by Kevin Hurley

ecord companies today seem to have forgotten some of the basic economic laws that still govern us all. As Adam Smith noted in The Wealth of Nations, a free marketplace leads every individual to promote the public interest as if “led by an invisible hand.” Today the invisible hand is operating through the Internet and MP3 programs. MP3 services are creating increasing anxiety among record-company executives as album sales plummet among college students and computer-savvy adults. The recording industry’s problems, however, go well beyond Napster and the like. Their true foes are the increasing speed and memory capacity of Internet hardware—and changing consumer attitudes. Record companies can do nothing about the former and are ignoring the latter.

Many of these Internet start-ups have made it clear that they are playing by a different set of rules. MP3-finder programs such as Gnutella are so far refusing to kowtow to the record companies and the Digital Millennium Copyright Act (DMCA). Ian Clark boasts that his Freenet program will prevent any exterior body or jurisdiction from controlling the traffic in any kind of digital information, including MP3s, DVDs, books, and software. The New York Times quoted him as saying, “I have two words for these companies: give up. There is no way they are going to stop these technologies. They are trying to plug holes in a dam that is about to burst.”

Clark’s prediction is rapidly becoming a reality. Record companies and other businesses can prosecute Napster, MP3.com, and Gnutella, citing violations of the DMCA and other copyright laws, but it will do them no good. As Pamela Samuelson, a digital technology and copyright expert at the University of California at Berkeley law school, said in a New York Times article, “Copyright law is not the right tool in the case of many of the new technologies. The question will quickly become whether other governments have reasons to try to regulate these new systems or whether the U.S. government has the ability to regulate them.”

Even if copyright law could regulate these new technologies, it would be of little use. Most Americans surf the Net with relatively slow 56K modems, but college students are benefiting increasingly from the speed of their universities’ networks. They can download MP3s in a matter of seconds and be gone in a flash. You cannot catch them. And as more households around the world use incredibly fast cable modems, policing the Net will become virtually impossible. PC storage capacities are also increasing geometrically, allowing consumers to download and archive vastly more files of all types than ever before.

Even the film industry might soon feel the Internet’s invisible hand. The Digital Media Group of Hitachi, Ltd. announced in June 2000 that it will release the world’s first DVD-RAM camcorder in Japan this August 25. A DVD-RAM video recorder will be released on the same day, with volume shipments of 4.7GB DVD-RAM and DVD-ROM drives for PCs to follow. Add this new technology to today’s faster modems and network connections, and it will soon be possible to send and download movies with ease, and people will be able and willing to send and store DVDs alongside their MP3s.

These developments will certainly not change society to the degree that Clark envisions, but the entertainment industry is walking a dangerous line, and any misstep could cost it greatly. First it must change consumers’ attitudes about digital products and the Internet. Suing Napster will not prevent college students from downloading MP3s, and worse yet, it will generate further resentment toward the music industry. Napster, however, is creating a generation of consumers who consider themselves entitled to free music and entertainment products. To begin reversing this attitude, the record companies should do what Warner Music Group, BMG Entertainment, and MP3.com did in June 2000. The two music giants dropped their suit and decided to allow MP3.com to store a selected batch of their music. This compromise will allow all three companies to work together and begin rebuilding their profit base.

Technological change and the Internet’s invisible hand are forcing record companies and the entertainment industry to lower prices, which is appropriate and in fact long overdue, as these firms have been overcharging consumers since the advent of the compact disc and the VCR. These companies, of course, do not want to lose their high profits, but the forthcoming lower prices should increase sales and create greater overall profits.

The record companies face a relatively simple choice: continue to fight the Internet and get slapped hard by the market’s invisible hand, or start to integrate with it and receive a pat on the shoulder—and greater profits.

Kevin Hurley is a freelance writer in Indianapolis.

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