, though, the Scene scooped even the network affiliates. In a notorious example, production prints of the entire fourth season of
The Wire
made it to the pirate underground before any of the episodes ever aired. In another legendary case, an Australian Scene pirate had realized that episodes of
The Sopranos
were being transmitted via unencrypted satellite feed to local stations from Los Angeles for future air
dates. The transmissions were sent at a bandwidth well outside the normal commercial spectrum, but, using a backyard satellite dish, he was able to snatch the episodes from the airwaves and upload them to the topsites in advance.

Dell Glover had access to all of this and more. After years of leaking, his connections were unrivalled. The edge that gave him over other bootleggers translated directly into profits on the street. Sometimes he even supplied his competitors, carefully dribbling out prerelease media to his friends only after he had bled his local patch dry. Word of mouth fueled business, and trade at the barbershops flourished. The high point came one Saturday in 2004, when he woke up to a dozen customers parked on the lawn outside his house, waiting for him to rip the discs.

His neighbors thought he was a drug dealer. Actually it was better than that—his cost of goods sold was almost zero, and he sourced it from the topsites, not from some unhinged basement meth cook or some fearsome Mexican cartel. Blank DVDs ran about 25 cents each, and, even once the barbers took their cut, his profit margins were over 50 percent. Plus, there were other, more lucrative sidelines. If you wanted to buy
Madden Football
for PlayStation, it would cost you sixty bucks retail and you’d have to camp outside of GameStop while you waited for it to come out. Glover would sell it to you right now for ten. A copy of Adobe Photoshop cost 400 dollars. Glover would sell it to you for twenty, including the cracks and patches you needed to get it to work. A copy of the professional engineering suite AutoCAD would run you 1,500 retail. Glover would sell it to you for forty.

Many of his best customers came from inside the plant, and for the ones he trusted most, Glover had an even better deal. Rather than paying five bucks per movie, for twenty bucks a month you could buy an unlimited subscription—and you didn’t even need the discs. Glover had set up his own topsite, run off a home server, and once you bought yourself a password you could download anything you wanted. There you would find every movie that came out on DVD in the last five
years, plus the latest copies of games, music, software, and more. If you wanted something he didn’t have, you just posted a request, and he found it for you within the hour. Video on demand was a speculative technology of the future, but if you knew Glover, it was here, now. He was running his own private Netflix out of his house.

His lifestyle was a nonstop grind. He worked 12 hours a day, came home, spent two hours on the computer burning discs, went to sleep, woke up a few hours later, brushed his teeth with his kids at his side, spent another half hour on the computer burning discs, then went back to work another 12-hour shift. But the net bottom line was a terrific influx of physical cash. Working every available overtime shift from a management position meant he pulled in nearly $1,500 a week in legitimate earnings. On top of that came another two grand in cash sales from the barbers, plus whatever he moved himself. By his mental accounting, in 2004 and 2005 he made more from bootlegging than he did from more than 3,000 hours a year of legitimate work. All told he was pulling in almost four grand a week—nearly $200,000 a year.

He began to make extravagant purchases. He bought rims for his girlfriend Karen Barrett—“Rims on a Honda,” he said, shaking his head. He bought game consoles for the kids. He took his family to Disney World. He bought another quad bike, then another. He made a down payment on a house. He paid off his child support and his credit card debt. And now, finally, Glover bought his car.

He sold the Cherokee on Craigslist and paid $24,000 cash for a fully loaded 1999 Lincoln Navigator, metallic charcoal blue exterior, leather interior. It was used, sure, but for Glover the vehicle was just the base. Using the DVD money, Glover began to pimp his ride.

First there were the tires—two thousand bucks. Then there was the hood scoop—a thousand. Then there were the xenon headlights—another thousand. Then there was the custom detailing, and the blue neon lights along the chassis. Together those cost him three. Then, of course, there was the stereo system: a grand for the custom deck, a
grand for the tweeters up front, and another three for the rack of 12-inch woofers in the back. Then there were the window tints, and finally the full set of 24-inch steel rims from the online retailer DUB. For years, rappers had favored “spinners”—metal rims with independent bearings, that rotated even as the car was stopped. Glover, looking to keep things lively, had switched up the game. At a thousand bucks per, his rims were “floaters”—weighted at the bottom, they looked like they were standing still even as the car was moving.

The aftermarket upgrades weren’t cheap, but after ten years of nonstop work Glover was finally driving a head-turner. During the week he was just another hump at the plant, but when he pulled up to the parking lot at Club Baha on a Saturday night everybody got caught looking. There, Glover could play his music over a 5,000-dollar stereo system, future hits that even Baha’s most devoted clubbers hadn’t yet heard. In person, and online even, Glover had always been reserved, quiet, unassuming, perhaps not totally comfortable with words. Now, around town, he let his car do the talking.

B
y the end of 2004 the future of the recording industry looked dire. Compact disc sales were down yet again. EMI, burdened with debt, was hurtling toward receivership. BMG and Sony were merging, making the Big Five the Big Four. And Time
Warner, seeking to “rationalize” its business, had dropped Warner Music Group, the label that Morris had run before the Interscope debacle. It had been taken over by Edgar Bronfman, Jr., the man who broke the Seagram’s empire, the man who used to be Morris’ boss.

Morris was now more powerful than Junior, and his market share at Universal was larger than it ever had been at Warner. Universal was selling one out of three albums in the United States, and one out of four in the world. But it wasn’t enough: even as the music industry’s number one supplier, Universal’s overall top-line revenues had gone down. The compact disc was going obsolete, and the revenue streams that Steve Jobs had promised him from iTunes were failing to materialize. Digital sales of music accounted for 1 percent of Universal’s revenues in 2005.

Morris had been forced to shut down entire divisions of his company. Since 2002 over 2,000 Universal employees had lost their jobs, in three successive waves of mass layoffs. There was a hiring freeze, and artists saw their advances dwindling. Promotional spending was slashed, and music video budgets had been reined in.

But this thrift did not extend to Morris himself. The Contract was still in force, and Vivendi’s corporate filings showed that in 2005, with the music industry in a death spiral, Morris earned more
than 14 million euros—the equivalent of nearly 18 million bucks. During the corporate belt-tightening at Vivendi, he alone had remained untouched, and he was now by far the highest-paid person in the entire organization. He pulled in more than six times as much money as any other member of the management suite, including CEO Jean-Bernard Lévy, the man who was notionally his boss. Every day that passed, Doug Morris earned 50,000 dollars—the same amount that an honest packaging line employee earned in a year of work at the plant.

Morris’ income was a matter of public record and attracted criticism. How could a man presiding over the decline of an empire possibly be worth so much money? The answer was that The Contract assessed his performance not against his top-line revenue, but against his overall return on invested capital. It worked like this: At the beginning of each year Morris requested A, a certain amount of budgeted money from the corporate parent. At the end of each year Morris returned B, the amount he’d brought in from promoting his artists. As long as B was greater than A, Morris got paid. But how did you do that when B kept shrinking? Easy. You cut A by an even greater amount.

Morris’ message to Vivendi each year was simple: give me less. It was a difficult thing to say. Many—perhaps most—corporate executives would have stumbled here, and suffered as victims of their own overreach. But Morris was different. Though his public statements were forever optimistic, behind the closed doors of his office Morris was a clear-eyed pragmatist who lived and died by the
Billboard
charts. The first thing he did when he entered his office each morning was check the retail sales figures. He could see what was happening to the industry better than even its fiercest critics, and as a result he never, ever requested more capital than he could profitably deploy.

But slashing A meant letting people go. Morris did not enjoy doing this. He spoke often, with genuine affection and tenderness, of those who worked around him. Even in dark times he tried to cultivate an upbeat atmosphere in the office. He had a politician’s talent for
remembering names, faces, and little details about people that made them feel cherished. And he talked often, unsolicited, of how much he valued loyalty.

“Loyalty” was a word you heard a lot in corporate boardrooms—usually right before somebody got stabbed in the back. But Morris really meant it, as his track record showed. In a volatile business, he had retained the same roster of artists and the same management team for nearly a dozen years. He’d championed executives like Jimmy Iovine and L.A. Reid and Sylvia Rhone for most of their careers. He’d stood up for 2 Live Crew and Tupac Shakur against deafening criticism. Going further back, at Atlantic in the 1980s, he had labored diligently under Ahmet Ertegun for a decade without complaining, even when most men with similar ambition would have sought opportunities elsewhere. And in the early 1960s, as a 23-year-old recruit stationed on an army base in France, he’d met the beautiful mademoiselle who would later become his wife. They’d had two sons together, and were now approaching fifty years of marriage.

But business was business. Although in 2005 compact discs still represented over 98 percent of the market for legal album sales, Morris had no loyalty to the format. In May of that year, Vivendi Universal announced it was spinning off its CD manufacturing and distribution business into
a calcified corporate shell called the Entertainment Distribution Company. Included in EDC’s assets were several massive warehouses and two large-scale compact disc manufacturing plants: one in Hanover, Germany, and one in Kings Mountain, North Carolina. Universal would still manufacture all its CDs at the plants, but now this would be an arms-length transaction that allowed them to watch the superannuation of optical media from a comfortable distance.

It was one of the oldest moves in the corporate finance playbook: divest yourself of underperforming assets while holding on to the good stuff. EDC was a classic “stub company,” a dogshit collection of low-growth, capital-intensive factory equipment that was rapidly
going obsolete. In other words, EDC was a drag on A that added little to B. Let the investment bankers figure out who wanted it—Universal had gone digital, and the death rattle of the compact disc had grown loud enough for even Doug
Morris to hear.

The CD was the past; the iPod was the future. People loved these stupid things. You could hardly go outside without getting run over by some dumb jogger rocking white headphones and a clip-on Shuffle. Apple stores were generating more sales per square foot than any business in the history of retail. The wrapped-up box with a sleek wafer-sized Nano inside was the most popular gift in the history of Christmas. Apple had created the most ubiquitous gadget in the history of stuff.

Since the introduction of the iPod, Apple’s stock price had septupled—the technology also-ran was now bigger than Universal itself. This was supposed to be good for Morris. When Sony had had its Walkman craze, the music industry had sold tens of millions of tapes. And alongside the Discman craze, the music industry had sold tens of millions of CDs. So, doing the math, the success of the mp3 player should have meant tens—no hundreds—of millions in sales of mp3s. In fact, ten million iPods sold in stores should have meant ten
billion
songs sold through iTunes. But that wasn’t happening. Digital sales were growing, but nowhere near quickly enough to recover the lost profits from the compact disc. And the legal precedent set by
RIAA vs. Diamond
had established that an iPod wasn’t a recording device like the Walkman or Discman; it was simply a glorified hard drive. As a result, those iPods out there were filled to capacity with pirated material. Morris, who himself signed off on the 99-cent agreement with Jobs two years earlier, now publicly vented against Apple, claiming he’d got the short end of the deal.

Morris often had petulant episodes like this. At Atlantic in the 1980s, he had been one of the first executives to embrace the potential of MTV, and pushed his artists to shoot promotional music videos for the channel. Soon, though, he was griping that they weren’t paying
him enough to air the material. So too with radio, where Morris spent millions marketing his artists, then bitched about his percentages on airplay royalties. Complaining about the terms of deals he had himself signed off on was one of his habits, and—who knows?—perhaps it was a negotiating tactic. But to
his critics in the digital era, his growing inconsistency made him look befuddled and out of touch.

Still, he must have known the real problem wasn’t Apple. Somebody had to make the mp3 player, and they could hardly be faulted for making an especially good one. The real problem was the public. Consumers were breaking the law. They forked over hundreds of dollars for iPods but wouldn’t give the record industry a dime. They still, somehow, didn’t seem to understand that file-sharing was illegal.

Stupid public. Seeking to guide and instruct, by the end of 2005 the RIAA had brought educational lawsuits against 16,837 people. Almost all of the defendants were average citizens with no connection to elite pirates like RNS or Oink. They were John and Jane Download, who got their music from Kazaa and woke up one day to a court summons. Project Hubcap clogged up the courts, and soon more than half of all intellectual property cases on the federal docket in the United States were RIAA lawsuits against individual consumers. The lawsuits weren’t popular, but, the way Morris saw it, the only way the music industry could survive was if the public understood the legal hazards of file-sharing.

But while the bedroom file-sharers could be rehabilitated, the dedicated pirate was beyond hope. The Scene crews and the torrenters had to be thrown in jail, and the RIAA continued cooperating with the FBI to make this happen. There was a lot of overlap between the different Scene groups, and the 2001 raids had netted them a guy named Mark Shumaker, a Florida-based software cracker who was also the head of Apocalypse Production Crew, the dedicated music piracy group.

Most conspiracy investigations started at the bottom. This one started at the top. With Shumaker’s cooperation, the FBI set up a new “honeypot” server, similar to the one it had used in Operation
Buccaneer. This false topsite, nicknamed “Fatal Error,” ran for more than a year, ensnaring nearly every member of the group. In April 2004, the Bureau moved, arresting 18 members of APC in coordinated raids. The conspirators were mostly basement dwellers with limited inside access. The cases of Bruce Huckfeldt and Jacob Stahler were typical: two 22-year-old Iowa roommates whose hobbies were beer, cage fighting, and music piracy. Neither Huckfeldt nor Stahler had a college education, nor any connection to the music industry. What they had instead were friends in low places. They’d been obtaining the leaks by bribing their way into the storeroom at Wal-Mart, to arrange a little “inventory shrinkage.”

Stahler and Huckfeldt had no priors, but the two were charged with conspiracy and faced five years in federal prison with no possibility of parole. Like nearly everyone in APC, they pleaded guilty and agreed to cooperate in exchange for sentencing leniency. They were brought to the Virginia suburbs of Washington, D.C., to meet with Jay Prabhu, the senior counsel for the Department of Justice’s Computer Crimes Section, who was handling the government’s case.

Getting busted for music piracy was a disorienting experience. Neither man considered himself a criminal—at least, not a serious one. While both Stahler and Huckfeldt understood their actions were theoretically illegal, they thought of themselves as pranksters, not felons. Both were surprised that APC was even a target, as there were many other more visible, more damaging groups.

Adding to their confusion was their arraignment in Virginia. No member of APC actually lived in that state, none of the leaked CDs had come from there, and the FBI’s honeypot had been hosted in Florida. Prabhu explained that this was because of the crime they’d been charged with: not larceny, nor fraud, but “conspiracy to commit copyright infringement.” “Conspiracy” was the key word there. The law specified that if you robbed a bank in New York, you got charged in New York. If you robbed a bank in Montana, you got charged in
Montana. But if you
talked
about robbing a bank in New York while you were actually
located
in Montana, you could be charged in either state. The legal statutes specified that, when it came to conspiracy, any location where the conspiracy was furthered could be used by prosecutors as jurisdiction.

Even so, Stahler and Huckfeldt were perplexed—it wasn’t as if they’d been traveling to Roanoke to discuss leaking CDs in Des Moines. Why, then, Virginia? Because Prabhu lived there. Because it was close to the Washington, D.C., field office where Peter Vu worked. Because its jury pool pulled largely from law-abiding federal employees, and because these juries tended to find defendants guilty with the highest frequency of any federal jurisdiction in the country. And because, once, years earlier, while chatting over AOL Instant Messenger, Stahler and Huckfeldt’s conversations had been routed through a fiber-optic pipe to an AOL server in Falls Church, Virginia, and this had triggered an electronic impulse that had lasted for a fraction of a millisecond. That momentary impulse was all it took to meet the legal definition of “furtherance.” When it came to a digital conspiracy, jurisdiction was anywhere the Department of Justice wanted it to be.

In Alexandria, Stahler and Huckfeldt were called to meet with Prabhu separately, but both recalled the same tableau. The DOJ senior counsel was an overweight South Asian who wore a goatee and orthopedic shoes. On one side of him was an American flag, and on the other a picture of President George W. Bush. Behind him, in the middle, was a whiteboard. On the whiteboard was diagrammed the chain of command for the true targets of Operation Fastlink: the Rabid Neurosis crew. At the top of the diagram, written in marker, was the name “Kali.”

Prabhu grilled Huckfeldt and Stahler about RNS. Did they know anyone in the group? No. Could they get access to any of their topsites? No. How were they getting their material? We don’t know, sir. They run a tight ship, sir. They don’t talk to us, sir. The only thing we
really know about them is that, around 1999, they starting beating us with leaks, and we’ve never been able to catch up.

Prabhu was insistent. Each meeting lasted more than two hours, and he returned to the same questions again and again. But Huckfeldt and Stahler weren’t bluffing—they really didn’t know anything about RNS. Prabhu was undeterred. RNS might be good, but they couldn’t be flawless. If they didn’t know anything, there had to be someone who did.