by David Leibowitz
Please Allow Me to Introduce Myself
I expect that many readers will have no idea who I am. Nor should they. But to minimize any criticisms or concerns regarding my personal interest, objectivity and impartiality, and without trying to toot my own horn, here goes.
My professional career has centered on the intersection of entertainment, media and technology, from the perspectives of law, policy, and business. Particularly relevant here are my past roles as Executive Vice President and General Counsel of RIAA from 1989 through the Spring of 1997, and my later roles as Vice Chairman and CEO of Aris Technologies, and Chairman of Verance and President of its Digital Division through 2002 (both Aris and Verance are featured prominently later in the story).
At RIAA, I wore a variety of hats given my dual roles as EVP and GC. Of particular relevance to this story, my work as RIAA GC included serving as Chairman of the RIAA Legal Committee, and a primary contributor, negotiator, and crafter of the Audio Home Recording Act of 1992 (“AHRA”), and the Digital Performance Rights in Sound Recordings Act of 1995. I also was a frequent speaker at many digital music and media centric conferences in the 1990’s, including Webnoize, Plug In, and Digital Hollywood. I recall one Plug In Conference around 1996 at Cooper Union in NYC, addressing the many digital “cowboys” in the audience. The panel topics included the legal issues associated with the digital distribution of sound recordings. Without getting into specifics, at the end of the panel, one of my fellow panelists told me that I “just scared the shit out of the audience”. To be clear, my objective was to educate, not scare; but I understood how my “education” could lead to that result.
As EVP of RIAA, of particular relevance here was my serving as Chairman of the RIAA Engineering Committee, founding Chairman of the RIAA New Technology and Multimedia Committee, and Chairman of the Worldwide Recording Industry’s International Steering Committee on DVD Audio. In addition, along with then RIAA EVP Hilary Rosen, we oversaw the work of a prominent Cambridge, Mass. based R&D company focused on building a “baseband signaling system” contemplated by the AHRA.
At Aris and later at Verance, I lead our participation in the Secure Digital Music Initiative.
To be clear, my observations and comments are my own and do not necessarily reflect the views of RIAA or Verance.
Now on to the show!
Living High on the Hog
The year 1999 was a banner year for the U.S. recording industry! Total revenue reached a highpoint at $14.6 billion. Physical product was King, with the CD continuing as the dominant format with $12.8 billion in revenues; 87.9% of the total.
It had been 15 years since Bruce Springsteen’s Born in the U.S.A. became the first CD released in the U.S. During those 15 years, the industry tried without much success to introduce additional physical digital formats – including the Digital Compact Cassette (DCC), the Mini-Disc, and the Enhanced CD – in an effort to grow the market, provide new features, and expand the portability of listening enjoyment.
In 1999, following several years of negotiations, the worldwide recording and consumer electronics industries finalized the standard for DVD-Audio. This product was intended to be the natural, higher fidelity successor to the CD, with increased data capacity, higher linear sampling rates, and a wider range of audio channels, up to 5.1 channel surround sound.
The first DVD-Audio discs entered the market the following year. And while we were in the midst of a format war between DVD-Audio and the Super Audio CD, the recording industry had high hopes and gearing up for a new and protected physical format.
Significantly, there were no recording industry revenues in 1999 attributable to either digital downloads or streaming.
A Perfect Storm Was Coming
Despite having record revenues in 1999, dark clouds were looming on the horizon. A convergence of three such clouds would, over time, put the recording industry into a tailspin.
Cloud #1 – The Release of the MP3 Codec. The first cloud appeared in 1991, with the somewhat unnoticed release by the Fraunhofer Society of the codec for MP3 file format. MP3 is an open lossy data-compressed digital audio format (meaning the format permanently removes data which ideally will not be noticeable when the file is decompressed) with “acceptable”, yet far lower audio fidelity available on CDs. Like physical formats of the day, the MP3 format had no controls over reproduction; nor were there any controls over distribution and usage.
In the second half of the 90’s, as the Internet continued to grow outside of the walled gardens like AOL, hundreds, if not thousands of websites began to offer free unauthorized downloads of musical recordings in the MP3 format. Music fans worldwide began to store a substantial number of MP3 music files on their computers, resulting in MP3 becoming the de facto standard for digital music delivery. While this was becoming a significant concern to the recording industry, the lack of portable MP3 storage and playback devices somewhat limited their commercial threat to the industry.
Cloud #2 – The Introduction of Portable Digital Media Players. The second cloud emerged in 1990’s with the introduction of Portable Digital Media Players. Given data storage limitations then available and the growing availability of these digital media players enabling portable music enjoyment, MP3 became the users’ universal music format of choice, and many digital media players were marketed as MP3 Players.
Of particular note was the 1998 launch of the Rio PMP300 portable digital media player by Diamond Multimedia. Rio enabled the portable storage and playback of MP3 files. Following the Rio’s launch, the RIAA unsuccessfully sued Diamond for violating the Audio Recording Act of 1992. The RIAA appealed the decision, which was affirmed by the Ninth Circuit in 1999. Two years later in October 2021, Apple unveiled its first generation iPod.
Cloud #3 – Now we REALLY have BIG Problems: Peer-to-Peer De-Centralized File Sharing Enters the Scene. But wait, there’s more! 1999 also saw the launch of Napster, a peer-to-peer (de-centralized file sharing service that, along with the later launches of Grokster, Morpheus, and Pirate Bay among others, would open the floodgates for the widespread unauthorized distribution of copyrighted sound recordings. And because these P2P services were decentralized, they presented bigger challenges to the recording industry seeking to enforce their members’ rights in this new arena.
It should therefore be no surprise that this perfect storm resulted in U.S. recording industry revenues continuing to their low point in 2014 and 2015, when revenues dropped each of these years to $6.7 billion.
The Secure Digital Music Initiative (SDMI) to the Rescue???
The Birth of SDMI. Following its lower court loss in the Diamond Multimedia case, announced on December 15, 1998 the formation of the Secure Digital Music Initiative (SDMI). According to the then RIAA President Hilary Rosen, SDMI was “about the technology community developing an open security system that promotes compatible products in a competitive marketplace. It is not the recording industry imposing a standard on technology companies”.
While there were many naysayers in the “Internet equals free content” community, it did successfully bring together a broad spectrum of over 120 companies. These included the worldwide recording industry, major consumer electronics such as Sony, Toshiba, Phillips and Matsushita, Internet services providers such as AOL, and information technology and security companies including AT&T, Intel, Texas Instruments, Lucent, Sun Microsystems, Microsoft, the Fraunhofer Society, and Intertrust. Importantly, SDMI also included then emerging industry players, such as Diamond Multimedia, Real Networks, Liquid Audio, Aris Technologies, Solana Technology Development, Adaptec, Portal Player, Creative Labs, and E.Digital.
The significance of these companies meeting monthly in both formal and informal gatherings should not be understanded, regardless of the actual success of SDMI. But more on this later.
What was SDMI trying to achieve? As noted above, SDMI was NOT intended to create a formal technical standard covering the means through which copyrighted sound recording can be distributed, copied, and enjoyed by all forms of digital devices and delivery systems. Rather, it was intended to provide an open architecture based on a set of reference models (including an Application Layer, Licensed Compliant Layer, and a Portable Device Layer), and technical requirements on security, robustness and content screening. Accordingly, companies were free to develop their own operational and functional rules governing their digital distribution of sound recordings, provided that they followed SDMI’s basic reference models and technical requirements.
Part Two of this Article will begin with SDMI’s initial work aimed at adopting a Phase I Screening Technology and Transition Signaler. SDMI-Compliant portable music players would incorporate with the Phase I technology, allowing players to continue to play both secured and unsecured music formats. Once record labels begin to distribute encrypted music files, the Phase I technology would signal the portable device to upgrade its software to play SDMI Phase II encoded music. Yes, this sounds fairly arcane and today, a largely irrelevant subject; and in many ways it is. But my objective it to share my perceptions about the SDMI process, the diverse and often conflicting objectives and competitive interests of its participants, the selection of the Phase I Watermark System, and the highly charged and publicized, and largely overstated and inaccurate SDMI Hacking Challenge.
Stay tuned for Part Two!
